Vastulal vs Pareek Commercial Bank

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 27 August 1964

Coram: P.B. Gajendragadkar, J.C. Shah, N. Rajagopala Ayyangar

In this case the Supreme Court of India heard a petition titled Vastulal versus Pareek Commercial Bank that was decided on 27 August 1964. The bench comprised P B Gajendragadkar, J C Shah and N Rajagopala Ayyangar, and the judgment was delivered by Justice Shah. The appellant, Vastulal Pareek—referred to in the judgment simply as “Vastulal”—had originally established a banking enterprise in the city of Bikaner in the year 1921. That enterprise operated under the name and style of the Pareek Commercial Bank. In the year 1943 a public limited company was incorporated under the Bikaner Companies Act and was named Pareek Commercial Bank Ltd., which the judgment thereafter calls “the bank.” At the time of incorporation all assets and liabilities of the earlier Pareek Commercial Bank were transferred to the newly formed public limited company. The articles of association of the bank provided that the general management of the business, although subject to the control and supervision of the board of directors, was vested in Vastulal, who was also appointed as the chairman of the bank.

Subsequently, in February 1952 a depositor of the bank presented an application under the Indian Companies Act 1913 before the High Court of Rajasthan, which by then had jurisdiction over the former princely state of Bikaner because of political changes. The High Court responded by issuing an order for compulsory winding up of the bank and by appointing an official liquidator to administer the winding‑up process. While examining the bank’s books of account, the liquidator discovered that six stock‑brokers held cash‑credit accounts containing a variety of amounts that together summed to Rs 66,821. Those sums had been transferred from the bank’s sundries register to the brokers’ accounts. The liquidator also learned that payments had been made to the brokers’ accounts in other banks on instructions that had been given by Vastulal on the bank’s behalf. In the directors’ report dated 31 December 1950, under the heading “Loans, advances, cash credits and overdrafts,” the report collectively described certain amounts as “debts considered good for which the bank held no other security than the debtor’s personal security.” The report identified the Rs 66,821 as the balance due from various “parties through whom shares were purchased and sold, but not transacted through share account,” and it labelled the sum as “unverified owing to the lack of information.” When Vastulal was examined publicly under Section 450 of the Banking Companies Act 1949, his explanation for the transfer of the sums to the stock‑brokers was deemed unsatisfactory. On further inquiry the stock‑brokers told the liquidator that the amounts had been credited by them to the account of M s B R Pareek & Sons Ltd., a private concern of which Vastulal was the managing director, and that the monies had been used to meet the liability for losses incurred by that concern in share‑trading activities conducted through the brokers. The liquidator then filed three petitions before the company judge of the High Court of Rajasthan at Jodhpur, invoking Section 235 of the Indian Companies Act 1913 and Section 45H of the Banking Companies Act, seeking directions against Vastulal and the other directors to restore the amounts belonging to the bank and to allow assessment of damages.

In the proceedings, the liquidator filed three petitions before the company judge of the High Court of Rajasthan at Jodhpur invoking Section 235 of the Indian Companies Act 1913 and Section 45H of the Banking Companies Act 1949, seeking orders that Vastulal and the other directors of the bank restore to the bank the sums that had been transferred to stock brokers, and also seeking assessment of damages. The petitions alleged that Vastulal had engaged in speculative trading of shares and securities on behalf of M/s B. R. Pareek & Sons Ltd., a private concern of which he was managing director, through various stock brokers, and that he had incurred heavy losses. It was claimed that, in order to meet his personal liabilities and advance his private transactions, Vastulal had received large amounts from the Imperial Bank of India at Bombay, which he then credited or permitted to be credited in the bank’s “sundries register” to the accounts of the brokers, thereby obtaining a personal advantage and committing misfeasance, malfeasance and non‑feasance. The petitions further alleged that the other directors of the bank were liable under Section 235 of the Indian Companies Act because, as directors, they had either aided or turned a blind eye to Vastulal’s misapplication of bank funds for his personal losses. The High Court dismissed the claim against those directors. The company judge rejected Vastulal’s plea and ordered him to pay the bank three amounts: Rs 700, Rs 8,500 and Rs 24,846‑11‑0, each with simple interest at six per cent per annum up to the date of realization. Against those orders, three appeals—numbers 5, 6 and 7 of 1960—were filed. Appeal 5 of 1960 was held not maintainable and dismissed. Appeals 6 and 7 of 1960 were heard on their merits and were ultimately dismissed by the High Court, leading to the filing of special leave appeals against those dismissals. Appeal No 484 of 1962 concerned the order in Company Case No 176 of 1957 directing payment of Rs 8,500, which represented the sum transferred by Vastulal to M/s Naraindas Aidan, stock brokers of Bombay. Appeal No 485 of 1962 related to the order in Company Case No 177 of 1957 directing payment of Rs 24,846‑11‑0, representing the money and the value of nineteen shares of Kohinoor Mills Ltd. transferred to M/s S. Ramdas, also stock brokers of Bombay. The relevant entries in the bank’s sundries register for the accounts of M/s Naraindas Aidan and M/s S. Ramdas were recorded as follows: “Account of M/s Naraindas Aidan page 75 9‑12‑49 To amount paid by Bank of India, Bombay, on 13‑12‑49.”

