ORDER M.P. Menon, J. 1. This is an application filed by the Official Liquidator of the Kerala Water Transport Corporation Ltd. in liquidation, against the former directors of the company for a declaration that they are liable to contribute to its assets on account of breach of trust, misfeasance, negligence, want of care, etc. There were 33 respondents in the application as originally framed, and most of them filed counter affidavits/objections; but in the amended application filed in July, 1970 there are only 28 respondents. The prayers in the points of claim filed in June, 1972 are: "(1) A declaration that the respondents and each of them as aforesaid have been guilty of misfeasance and breach of trust in relation to the above named company as aforesaid. (2) An order that the respondents 1 to 10 jointly and severally do repay the Official Liquidator of the said company a sum of Rs. 8,50,000 being the estimated loss on account of overpayment for boats taken over by the Corporation. (3) An order that respondents 1 to 28 do jointly and severally repay the Official Liquidator of the said company a sum of Rs. 15,50,000 being the estimated accumulated loss of the company subject to the maximum amount mentioned in column 9 of Exhibit 'j' annexed herewith. (4) An order that the said respondents to pay the costs and incidental to this application. (5) Such other further reliefs as this Honourable Court thinks fit proper to make." 2. Certain facts are not in dispute. At the beginning of 1958, there were about 145 private boats belonging to 42 different owners plying in the Kuttanad area and connecting places like Quilon and Ernakulam, with Alleppey at the centre. These boats had their own licences, route permits and timings and were catering mostly to the needs of passenger transport. There were about 2,000 employees organised into two or three trade unions, and the most influential was the one affiliated to the A.I T.U.C. The late Mr. T. V. Thomas was its President till he became a minister after the 1957 elections. There were disputes between the boat owners and the employees and an award had been passed by the Industrial Tribunal granting additional benefits to the employees including gratuity. To the owners most of whom were operating on loss, the award proved to be the last straw on the camel's back. There were disputes between the boat owners and the employees and an award had been passed by the Industrial Tribunal granting additional benefits to the employees including gratuity. To the owners most of whom were operating on loss, the award proved to be the last straw on the camel's back. A few of them issued notices of closure. Others represented to Government that steps be taken for taking over all the boat services through a corporation. Threatened with a break down of water transport facilities in an area where other forms of transport were then practically unknown, the Government decided to move in, and move in swiftly. The circumstance that Sri T. V. Thomas who had intimate knowledge about the industry and its problems had become the Minister for Transport and Labour in the meanwhile, proved helpful. On 11th February 1958 a conference of the interested parties was convened, and on 19th February 1958 Government issued an order embodying its decision to form a company with 51 per cent of the shares for itself, 40 per cent for the boat owners, and 9 per cent for the employees. Boats plying: "In the main lines between Quilon and Ernakulam and services touching Alleppey and those operated from Alleppey." were to be taken over, and Government was to advance Rs. 15 lakhs out of which Rs. 5 lakhs was to be retained as working capital, and Rs. 10 lakhs "spared to the boat owners as part payment of the value of the boats". Fifty per cent of the arrears of wages, bonus, gratuity, etc., due to the workers was to be deducted from the value of the boats payable to the employers to be converted into employees' shares. A Special Officer was appointed to work out the scheme in detail and to submit the draft Memorandum and Articles of Association before the end of the month. A "valuation committee", consisting of two representatives each of the employers and employees, and an engineer nominated by the Government, was also appointed to value the boats. 3. The company (Water Transport Corporation) was registered on 18th April 1958 with five officers of the Government, four representatives of the boat owners and two representatives of the workers as directors. A "valuation committee", consisting of two representatives each of the employers and employees, and an engineer nominated by the Government, was also appointed to value the boats. 3. The company (Water Transport Corporation) was registered on 18th April 1958 with five officers of the Government, four representatives of the boat owners and two representatives of the workers as directors. The valuation committee had submitted its report in the meanwhile; and at the first meeting of the Director Board held at the Government Secretariat at Trivandrum on 19th April 1958, the report was "perused and recorded subject to the Government's approval". Government approved the valuation on 17th May 1958. On 30th May 1958 the Director Board accepted, in anticipation of Government approval, the valuation of three other boats, and this too was approved by Government on 10th July 1958. In June, 1959 the Deputy Comptroller (Kerala) submitted to Government an "Inspection Report on the accounts of the Kerala Water Transport Corporation relating to the payment of compensation to the boat companies", indicating that the value fixed was excessive. It appears that there was a change in Government by about this time or soon thereafter. On 15th October 1959 Government appointed Sri A. G. Menon, then Additional Chief Secretary to Government, to examine the working of the Corporation and to suggest measures for its improvement. He submitted his report to Government on 28th January 1960 assessing the extent of excessive valuation as Rs. 11,44,032 and suggesting measures for the improved working of the company. In the meanwhile, Government had appointed Sri Menon as Chairman of the company, hoping that under his leadership its affairs would improve. On 4th November 1959 Government had also "remitted" the valuation committee's report to the same committee, for review/revaluation, on the basis of the Comptroller's report. The revaluation report was made on 23rd May 1960 substantially reaffirming the original report and disputing the approach made by the Comptroller. It is not known what further steps the Government or the Corporation had taken in respect of this report. The Corporation continued to work on heavy loss year after year (except for a nominal profit during one) and was ultimately ordered to be wound up, on an application made by the Government, on 20th March 1955. At that time, Government was the biggest creditor and shareholder of the Corporation. 