JUDGMENT
Fawcett, J.
1. This is an application by Mr. P.D. Shamdasani for revision of an order passed by the Chief Presidency Magistrate, dismissing a complaint that he had filed against the directors, the secretary, the chief accountant and the accountant of the Central Bank of India, Ltd. This complaint charges them with having in 1925 and 1926 wilfully made, or caused to be made, false statements in the balance-sheets and Profit and Loss accounts of the bank, and so having committed offences under Section 282 of the Indian Companies Act of 1913. The learned Magistrate before issuing process had a notice of the complaint given to the respondents, and after taking some evidence and hearing the arguments of the parties has come to the conclusion that the applicant failed to make out a prima facie case. Accordingly he discharged the notice and dismissed the complaint. The alleged false statements were :-
(1) In the balance-sheet as at June 30, 1925, under the heading “Particulars required by Act VII of 1913,” item (5) “Debts considered doubtful or bad” are shown as nil.
(2) In the balance-sheet as at December 31, 1925, under the heading “Particulars required by Act VII of 1913,” item (5) only shows “Debts considered doubtful” as Rs. 5,00,000 and by implication “Debts considered bad” as nil.
2. There were further allegations as to certain figures in the Profit and Loss Account, but it is unnecessary to go into that part of the charge. The only question that has been raised before us is whether the statements in question as to bad debts are false, and contrary to the provisions of the Indian Companies Act 1913, as to balance-sheets. It was eventually admitted by the bank in the proceedings before the Magistrate that there were certain bad debts that might have been shown in the two balance-sheets, but it is denied that the statements in question are false and in contravention of the provisions of the Indian Companies Act. The grounds on which this contention is set up and was accepted by the lower Court are shown in the following extract from the Magistrate’s judgment:-
The evidence of Mr. Stevens shows that in accordance with the usual practice he and Mr. Cooke went through each loan or advance made by the bank and considered the securities for the same and the value thereof and also any collateral security handed over to the bank by the debtors. Whenever necessary, explanations were called for from the bank and duly considered, According to his evidence the auditors take into consideration in respect of loans or advances whether any allowance should be made or not after paying due regard to the securities, their values and personal standing, and if in their opinion the allowance suggested is insufficient, then the Auditors require the management to make proper allowances, and in case when such allowance is made they do not show in the balance-sheets the extent of the debt being bad or doubtful, in case of bank accounts in drawing up of balance sheets of banks. Mr. Stevens gives an illustration; says he ‘supposing the debt amounts to five lacs in a particular case and the auditors value the securities at a lac of rupees, then they require the bank to provide for four lacs in some other account on both sides. In other words the four lacs do not appear on either side of the account. If the four lacs is provided out of the reserve, it does not appear in the balance-sheets or anywhere, i.e., to the extent to which the auditor finds the debts to be bad or doubtful, they reduce the assets and liabilities to that extent on both sides.’ According to the evidence of Stevens, which I have no reason to distrust and which I accept, all the accounts challenged in this case were duly considered and where necessary, further allowance was called for and made out of the secret reserve fund, which is not shown in the balance-sheet but which undoubtedly existed and was available to fully provide for the so-called bad or doubtful debts.
The respondents’ case is that in the amount of five crores eighty-one lacs odd under item No. (1) under the heading ‘Particulars required by Act VII of 1913,’ and of three crores sixty-one lacs odd under item (2) and (c), the so called bad or doubtful debts are not included as contended for by the applicant. The extent to which the debts were doubtful or bad is not shown in these figures. The respondents say that the total debts under these headings shown at nine crores forty-three lacs 94,000 odd are good assets. What the bank has done is they have in effect wiped off the bad debts of twenty lacs referred to by the applicant. The bank has provided for those bad debts or made allowance in respect thereof out of the secret reserve fund, which undoubtedly the bank had at material periods, and neither shown the bad debts on the assets side nor the secret reserve on the liability side. They have disclosed only good assets and the figure of total debts nine crores forty-throe lacs odd constitute good assets, and does not include the so-called twenty lacs bad or doubtful debts, and if these lacs had been disclosed then the figure of nine mores forty-three lacs odd would have become nine crores sixty-three lacs, and in that case they would have had to show on the liabilities side the twenty lacs of secret reserve, which the bank had built up out of the appreciated value of some of the assets. If the bank had followed this method of accounting, the assets no doubt would be inflated to the extent of twenty lacs, but wrongly, so that the statement that there were no bad or doubtful debts as it stands, in view of the manner in which the total debts have been treated is undoubtedly correct.