In the sundries register of the bank, the entry for the account of M/s Naraindas Aidan recorded on page 75 shows that on 9‑12‑1949 an amount was received from the Bank of India, Bombay. A further receipt of Rs 3,500 was entered on 6‑2‑1950 as an amount paid by the Imperial Bank of India, Bombay. On 6‑12‑1951 a credit of Rs 5,000 was noted as an amount transferred to a cash‑credit account, and the total of Rs 8,500 was shown as a credit balance for the account.

The account of M/s S. Ramdas, shown on page 76, contained several entries of cash received from the Imperial Bank of India, Bombay. On 23‑12‑1949 a cash receipt of Rs 10,000 was recorded as being paid on 19‑12‑1949. On 28‑1‑1950 a further cash receipt of Rs 2,500 was logged as being paid on 7‑1‑1950. On 6‑5‑1950 a cash receipt of Rs 1,000 was entered as being paid on 22‑2‑1950. On 6‑12‑1951 a credit of Rs 1,000 was noted as an amount transferred to a cash‑credit account, and the total credit balance for the account was shown as Rs 18,500.

In addition to the entries amounting to Rs 18,500, the register also recorded a transfer by Vastulal to Messrs S. Ramdas of nineteen shares of Kohinoor Mills Ltd. that had been owned by the bank. The market value of those shares at the date of transfer was Rs 6,346‑11‑0. Consequently, the outstanding balance against Messrs S. Ramdas in the cash‑credit account was Rs 24,846‑11‑0.

The Court considered the two matters involving the sums transferred to the two brokers separately. Regarding the sum of Rs 24,846‑11‑0 transferred to Messrs S. Ramdas, the record showed that Vastulal did not contest that Messrs B. R. Pareek & Sons Ltd. was his personal concern and that he acted as its managing agent. He also did not deny that the items credited to the account of Messrs S. Ramdas, including the nineteen shares of Kohinoor Mills Ltd., were entered on his instructions. He admitted that those amounts and the shares were the property of the bank and that he, in his capacity as chairman of the bank, had delivered the shares to the stock‑brokers. The appellant’s sole argument was that the payments and the delivery of the shares were made for the benefit of the bank and that he had not authorised the brokers to apply the amounts or the share value to cover any personal losses he might have incurred in share‑sale and purchase transactions on behalf of Messrs B. R. Pareek & Sons Ltd. He contended that if the brokers had applied the sums to his personal losses, such action was beyond their authority and they should be liable to repay the bank, but the liquidator could not recover those appropriated amounts from Vastulal personally. Concerning the Rs 24,846‑11‑0, Vastulal asserted that the bank had agreed to purchase debentures of the Calcutta Electric Supply Company Ltd. with a face value of Rs 50,000, and to place the brokers in possession of the necessary funds. Accordingly, Rs 18,500 had been transferred through the Imperial Bank of India, and the nineteen shares of Kohinoor Mills Ltd. had been delivered for sale. Vastulal testified that Messrs S. Ramdas had been instructed to acquire the debentures on behalf of the bank.

In this case, the bank recounted that a directive to purchase debentures of the Calcutta Electric Supply Company had been issued during the last week of January 1950 and that the directive had been cancelled on 14 February 1950; the High Court found Vastulal’s version of these events to be unreliable. Vastulal failed to produce the accounting records that would reflect the share transactions carried out in the name of Messrs B R Pareek & Sons Ltd, and he also did not produce any correspondence with the stock brokers that would show that the brokers had received the sums and had earmarked them for a particular purpose. It is accurate, however, that the broker S Ramdas, in paragraph 9 of his statement dated 15 October 1955, admitted that the bank had placed an order for the purchase of the Calcutta Electric Supply Company debentures in the last week of January 1950 and that this order had subsequently been cancelled on 14 February 1950. Ramdas further admitted that the bank had made no payment toward those debentures because the securities had not yet entered the market and consequently no bill had been presented for the amount required for the purchase. The narrative presented by Vastulal conflicted with the entries recorded in the bank’s own books of account. The sum of Rs 18,500, which was the subject of dispute, consisted of four separate payments: Rs 10,000 on 19 December 1949, Rs 2,500 on 6 February 1950, Rs 5,000 on 7 January 1950, and Rs 1,000 on 20 February 1950. Of these, Rs 17,500 were transferred before any instructions—according to Vastulal’s own account—regarding the purchase of the Calcutta Electric Supply Company debentures had been given, and the final entry of Rs 1,000 was dated after the order had already been cancelled. The broker’s ledger showed that the amounts received had been credited to the account of Messrs B R Pareek & Sons Ltd; this ledger was produced to demonstrate the transactions that were conducted in the name of that partnership, and every disputed amount was shown as having been received through the Imperial Bank of India. The same ledger also recorded the proceeds from the sale of nineteen shares of Kohinoor Mills Ltd, and after crediting all the amounts, a balance of Rs 891‑10‑6 remained outstanding against Messrs B R Pareek & Sons Ltd in the broker’s books. The letters that would have indicated the broker’s intention to appropriate the received sums were never produced, nor were the books of account of Messrs B R Pareek & Sons Ltd. Two letters, which ordinarily should have been retained by the bank but were instead supplied by Vastulal, were offered to support the claim that the transferred sums were related to the debenture purchase order; however, even these letters failed to corroborate Vastulal’s contention.