4. The Corporation continued to work on heavy loss year after year (except for a nominal profit during one) and was ultimately ordered to be wound up, on an application made by the Government, on 20th March 1955. At that time, Government was the biggest creditor and shareholder of the Corporation. 4. According to the points of claim the company had lost Rs. 8.5 lakhs as overpayment for the value of the boats. The company had sold away 42 boats in 1962; and after winding up, 117 boats were sold by the liquidator. The loss is arrived at by deducting the total sale proceeds from the book value of the boats at the time of the sale. What is mainly alleged against respondents 1 to 10 who were the directors at the relevant time, and from whom the above loss is sought to be recovered, is that while accepting/ approving the valuation committee's reports as per the Board resolutions of 19th April 1958 and 30th May 1958, they had not exercised their independent judgment or scrutinized the reports with the aim of safeguarding the company's interests. They simply perused the report and left it to Government to take a decision, thereby abdicating their powers and duties. The directors did not make any attempt to ascertain the written down value of the boats; they omitted to note that the committee had adopted a peculiar method of valuation, unjustified on all counts. What the committee had done was to work out the "replacement cost" and deduct repair charges i. e. arrive at the "present cost of construction" going by the then prevalent market rate of the materials used, dividing it by the estimated total life of the boats, and then multiplying this figure with the estimated remaining life. The committee had not measured all the boats. They had taken one large boat and one small boat as samples and worked out the figures on this basis, treating the average of the two classes as the figure applicable for medium size boats also, though over 100 boats belonged to this latter class. The estimated life was too low. The committee had also not taken into account previous sales transactions regarding similar and some of the same boats, particulars of which were available with the Chief Inspector of Boats. The estimated repair charges were too low. The estimated life was too low. The committee had also not taken into account previous sales transactions regarding similar and some of the same boats, particulars of which were available with the Chief Inspector of Boats. The estimated repair charges were too low. For valuing the hulls, wastage of wood was taken as 50 per cent whereas normal rates of wastages were lower. Some of the engines had been valued only approximately. There were also arithmetical mistakes in calculations. For the intermediate group, the committee had fixed a higher value by enhancing the average of the other two classes by 25 paise per cubic foot, without any justification. Losses were sustained under all these heads; but the "points of claim" does not indicate what the loss under each head is, nor does it correlate the total of Rs. 8.5 lakhs to the loss said to have been caused by the above defects. 5. Respondents 1, 2 and 10 were directors of the company representing employers, at the relevant time. Respondents 3 and 4 were representatives of employees, and respondents 5 to 9, officers of the Government. The stand generally taken by the officers in the points of defence is that they were not full time directors, but only nominees of the Government by reason of other offices they were holding, and that they had at all times acted honestly and with due care. The 5th respondent, for example, was the District Collector of Alleppey at the time the company was formed and was made chairman only for that reason. They had no technical skill or experience; it was not possible for them to sit in judgment over the valuation committee's report, particularly in the absence of any independent machinery to assist them in the matter. The committee consisted of a senior engineer in Government service with "the necessary technical qualification and experience" and of representatives of the industry who, even in the opinion of the Government, were competent and reliable persons. Even so, they took, the precaution of subjecting the same to Government scrutiny. The boats were being inspected by the Canal Department from time to time, involving periodical drydocking and replacement of worn out parts at heavy capital expenditure and in this view, they were as good as new ones at the time of takeover. Even so, they took, the precaution of subjecting the same to Government scrutiny. The boats were being inspected by the Canal Department from time to time, involving periodical drydocking and replacement of worn out parts at heavy capital expenditure and in this view, they were as good as new ones at the time of takeover. Escalation of prices and increase in labour charges had rendered the method of taking the written down value, unrealistic and impracticable. The estimated life of the boats was not on the low. Comparatively lower prices were obtained at the time of sale because the condition of the boats had deteriorated and they had been sold without route permits and timings. 