The contentions of the respondents are in my opinion fully established by the evidence before me and in particular by the evidence of Mr. Stevens. As against that there is no evidence on behalf of the prosecution except vague generalities and mere speculation. On the evidence before me I am satisfied that, although the total of the loans and advances etc, was larger, what the balance sheets show is the total of the net good debts fully secured, and that, to the extent that the debts were bad or doubtful, or to the extent that the security in respect of some of these debts was considered insufficient by the auditors, at the time of the auditing of the accounts due and adequate allowances were made by debiting the amount of the estimated deficiency to secret reserve.
3. Sir Thomas Strangman for the respondents has very lucidly argued in support of that view. His arguments can be, we think, fairly summarised as follows :-
4. The general object of a balance-sheet is to show the financial position of a company as at a particular date, so as to convey a truthful statement of that position, which will not mislead any shareholder or customer. But in doing this it is open to a company to undervalue its assets, and a prudent company often estimates its assets at less than their probable real value. Thus it has been laid down by Buckley J. in Newton v. Birmingham Small Arms Company, Limited [1906] 2 Ch. 378 (p. 387):-
The purpose of the balance-sheet is primarily to shew that the financial position of the company is at least as good as there stated, not to shew that it is not or may not be better.
This dictum has been followed in Young v. Brownlee & Co. [1911] S.C. 677 which is cited in Mew’s Digest of English Case Law, 1911 to 1915, at Col. 250. The assets side of a balance-sheet is intended to show the real assets of the company, and if a company considers that a particular debt due to it is a bad debt, there is consequently nothing improper or contrary to the object of a balance-sheet in adopting this method of “cutting down” bad debts, so as to eliminate them from the balance-sheets. The net result is that the financial position of the company is correctly shown, although the balance-sheet does not disclose the existence of bad debts that can be met from the secret reserve. The form of balance-sheet given in Schedule III of the Indian Companies Act, 1913, says nothing more than that, if the bank chooses to show any of its bad debts as part of its assets, then they must be distinguished as bad. It does not lay down that the bank must show every book-debt, even if it considers it to be a bad debt, and so not a realisable asset. The real question, he submits, is whether the provisions of Section 132 of the Act as to the contents of a balance-sheet have been substantially complied with, and if they have, then there is nothing either illegal or improper in what the Central Bank did.
5. The Government Pleader for the Crown said he was instructed to support the view taken by the Magistrate, and adopted the arguments of Sir Thomas Strangman.
6. In considering this contention, we think the first thing to notice is the difference between the English and the Indian law, in regard to a form of balance-sheet being prescribed. Sub-section (2) of Section 132 says, that “the balance-sheet shall be in the form marked F in the Third Schedule or as near thereto as circumstances admit.” The English law as to the contents of a balance-sheet is contained in Sub-section (3) of Section 26 of the Companies (Consolidation) Act, 1908. This enacts provisions corresponding to Sub-section (1) of Section 132, but there is no form prescribed. The form F in the Third Schedule of the Act merely gives the heading “Statement in the form of a balance-sheet made up to the day of 19 containing the particulars of the capital, liabilities and assets of the Company.” The form F of the Indian Act has on the “Property and Assets” side an item “Book-debts,” and below that comes this note :-
Distinguishing in the case of a Bank between those considered good and in respect of which the Bank is fully secured and those considered good for which the Bank holds no security other than the debtor’s personal security, and distinguishing in all cases between debts considered good and debts considered doubtful or bad. Debts due by Directors or other officers of the Company or any of them either severally or jointly with any other persons to be separately stated in all cases.
7. It is of some interest to note the history of the Indian form and this particular note. The English Companies Act, 1862 (25 & 26 Vic. c. 89) contained a form of balance-sheet, and item (iv) of this on the side of “Property and Assets” was as follows :-
IV Debts owing Showing:
to the Debts considered good for which the Company hold
Company. Bills or other securities.
Debts considered good for which the Company bold no
security.
Debts considered doubtful and bad.
Any debt due from a Director or other Officer of the
Company to be separately stated.