In the case, the letter dated 25 January 1950 merely confirmed that an order had been received for the purchase of debentures worth Rs 50,000. The letter did not mention any sum being transferred as an advance payment for that order. It was admitted that Rs 17,500 had been received by Messrs S Ramdas before the date of that letter, and if that amount had been intended as an advance for the purchase of debentures, the letter would have been expected to contain a reference to such appropriation, which it did not. The second letter, dated 14 February 1950, dealt with the cancellation of the order but likewise made no reference to any transfer of funds for the purchase of debentures, nor did it address the disposition of the funds that had already been transferred to the brokers for the alleged specific purpose of buying the debentures. The bank’s account books demonstrated that the bank ordinarily did not make advance payments for the purchase of stocks, shares or securities; payments were made only after the securities were purchased and a bill had been submitted. No rational explanation was offered by Vastulal as to why this particular transaction would have been an exception to the bank’s usual practice. Consequently, the assertion that the amounts appropriated by Messrs S Ramdas to cover losses in the account of Messrs B R Pareek & Sons Ltd. were directed toward the purchase of Calcutta Electric Supply Co. Ltd. debentures was not supported by any documentary evidence held by the bank.

Counsel for Vastulal argued that the entries in the books of Messrs S Ramdas were not admissible under Section 34 of the Evidence Act. However, the question of admissibility had not been raised before the company judge. The law permits a question about the proper proof of evidence that is otherwise admissible to be raised only at the time the evidence is tendered and admitted, not at the appellate stage. It was for the first time on appeal that counsel contended that the entries had not been proved by the person who made them. The company judge appeared to have accepted that the entries were duly proved, and no objection was made to their proof at that stage. Established law holds that when evidence which is legally admissible and relevant is admitted in the trial court without objection, an appeal cannot entertain a plea of improper proof. Because the entries had been admitted without objection, the High Court correctly refused to consider the plea raised by counsel. Counsel for the appellant also submitted that the appellant had been misled into believing that, when an enquiry under Section 45‑H of the Banking Companies Act was held, the company judge was only to determine whether the liquidator had made a prima facie case, and that a full enquiry would follow if such a case existed. As a result, the appellant had not produced evidence in his possession. No such argument was raised before the appellate court, and it was therefore not considered.

In the appeal, the appellant argued that the purpose of the enquiry under Section 45‑H of the Banking Companies Act was merely to determine whether the liquidator had established a prima facie case, and that, if such a case existed, a full investigation of the appellant’s defence would follow. The appellant therefore said he had not produced the documents that were in his possession because he expected the court to first decide the prima facie issue. The appellate court noted that no such argument was presented before it, and it rejected the contention for clear reasons. The court explained the operation of Section 45‑H, stating that the provision directs that when an application is filed in the High Court under Section 543 of the Companies Act, 1956 (or section 235 of the earlier Companies Act of 1913) against an officer of a banking company for the repayment or restoration of money or property, the High Court must order the officer to repay or restore the amount if the applicant establishes a prima facie case. Only after that finding does the burden shift to the officer to demonstrate that he is not liable, either wholly or partially, for the repayment. Consequently, the scheme of Section 45‑H makes it clear that once a prima facie case is shown, the person against whom the order is made must bear the onus of proving his non‑liability. In the present case, after oral evidence was given, Vastulal never asserted that he intended to prove he was not liable to restore the sums that had been appropriated to cover his losses. On the basis of the material before it, the High Court was therefore properly justified in concluding that the amount of Rs 24,846‑11‑0 which the appellant had been ordered to pay had been misapplied by him to satisfy his liability in respect of the transactions of Messrs B R Pareek & Sons Ltd., and that, on that basis, he remained liable to make good the same amount to the bank.