6. Directors representing the employers have gone a step further in their points of defence, and have asserted that the valuation was perfectly reasonable and justified. The defects pointed out by the Comptroller were more imaginary than real, and those had been made clear in the second (revaluation) report to which no one had taken any exception. Purchase of a going business involving assets acquired long ago, and in the background of rising prices and costs, could never be examined with reference to rules of accountancy, written down value, etc. Examples are also given to show that it would have been less beneficial to the Corporation if reliance had been placed on book values and prior sale transactions. Long experience had shown that 50 per cent wastages was the minimum permissible in the matter of constructing the wooden hull. Some of the books of the private owners had shown more than 50 per cent wastage. Regarding value of engines, quotations were obtained from reputed dealers; but no prices were actually quoted in some cases. 7. The second head of claim, against respondents 1 to 28, is for Rs. 15.50 lakhs, estimated to be the accumulated loss of the company for about six years. Here again, the allegation is that the directors had not been showing due care and attention in the management of the assets of the company and the running of its business. Though the company was incurring loss year after year, no effective steps to improve its finance were taken by them. The reforms suggested by auditors and persons who enquired into the company's working were not properly implemented. Though the company was incurring loss year after year, no effective steps to improve its finance were taken by them. The reforms suggested by auditors and persons who enquired into the company's working were not properly implemented. No stock taking had preceded the taking over of the assets of the private owners. The staff and crew were also taken over without due screening. Unwanted staff were maintained. Persons like jetty masters and porters who were not paid employees of the private owners were made monthly paid. About 50 per cent of the boats taken over was kept as reserve, as against 10 to 15 actually required. The surplus boats were sold only in 1962 and till then the crew were retained and paid. A guarantee of Rs. 10 lakhs obtained from the State Bank of Travancore for expanding cargo services was used for other purposes. The directors did not exercise proper administrative control and supervision. Uneconomic routes were maintained, surplus crew retained and materials wasted. 8. Among respondents 11 to 28, thirteen are officers or former officers of Government who had functioned as directors, four of them being former District Collectors of Alleppey, and three, former Secretaries to Government in the Public works Department. Among the non officials are included a few former boat owners and a trade union representative. It is pleaded by the respondents that they had bestowed proper attention to the various matters that had come up before the Board from time to time, including measures of economy, and that they had acted bona fide and with due care. The industry was incurring losses even under the private owners and was on the verge of close down when Government took over; and mere change of ownership could not have eliminated the inherent weakness of the industry. After the winding up order, the same boat services are being run departmentally, but again with heavy loss. One of the purpose of takeover was to ensure continued employment of the staff and crew, and proposals for retrenchment were being opposed by the trade unions. Some of the employees who were being paid on piece or commission basis were converted into monthly paid on the basis of a binding award. Proposals were made to increase the fares, but Government was not prepared to sanction it. Some of the employees who were being paid on piece or commission basis were converted into monthly paid on the basis of a binding award. Proposals were made to increase the fares, but Government was not prepared to sanction it. Surplus boats were there; but the decision to takeover all the boats had been taken by the Government even before the formation of the Corporation. There was a proposal to start cargo services; and the surplus boats could not have been disposed of before a final decision on this question was taken. The diversion of bank guarantee was unavoidable and was approved by the general meeting of the shareholders. The circumstances under which the company was formed, the socio economic conditions which compelled the takeover, the majority share holding by the Government, its power to nominate all the directors including labour representatives, the fact that all the directors were part time, are all relevant in evaluating the case sought to be made out. 9. In support of the application, PWs 1 to 6 have been examined, and Exts. A-1 to A-15 marked. The second respondent has been examined as R.W. 1 on the other side, and Exts. B-1, B-1(a) and B-1(b) have also been marked. P.W. 1, a former General Manager, has only proved the books of the company and some documents. P.W. 2 is the Deputy Controller who had submitted the Inspection Report of June 1959 marked as Ext. A-9. P.W. 3 is the Chief Inspector of Boats who had furnished to the Official Liquidator copies of certain sale deeds relating to the boats. P.W. 4 is A. G. Menon, author of Ext. A-10 report dated 28th January 1960. P.W. 5 has only produced some documents relating to the appointment of Sri A. G. Menon in connection with Ext. A-10 and P.W. 6 is the liquidator. 10. Before proceeding further, the scope of misfeasance proceedings under S.543 of the Act has to be briefly outlined. The section reads: "543. A-10 report dated 28th January 1960. P.W. 5 has only produced some documents relating to the appointment of Sri A. G. Menon in connection with Ext. A-10 and P.W. 6 is the liquidator. 10. Before proceeding further, the scope of misfeasance proceedings under S.543 of the Act has to be briefly outlined. The section reads: "543. Power of Court to assess damages against delinquent directors, etc.-(1) If in the course of winding up a company, it appears that any person who has taken part in the promotion or formation of the company, or any past or present director, managing agent, secretaries and treasurers, manager, liquidator or officer of the company (a) has misapplied, or retained, or become liable or accountable for, any money or property of the company; or (b) has been guilty of any misfeasance or breach of trust in relation to the company; The Court may, on the application of the Official Liquidator, of liquidator, or of any creditor or contributory, made within the time specified in that behalf in sub-s.