8. This was copied in the Indian Companies Act, 1866 (Act X of 1866). Section 49 of this Act prescribed a balance-sheet containing “a summary of the property and liabilities of the Company arranged under the heads appearing in the form annexed to Table A in the First Schedule thereto, or as near as circumstances admit.” And in this form the item “Debts owing to the Company” appeared exactly us in the English form. These provisions were continued in the Indian Companies Act of 1882 (Act VI of 1882), In the Act of 1913 the form has been modified, so that the expression “book-debts” is substituted for “debts owing to the Company”, and the provision for the distinction between fully secured and unsecured good debts has been confined to the case of a bank. The English Act of 1908 on the other hand has not retained the form of 1862. Possibly this is due to its being considered too detailed. Thus Buckley J. in Newton v. Birmingham Small Arms Company, Limited [1906] 2 Ch. 378 says (p. 389)
…undue publicity as regards the details of their trade, or as to their financial arrangements, may often be very injurious to traders, having regard to the rivalry of competitors in trade, to complications sometimes arising from strained relations between capital and labour, and the like.
9. But the Indian Legislature has thought fit to retain the form with the publicity that its contents require.
10. In view of this direct provision in the Indian Companies Act, there clearly must be caution in applying general principles or dicta, which have been stated in England and which may at first sight seem applicable. It is not, we think, necessary in this case to consider whether it is legitimate for a company to have a secret reserve fund formed by deliberate under-valuation of some of its assets. On this point, we agree with the Magistrate’s remark that he was not concerned with the contention that the bank had no authority to maintain a secret reserve, which was not disclosed in the balance-sheet. But it may be noted that, although the decision in Newton’s case has the high authority of Buckley J. (now Lord Wrenbury), the views he expressed in that case have been questioned by eminent commentators on Company Law. Thus Stiebel in his “Company Law and Precedents” 1920, 2nd Edn., says (p. 485) :-
A company cannot have a secret reserve fund, and keep the particulars of such fund from its auditors. But previously to the Act of 1907, it was held that if a company had such a fund, and its auditors were satisfied with what was being done with it, it would be enough for the balance sheet to indicate that there were other undisclosed assets; but that if they were dissatisfied with the state of such fund, e.g., if it was invested in partly paid shares which might expose the company to serious liability, they must disclose the fact to the shareholders. It is not thought that this decision can now hold good (in the case of companies other than private companies) for the statement in the form of a balance sheet which such companies have to make under Section 26(3) of the Companies (Consolidation) Act, 1908, must contain a summary of the company’s share capital and of its liabilities and assets, giving such particulars as will disclose the general nature of those liabilities and assets, and how the value of the fixed assets have been arrived at.
11. Similarly, Palmer in his “Company Precedents”, 12th Edition, Part I, at p. 736, says :-
As to providing for a secret reserve, see dicta in Newlon v. Birmingham Small Arms Company, Limited, [1906] 2 Ch. 378. These dicta are not reconcilable with the audit provisions of the Act of 1908.
But, for the purpose of the present case, we will assume that there is nothing illegal or objectionable in the maintenance of a secret reserve by a bank. Still the question remains whether the direction in form F as to distinguishing between “good” and “doubtful or bad” book-debts does not prohibit the “cutting down” of debts so as to eliminate or reduce any reference to doubtful or bad debts in the balance-sheet. Primarily, the expression “book-debts” means debts owing to the company, and so shown in the books of the company. The primary meaning of the expression, even apart from the subsequent note, would in our opinion, be that all debts due to the company shown in the books should be included in the total entry against this item. In saying this, we do not of course mean to imply that, if a company’s books show a debt, which the auditors ascertain to be not a real debt, but a fraudulent entry, that such a debt should be included in this item. We frequently have cases in the Courts, where the evidence reveals untrue entries of debts in account-books, and the auditors of course have power to require that such fictitious debts should not be included, if they have the requisite information on the subject. But apart from any exception of that kind, it seems to us that the intention of the Legislature clearly is that all debts which are entered in the current books of the company should be included under this head. The alteration of the form by substitution of “book-debts” for “Debts owing to the Company” emphasizes this requirement. A debt is none the less a debt, though there may be little prospect of its recovery, and though the creditor may have means of covering the deficit, if it is not paid. It is always open to a company to write off debts that in its opinion are entirely irrecoverable (e.g., if they have become time-barred); and on that being done such debts would cease to be “book-debts”.’ If there could be any possible doubt on this point, it is clearly swept away by the terms of the note about distinguishing good, doubtful and bad debts. We can see no reasonable construction of this provision than a meaning that all genuine book-debts must be covered by the entry against this item, whether they are considered good, doubtful or bad debts. If you have a heading X, which is wide enough to cover (a), (b) and (c), and you are told to distinguish in the entry under X between (a), (b) and (c) there is no reasonable or logical escape from the conclusion that you have to include (b) and (c) in the. X entry. The meaning is just as explicit, as it was under the provision in the form contained in the Acts of 1866 and 1882 that the entry as to debts owing to the company should “show” debts” considered bad and doubtful “, as well as debts “considered good.” There is not the slightest ground for supposing that the Legislature intended any alteration in that particular respect.