The court further examined Vastulal’s claim concerning the sum of Rs 8,500 that had been transferred to the account of M/s Naraindas Aidan, which formed the subject of Appeal No 435 of 1962. The court found this plea to be wholly unsubstantial. The liquidator had argued that Vastulal was engaged in the business of buying and selling shares and securities through the stock‑broking firm M/s Naraindas Aidan, and that Vastulal had transferred Rs 3,500 on 13 December 1949 and Rs 5,000 on 3 February 1950 to that firm. Both transfers were admitted to have represented money belonging to the bank. However, the records showed that those amounts were entered in the stock‑broker’s books under the name of M/s B R Pareek & Sons Ltd., not under the bank’s own account. Initially, Vastulal submitted that, without examining the bank’s records, he could not state the purpose of the two payments. He subsequently inspected the bank’s records but remained unable to explain why the amounts had been transferred to the stock‑brokers on the bank’s behalf. The records

The bank’s records failed to clarify the two transfers and gave no indication that the bank had ever dealt with M/s Naraindas Aidan. To examine this issue, Tulsidas, who was a partner of M/s Naraindas Aidan, gave evidence on behalf of the liquidator. He produced the complete set of the firm’s account books and affirmed that the firm had never carried out any transaction for the bank and that no account in the name of the bank appeared in those books. He contested Vastulal’s claim that the two sums had been entered in the firm’s books as payments made on the bank’s behalf. Tulsidas also produced office copies of the contract notes and the statements of account that reflected the transactions recorded in the firm’s books, and he asserted that the original documents had been forwarded to Vastulal from time to time. In addition, his books showed that Vastulal had incurred heavy losses in share‑trading activities that were conducted through the firm. By contrast, Vastulal did not produce the account books of M/s B.R. Pareek & Sons Ltd., which he admittedly possessed, nor did he produce the statements of account that he had received from M/s Naraindas Aidan. Moreover, the bank’s own books contained no reference indicating the purpose for which the two amounts had been transferred to M/s Naraindas Aidan. Considering these facts, the only reasonable conclusion was that the sums, which belonged to the bank, had been misapplied by Vastulal to settle his personal liabilities and had not been appropriated for any legitimate bank purpose.

The appellant’s counsel argued that because the amounts transferred to the two brokers were drawn on other banks by way of cheques or bills of exchange, and because such instruments were issued in accordance with the Negotiable Instruments Act 1881 and the prevailing commercial practice, evidence showing that the amounts were not paid by the bank or not for the bank’s purpose should be deemed inadmissible. The Court held that this argument was based on a misunderstanding of the real dispute that the appeals were meant to resolve. It was undisputed that the sums of Rs 18,500 and Rs 8,500 transferred to the stock brokers belonged to the bank, and it was also undisputed that the transfers were effected by bank drafts or cheques drawn by Vastulal while he was acting on the bank’s behalf. The liquidator’s case was that Vastulal, relying on the authority that had been given to him, unlawfully appropriated the bank’s funds for his private use, thereby committing misfeasance. The Court could not see how a question of the admissibility of evidence contrary to the terms of a bill of exchange or a cheque could arise in these circumstances. The matters before the Court therefore consisted of the liquidator’s claim that the bank’s funds had been wrongly used by Vastulal and the appellant’s attempt to rebut that claim.

In this appeal the liquidator asserted that the funds belonging to the bank had been wrongfully utilized by Vastulal in order to discharge his personal liabilities to share brokers, while Vastulal, the appellant, contended that the sum of Rs 18,500 transferred to M/s S Ramdas had been sent for the purpose of purchasing, on behalf of the bank, debentures of the Calcutta Electric Supply Co. Ltd. The Court examined Vastulal’s conduct, the documentary evidence surrounding the transaction, and concluded that Vastulal’s explanation that the Rs 18,500 was forwarded for the purchase of debentures was false. The Court further held that the liquidator’s case could be proved and that no provision of the Negotiable Instruments Act, 1881, or the Indian Companies Act, 1913, barred the admission of such evidence. The Court observed that Section 27 of the Negotiable Instruments Act, which was relied upon by counsel, merely addresses the authority of an agent to bind his principal and does not exclude proof that an agent, by taking wrongful advantage of his authority, misappropriated the principal’s funds or applied them to purposes for which he had no authority. The Court noted that although Vastulal had drawn cheques and bank drafts purporting to act on behalf of the bank, in doing so he gave directions that appropriated the bank’s property for his own purposes, and that such conduct could be established without contravening the Negotiable Instruments Act. Accordingly, the Court dismissed the appeals, ordered them to fail, and awarded costs together with a single hearing fee.