(2), examine into the conduct of the person, director, managing agent, secretaries and treasurers, manager, liquidator or officer aforesaid, and compel him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Court thinks just. (2) An application under sub-s.(1) shall be made within five years from the date of the order for winding up, or of the first appointment of the liquidator in the winding up, or of the misapplication, retainer, misfeasance or breach of trust, as the case may be whichever is longer. (3) This section shall apply notwithstanding that the matter is one for which the CaseSearch 2011 (Full Text) Copyright © Em Tee En Publications This Product is Licenced to Unnikrishnan V., Adv, Ekm Page:8 person concerned may be criminally liable." The heading indicates that what is involved is an assessment of damages arising from delinquency of directors and others. (3) This section shall apply notwithstanding that the matter is one for which the CaseSearch 2011 (Full Text) Copyright © Em Tee En Publications This Product is Licenced to Unnikrishnan V., Adv, Ekm Page:8 person concerned may be criminally liable." The heading indicates that what is involved is an assessment of damages arising from delinquency of directors and others. The liabilities of the persons concerned do not arise from the statute itself, but from other rules of law, which impose on them an obligation not to misapply or retain money or property belonging to the company, or to commit misfeasance or breach of trust in relation to them. The Court's power is to compel the persons concerned to make good to the company the loss sustained by it on account of their acts of commission or omission. The section does not create new rights or impose new obligations, but only provides a convenient means of enforcing rights and remedies otherwise enforceable by action, had there been no winding up. 11. Persons who take part in the promotion or formation of a company, its directors past and present, managers, and officers owe a duty to the company, different in nature from that of others. Acceptance of office or responsibility by them, in connection with the formation, management and working of the company, carries with it certain duties which depend on the circumstance that they are agents or trustees or persons occupying a fiduciary position. Breach of these duties attracts liability; and the misfeasance proceedings enable assessment and recovery of the damage suffered by the company thereby. The basis of the liability thus appears to be the existence of duties such persons owe to the company. 12. If the proceedings are against the directors, as in this case, the first thing to be ascertained is the nature of the duties they have undertaken; and this involves an enquiry into the nature of the company's business, the manner in which its work is distributed, the provisions in its articles of association, the degree of skill and care that may reasonably be expected of persons of their knowledge and experience etc. If a director acts honestly and within his powers for the benefit of the company, and with such care that may ordinarily be expected of him a mere error of judgment on his part cannot spell in the realm of misfeasance. If a director acts honestly and within his powers for the benefit of the company, and with such care that may ordinarily be expected of him a mere error of judgment on his part cannot spell in the realm of misfeasance. His duties are of an intermittent nature to be performed periodically at board meetings; in respect of duties which may properly be left to other officials, he is entitled to rely on them. A director should at all times consider the interests of the company; extraneous considerations, even if philanthropic, should be eschewed. Fraud, underhand dealings, undue preferences, personal aggrandisement and the like are all taboo. The director should exercise cue diligence and if he has reason to suspect another director or officer of the company, he should investigate at least in order to pre empt accusation of dishonesty and connivance. 13. Imprudence, want of judgment or bona fide exercise of discretion may not attract liability, though on hindsight, it may be seen that a better course of conduct could have been followed by a director. Misfeasance does not cover every misconduct, because the scope of misfeasance proceedings is only to recover assets or property lost by reason of such conduct. Money spent for improper purposes, amounts improperly received, benefits unduly obtained, sale of assets at less than their proper value, declaration of dividends in the absence of profits, etc., have all been held to be within the scope of the recovery provisions. Gore Browne on Companies (43rd Edition) says:- "Where money is lost to the company through an error of judgment of the Directors, it cannot be recovered either under this Section or by action. It has even been said that directors have never been held liable for negligence unless it has been so gross as practically to amount to fraud; but although in some cases it has been suggested that it is necessary to show gross negligence, on other occasions the phrase has been objected to as meaningless. The true test appears to be that first a duty must be shown, and then that duty has been neglected to the detriment of the company, and the charge has more often failed by reason of the difficulty in showing what has been the duty neglected than by inability to prove the neglect. The true test appears to be that first a duty must be shown, and then that duty has been neglected to the detriment of the company, and the charge has more often failed by reason of the difficulty in showing what has been the duty neglected than by inability to prove the neglect. On both points all the circumstances surrounding the acts and the common practice of businessmen have to be considered". 