12. No doubt in the case of a bad debt it may be said that it is of no value as an asset. But the opinion of the company that it is a bad debt may eventually turn out to be wrong; and the contention that a company need not show any debt that it considers bad, because it is a doubtful asset is opposed to the direct enactment in the note. Furthermore, though some book-debts may be considered doubtful or bad, they can still be of some service to the company. They can be mortgaged or charged (cf. Section 109(d) of the Act of 1913), and it is not uncommon for a company to create a “floating charge” on its book-debts (cf. Section 233 of the Act of 1913, and Illingworth v. Houldsworth [1904] A.C. 355.)
13. The note requires that all debts due by directors or other officers of the company shall be “separately stated” under this item. Is it to be said that, because some of those debts might be considered bad, they can be excluded ? Obviously they cannot, in view of the express direction in this note, so this also goes against the contention that bad debts can be omitted. Another important consideration is the fact that the “Capital and Liabilities” side of the form contains an item “Provision for bad and doubtful debts.” This is another indication that the Legislature intended that bad or doubtful book-debts should be shown on the “Assets” side and it ensures that a company, if it has made provision against such debts, should in this manner be able to correct a bad impression that might otherwise arise from the entry of bad or doubtful debts on the “Assets” side. Incidentally we think that this item shows that the contention about a secret reserve fund is at any rate subject to this qualification that in India, if (as in this case) any part of such secret reserve is availed of to meet bad and doubtful book-debts, it must be revealed in the balance-sheet and not concealed in the manner adopted in this case. This item of the form was inserted in 1913; it is not contained in the forms of 1866 and 1882.
14. The clear provisions of the form cannot be allowed to be whittled down by general considerations as to the object of a balance-sheet. As was said by Viscount Finlay in Krishna Ayyangar v. Nallaperumal Pillai (1919) I.L.R. 43 Mad. 550, 564, s.c. 22 Bom. L.R. 568, P.C. in regard to the construction of the Explanation to Section 68 of the Indian Companies Act (p. 584) :-
The construction of the Explanation must depend upon its terms, and no theory of its purpose can be entertained unless it is to be inferred from the language used.
15. The object of an enactment may be met by doing a thing in many ways. But if that enactment lays down a particular way in which that thing is to be done, it is no defence to say that, although you have done it in a different way, it fulfils the object of the enactment. The contention that a company need not show any bad or doubtful debts, so long as they can be covered by a secret reserve fund entirely nullifies the enactment of the Legislalature that such book-debts should be included on the “Assets” side and any provision made for meeting them should be shown on the “Liabilities” side.
16. This is a view which already has Indian authority in its favour. In Queen-Empress v. Moss (1863) I.L.R. 16 All. 88 Edge C.J., referring to the form of balance-sheet required under the Indian Companies Act of 1882, says as follows (p. 107) :-
The debts owing to the company must according to the balance-sheet in the Act be divided into and shown in three classes. You have to show good debts for which the company holds security, good debts for which the company holds no security, and debts, if any, considered doubtful and bad. Gentlemen, that is very material, because when you consider what the facts of this c^se are, you will probably come to the conclusion that if the company had on June 30, 1890, disclosed the fact that it had Rs. 13 lakhs of bad and doubtful debts, instead of showing a divisible balance of Rs. 19,543-0-7, it might have closed its doors next morning. Any persons, assuming they were dealing with a Bank that was honest, would assume from these balance-sheets that there were no doubtful and bad debts not covered by the reserve fund. They would never assume for one moment that the Rs. 28 lakhs shown in assets included some Rs. 13 lakhs of absolutely bad debts.