14. As already noticed what is expected of a director is only exercise of reasonable care in the management of the company's affairs. Decided cases however show that courts have been at pains not to lay down exacting standards in this regard, as in the matter of honesty and fair dealings, where the duties imposed have been stringent. In the matter of negligences or want of care, some latitude is always shown, apparently for the reason that to make the duty too onerous would be to deter men of ability from serving as directors. Unless it is shown that the circumstances attending a transaction were of such a character, so plain, so manifest, and so simple of appreciation that no men with any degree of prudence would have entered into it, no breach of the duty of case is held to be established. As has been said by Lindley M. R. in Lagunas Nitrate Company v. Lagunas Syndicate 1989 (2) Ch. 392: "The amount of care to be taken is difficult to define; but it is plain that directors are not liable for all the mistakes they may make, although if they had taken more care they might have avoided them ........Their negligence must be not the omission to take all possible care; it must be in a business sense culpable or gross." Thus directors have been held not liable for completing the purchase of a business without consulting the shareholders when they discovered that despite its high reputation and good prospects, the liabilities of the business exceeded the value of its assets. The low standard of care thus formulated and applied to the case of part time directors may not apply to full time directors employed under service contracts. The low standard of care thus formulated and applied to the case of part time directors may not apply to full time directors employed under service contracts. Specialists in the field of accountancy, engineering, finance, etc., are often appointed as directors to manage some department of the company's business as well as to supervise its whole working at Board meetings; and such people are expected to devote their whole time and attention to the company's affairs so that what may not constitute culpable negligence in the case of other directors, may amount to misfeasance on their part. 15. All the directors are not en masse liable for all the acts of misfeasance established; the liability of each director has to be fixed up, depending upon his accountability. But where all the directors are shown to have wilfully shut their eyes to acts of mismanagement by the managing director or the one in charge, and to have recklessly approved such acts, a common design and concerted action bordering on culpability can be inferred. It has often been said that a precise rule as to what would amount to misfeasance could never be formulated. Parliament itself has abstained from doing so, and what the court can do is to deal with a particular case on its own facts, keeping in view guidelines like the above. In Supreme Bank v. P. A. Tendolkar AIR 1973 SC 1104 the Supreme Court has indicated that the question is always one of fact. 16. Turning now to the first head of claims, the points that arise for decision are:- "(i) did the company suffer any loss owing to over valuation of the boats ? (if) if so, what is its extent ? (iii) is the loss attributable to misfeasance of respondents 1 to 10 ? and (iv) if so, to what extent are they liable, jointly and severally, to contribute to the assets of the company ?" 17. In the nature of the evidence adduced, it is convenient to consider points (i) and (ii) together. PWs 1 to 5, as already noticed, have been examined only to prove certain documents; their oral evidence does not throw much light on the question of valuation of over valuation. P.W. 6 has only the information he has gathered from the books and documents. PWs 1 to 5, as already noticed, have been examined only to prove certain documents; their oral evidence does not throw much light on the question of valuation of over valuation. P.W. 6 has only the information he has gathered from the books and documents. In fact what is relied on by the liquidator for establishing the alleged loss and its extent are the document marked as Exts. A-9 and A-10, the first being the report of the Deputy Collector and the 2nd, that of Sri A. G. Menon. The points of claim also show that the facts and grounds have been bodily lifted from these two. 18. In Part I of Ext. A-9, the Comptroller has explained the manner in which the valuation committee had proceeded to make its assessment. Two standard boats, with passenger capacity of 115 and 37 respectively, were chosen at random and their measurements were taken in detail. The cost of constructing two new boats as at that time was then arrived at, and for this purpose, the "present cost" of materials and labour were ascertained from standard boat building yards. The prices of engines were fixed on the basis of quotations from dealers. The costs of the hull and the engine were worked out separately The life of a boat made of teak was fixed as 15 years and of others, as 10 years. Each boat was then separately considered, and the "replacement cost" worked out in the following manner. If the total cost of a new teak boat of the same specification was Rs. 30,000 the cost per year was fixed as Rs. 2,000. Then the future life of the boat was assessed; if it was six years, the replacement cost was fixed as Rs. 12 000. A deduction was then made towards anticipated repairs, and the balance was fixed as its value for the purpose of take over. Since actual measurement was made only in the case of two boats, the value of the others were fixed by taking averages. Boats of passenger capacity of 100 and above were taken as one class, and those with passenger capacity of less than 50 was taken as another class. Since actual measurement was made only in the case of two boats, the value of the others were fixed by taking averages. Boats of passenger capacity of 100 and above were taken as one class, and those with passenger capacity of less than 50 was taken as another class. For these two classes, the actual figures obtained by measuring the two samples were taken as the standard; and for boats of the intermediate class, the average of the above two figures (with a weighted average) was taken as the basis. A list of standard equipment and tools was prepared; and in respect of the boats where such standard items were missing, proportionate deduction in cost was made. The committee had taken note of some particulars regarding a few sale transactions, but it had decided to discard them as unreliable. 146 boats were valued by the committee in the above fashion and the compensation payable was fixed as Rs. 25,27,380. Rs. 14,78,100 were paid in cash and the balance was retained by the Corporation for adjustment towards the value of the shares to be allotted to the boat owners and for liquidating arrear claims. 19. Part II of Ext. A-9 contained detailed comments on the "general defects in valuation", and those are summed up and enumerated in the concluding paragraph (12) of the part as follows:- "(i) each boat was not separately measured; (ii) not even a representative boat of the intermediate group was separately measured; (in) no documents were available in support of the market value of materials relied on; (iv) the committee had initially adopted one rate for working out the cost of the two boats measured, and then revised it to a higher rate. Adoption of this higher rate was not justified; (v) there was no evidence to support the committee's assumption that in a boat made of both teak and venteak, 1/7th of the volume was teak; (vi) the quotations from dealers of the engines concerned were also not available; (vii) prior sale transactions relating to boats should have been taken into account; (viii) the valuation was excessive when compared with the cost incurred for constructing the boat Kerala Kumari at the Government Boat Building Yard at Thevara; (ix) Assessment of wastage of timber at 50 per cent was excessive; (x) no data was furnished regarding amounts that could have been recovered by sale of waste, unused timber; (xi) a uniform principle was not evolved for assessing future age of hulls and engines; (xii) working sheets were not available to support the additions towards cost of electric fittings, extra kits, sliding shutters, etc.; and (xiii) the amount required for repairs was not correctly estimated. The monetary loss on account of defects (vi), (ix), (x) and (xiii) and the taking over of six boats which were not operated was estimated as Rs. 4,77,546, and the loss on account of the other defects remained unassessed. 20. Part III of Ext. A-9 is devoted to the defects in calculation detected on checking. These include the failure to deduct the value of cabins and tie roads in respect of some boats, arithmetical inaccuracies, assignment of a higher value for the cubic contents of boats belonging to the intermediate group, erroneous classification of boats, failure to make deduction towards accessories found missing, etc. The loss under this sub head is assessed at Rs. 57,211. 21. From the above summary of Ext. A-9 report what appears to be significant is that no assessment of the Joss sustained by reason of nine out of the thirteen defects enumerated in paragraph 19 above, has ever been made. P.W. 2 did not claim, during the course of his examination, that he had any experience in valuing boats and that the only permissible method was to go by the written down value. There is nothing in Ext. A-9 or in the evidence of P.W. 2 to show that particulars of the written down value of all the boats, or boat war accounts, were available at the time the committee had done its work. There is nothing in Ext. A-9 or in the evidence of P.W. 2 to show that particulars of the written down value of all the boats, or boat war accounts, were available at the time the committee had done its work. No witness examined in support of the claim has asserted that the method of "replacement cost" adopted by the committee was unknown to business or commercial circles; on the other hand, Ext. A-9 itself contains the following observations:- "Considering the quantum and nature of the work involved in valuing all the 146 boats and having regard to the fact that the basis of valuation depended, in the absence of any definite data, on such information as could be obtained from all possible sources, it is significant to note that the period of just over two months was too short to enable the committee to value all the boats in detail. The committee had, therefore, necessarily to adopt a rough method of valuation and those they did by finding out the cost of two boats selected at random and valuing the rest on the basis of the cost of the two boats." 22. As against the above, the oral evidence of R.W. 1 and the "revaluation report" Ext. A-15 are relevant. The latter report answers the criticisms contained in Part II of Ext. A-9, under each of the items mentioned in paragraph 19 above. As regards the failure to measure each boat separately, time was the most important constraint. There was only one month. Regarding item (ii), the committee notes that a boat belonging to the intermediate category was actually measured at the second stage, and figures worked to ascertain whether the average rate adopted was excessive or not. and that it was found that there was no difference. The market value of materials used were ascertained after careful enquiry. The higher rate referred to in item (iv) was adopted because the lower rate worked out earlier was on the basis of a rough idea about market rates which proved to be too low on actual ascertainment. As for item (v), the committee had measured the boat "LAWN" and had found the teak content to be one - fourth, while in the case of "SWARAJ 14" it. was found to be 1/7th, and only the lower figure was adopted. As for item (v), the committee had measured the boat "LAWN" and had found the teak content to be one - fourth, while in the case of "SWARAJ 14" it. was found to be 1/7th, and only the lower figure was adopted. Quotations from engine dealers had been obtained in most of the cases, but they had not been forthcoming in the case of a few types. The criticism under item (vi) is answered by referring to specific cares, figures and illustrations and reiterating that the sale prices indicated by available sale deeds were undependable. Regarding comparison with the construction cost of KERALA KUMARI, it is pointed out that the committee had approached the Department for data, but this was not supplied. It is also pointed out that the rate per cubic foot fixed for LAWN and SWARAJ 14 compared favourably with the actual rate for KERALA KUMARI. It is asserted that 50 per cent was a well recognised rule for wastage of timber in the construction of boats, that this was supported by the actual accounts of LAWN, and that even for plain cuttings, the P.W.D. schedule was 33 1/3 percent. Data regarding unused