That, we think, clearly shows he was of opinion that the Act required debts considered doubtful and bad to be shown according to the form. In that particular case the bad debts could not apparently be met from any reserve fund, but that does not affect his construction of the item “debts owing to the company.”
17. It was contended that such a deviation from the provisions of the note in the form might be justified by Sub-section (2) of Section 132 which says that the balance-sheet “shall be in the Form marked F or as near thereto as circumstances admit,” Obviously, this elasticity is intended for cases where the circumstances of a particular company make any part of the form inapplicable to it. It clearly cannot cover the present case, for there is nothing that makes the note inapplicable to a bank and in fact it now specially alludes to the case of a bank. The expression “in all cases” in the note plainly means “in the case of all companies including a bank.” Nor is there anything in the note which is contradicted by the terms of Section 182, so as to bring in the rule that a form in a schedule does not control the operation of the statute (cf. Hard-castle on Statutory Law, 3rd Edition, pp. 223, 224). On the contrary, the form is in pursuance of the direction in Sub-section (1) of Section 132 that the balance-sheet shall give “such particulars as will disclose the general nature” of a company’s liabilities and assets. Sir Thomas Strangman’s contention virtually boils down to saying that, because the concealment as to provision for bad debts from a secret reserve fund cancels the concealment in regard to the existence of bad book-debts, there is no illegality or impropriety in the latter concealment. With all respect, that seems to us, in the face of the clear provisions in the form to the contrary, to be nothing better than a quibble, equivalent to saying that “two blacks make one white.” It appears to us to be simply an attempt to drive a coach-and-four through the Act. We would refer in this connection to the remarks of Lord Macnaghten in Netherseal Colliery Company v. Bourne (1889) 14 App. Cas. 228. There certain deductions were made from wages contrary to statutory provisions, and Lord Macnaghten says (p. 247) :-
Parliament would legislate to little purpose if the objects of its oars might supplement or undo the work of legislation by making a definition clause of their own. People cannot escape from the obligation of a statute by putting a private interpretation upon its language.
18. We may also refer to Galloway v. Schill, Seebohm & Co., Limited [1912] 2 K.B. 354. That case relates to the balance-sheet required by Section 26 of the English Act of 1908. A company in its statement of assets lumped together certain assets without showing them separately, though Section 26, Sub-section (4), prescribes that the statement should show not only the general nature of the assets, but “how the values of the fixed assets have been arrived at.” Stress was laid for the company upon the argument that it would impose a most onerous burden upon companies to require separate valuation and separate statement of values, and that it would make companies liable to prosecution by the common informer. The Court, however, held that no such consideration could prevail against the direct provisions of the section that the balance-sheet should show how the values of the fixed “assets have been arrived at. The key note of a balance-sheet is “information” within certain limits, and not “concealment”; and when the Indian Act contains a distinct provision as to doubtful or bad debts being shown on the “Assets” side, the Courts should not endorse a contravention of the express enactment to that effect. We cannot help remarking that the Magistrate’s judgment is considerably discounted by the fact that, while he gives copious references to English dicta such as those contained in Newton’s case, and extracts from Auditors’ Hand-books as to the maintenance of at “secret reserve”, he has not made a single reference to form F of the Act of 1913, and its directions as to “book-debts” which cannot properly be ignored in this summary fashion.
19. If our conclusion operates so as to cause undue inconvenience to banks, it is open to them to move the Governor-General-in-Council to amend the form under the power conferred on him by Section 151 of the Indian Companies Act of 1913.* But, as the form stands, effect must be given to the plain meaning of the language used in it.
20. Therefore, in our opinion the view taken by the Magistrate was erroneous, and he was not justified in dismissing the complaint in the way he did. There are clear prima facie grounds for holding that the total book-debts shown in the two balance-sheets of 1925, now in question, are incorrect and that the express or implied statements that there were no bad debts are untrue. It will remain for the Magistrate to decide whether these false statements were made wilfully and knowingly by all or any one of the respondents. That is a question which is entirely untouched by this judgment. We set aside his order dismissing the complaint and remand the case to him for disposal according to law.
* This has since been done by a Notification of the Government of India, published in the Bombay Government Gazette Extraordinary, for March 31, 1927.