timber were not furnished for the reason chat there would be no such balance after using them for bending the planks. It was not possible to follow a uniform principle in the matter of assessing future life of the boats because what was relevant was the exact condition of each boat, having regard to the periodical repairs and overhauling they had undergone. The committee had only given its report, and not the working sheets. As for repair charges, what the committee had taken into account was the expenses immediately required for getting the boats inspected and passed. The boats were laying idle for sometime and an inspection and "passing" was necessary before they could be operated again; and only the amount needed for this purpose was taken note of, and not the repair and maintenance charges for a full year, to which Ext. A-9 had referred. The criticisms under Part III of Ext. A-9 are also separately answered. It is pointed out that deductions towards cabin cost and tie roads were necessary in the case of two boats only, involving Rs. 275 in all. A-9 had referred. The criticisms under Part III of Ext. A-9 are also separately answered. It is pointed out that deductions towards cabin cost and tie roads were necessary in the case of two boats only, involving Rs. 275 in all. Arithmetical mistakes had occurred because the cubic contents were taken from the licences issued by the Canal Department (for fixing licence fee) which often varied slightly from the actuals. Regarding the "weighted average" adopted for the boats in the intermediate category, the explanation given is that 52 boats of this category had passenger capacity below 76 and 43 above. The volume rate will normally be higher in the case of smaller boats and therefore the average rate arrived at after measuring two boats of 115 and 37 passenger capacity each had to be adjusted. Regarding classification, it is asserted that there was no mistake at all and that it was the Comptroller who had made the mistake. All the other specific comments in Ext. A-9 are also dealt with in Ext. A-15. 23. R.W. 1 was a boat owner, a member of the valuation committee and also a director till 1961. He points out that at the time the valuations were accepted by the Board of Directors on 19th April 1958 and 30th May 1958 all the shares except one worth Rs. 10 were being held by the Government (this is supported by the entries in Ext. A-7 series, the balance sheets), so that it was only prudent and legitimate on the part of the directors, all nominated by Government, to have accepted them subject only to Government approval. No share holder or creditor had complained against the valuation. The defects pointed out in Ext. A-9 were gone into again by the revaluation committee, and allotment of shares were made only after Ext. A-15. The Government had accepted both the valuation, and only Ext. A-15 was finally acted upon. The company sold the boats later without route permits and timings and this was the reason for the low prices obtained. The company itself was formed to ensure that the services were operated irrespective of profit and loss, and the Government was also anxious to make available to the workers the benefits of the Tribunals award. The company suffered losses mainly because. The company itself was formed to ensure that the services were operated irrespective of profit and loss, and the Government was also anxious to make available to the workers the benefits of the Tribunals award. The company suffered losses mainly because. "(i) The Ernakulam Quilon routes became unremunerative after the introduction of train services; (ii) The rapid development of bus and lorry services after 1958 diverted traffic; (iii) During 1958 itself, there was a spurt in the cost of fuel by about 50 per cent; and (iv) Though the company wanted to retrench some of the surplus staff, an industrial dispute was raised and this resulted in an award in favour of the workers". He has referred copiously to the minutes books where proposals formulated and action taken by the Board of Directors to enforce economy and reduce losses are seen considered. Mr. A. G. Menon, author of Ext. A-10, had himself become the Chairman of the company before the end of 1959 and the other directors had all cooperated with him in giving effect to such proposals as he had placed before the Board. The directors had no reason to suspect the integrity and competence of the full time General Manager. Witness was the Director of Panchiri Boat Services before takeover and had about 15 years' experience in the industry by that time. There might have been instances of boats being bought and sold at negotiated prices, but there was no prior instance of such a large fleet operating in different areas and under varied conditions changing hands. Some of the boats the committee had valued in 1958 are even now (1979) being operated by Government and this shows that the committee had not inflated their "future life". 24. A perusal of Ext. A-9 gives the impression that everything was not all right with the working and report of the valuation committee; but this impression gets blurred when Ext. A-15 report and the evidence of R.W. 1 are considered. It may be that the value of the boats could have been fixed more accurately and carefully, and that had this been done, the Corporation would have probably been called upon to pay only a lesser amount by way of compensation. But in misfeasance proceedings, accountability has to be fixed with reference to specific acts of omission and commission leading to ascertainable loss. But in misfeasance proceedings, accountability has to be fixed with reference to specific acts of omission and commission leading to ascertainable loss. As already noticed, the extent of loss is not assessed at all in respect of nine out of the thirteen items of irregularities set out in Part II of Ext. A-9. Besides, in regard to each of the thirteen, as also the mistakes referred to in Part III, answers are attempted to be furnished by Ext. A-15 and the evidence of R.W. 1; and nothing has been said or brought out to discredit these. It does not appear that the "revaluation report" has been subjected to any scrutiny either by the Comptroller or by the Government or Sri A. G. Menon, who functioned as Chairman for sometime thereafter, or even by the Official Liquidator. With Ext. A-9 on one side, and Ext. A-15 on the other, it is not possible for the court to make a choice, in the absence of other evidence regarding the accuracy of the two. There is no acceptable evidence to show that the errors, discrepancies and defects pointed out by the Comptroller were all really there, or were of such a character as could not have arisen when a large fleet of boats change hands in commercial transactions. Ext. A-9 by itself is therefore insufficient to hold that in acquiring the boats in question, the Corporation had suffered losses of such a nature and extent as could be assessed in the present proceedings. 25. Ext. A-10 report of Sri A. G. Menon does not also improve matters, since its main inspiration is the thirteen defects noticed by the Comptroller. Paragraphs 18 to 24 of Ext. A-10 discloses that what was attempted by Sri Menon was only a post mortem examination of the work done by the valuation committee, in the light of the remarks offered by the Comptroller in Ext. A-9. Paragraph 22 of Ext. A-10 assesses the excessive valuation at Rs. 11,44,032; but this is based on the assumption that a reasonable estimate of the average life of the boats should have been more than 15 and 10 years as fixed by the committee. But what is the basis of the assumption? I have not been referred to any data, either in Ext. A-10 assesses the excessive valuation at Rs. 11,44,032; but this is based on the assumption that a reasonable estimate of the average life of the boats should have been more than 15 and 10 years as fixed by the committee. But what is the basis of the assumption? I have not been referred to any data, either in Ext. A-10 or elsewhere on the basis of which it is possible to hold that the estimated average life was too low. It is true that a boat expected to live for 15 years with routine maintenance and repairs could actually be operated for 20 or 30 years, if replacements involving additional capital expenditure are made; but then its value would not be the amount spent at the time of construction, but much more for the purposes of the spread over. What is relevant is not how long the boats actually lived but how would businessmen engaged in boat industry have estimated a boat's life for purposes of depreciation. Though Sri A. G. Menon was examined as P.W. 4, nothing was brought out to show how and why the life estimate was defective. No engineer or boat builder or any other person familiar with the industry has also been examined. In the absence of any evidence to support the assumption noticed, and in the light of Ext. A-15 which answers the criticisms which form the basis of the approach in Ext. A-10, it is not possible for me to place much reliance on the latter for the purposes of these proceedings. 26. My finding on points (i) and (ii) set out in paragraph 16 above is therefore against the liquidator. 27. Nor could a finding be entered in his favour on points (iii) and (iv), in the state of the evidence before me. Respondents 1 to 10 were all part time directors whose normal duties were only to attend the Board meetings and exercise their judgment over matters brought before them with due care and caution, eschewing extraneous considerations and keeping the company's interests in mind. There is no case that they were appointed to the Director Board for the reason that they were experts in any field, or persons experienced in valuing boats. There is no case that they were appointed to the Director Board for the reason that they were experts in any field, or persons experienced in valuing boats. Respondents 1, 2 and 10 became directors because they were representatives of boat owners who had to be allotted a given percentage of the seats in the Board, and respondents 3 and 4 were employees' representatives, nominated for the same reason. The other five were officers of the Government nominated ex officio. All of them were entitled to rely on the full time General Manager whose part in the acceptance of the valuation remains unknown. When resolution No. 3 was passed on 19th April 1958, the report of the valuation committee (Ext. A-8) was apparently the only paper placed before the Board. Ext. A-9 and Ext. A-10 had seen the light of day much later, and the defects and deficiencies high lighted in them are relatable to materials subsequently collected by the Comptroller and Sri A. G. Menon. The directors who participated in the meetings of 19th April 1958 and 30th May 1958 could not be fixed with knowledge of them. The question therefore is whether Ext. A-8 was of such a character that the then directors, with the degree of knowledge and skill that could reasonably be expected of them, could have found it unsatisfactory or defective; and despite repeated questioning, learned counsel for the liquidator was unable to draw my attention to any part of Ext. A-8 which could have aroused the suspicion of reasonable men, or put them on further enquiry, or which could have been treated as so manifestly erroneous as to require outright rejection. It may be that three of them who had been in the valuation committee had better knowledge about Ext. A-8; but there is no such separate case against them, and there is also no allegation that they had misguided the others. There is nothing on record to show or to infer that the directors had not acted honestly, bona fide or with the prudence that could be expected of them. The evidence discloses nothing blameable or culpable on their part, if the state of affairs then existing alone are taken note of, and the standard of care recognised by courts in cases of this kind is applied. 28. The evidence discloses nothing blameable or culpable on their part, if the state of affairs then existing alone are taken note of, and the standard of care recognised by courts in cases of this kind is applied. 28. Examining the matter in another perspective, one has to remember that all the directors of the company were to be nominated by Government, under the Articles of Association. There were no qualifying shares for the directors and they were not elected. Both on 19th April 1958 and 30th May 1958, the entire paid up capital of the company was being held by the Government, barring one share held by a former boat owner. Under these circumstances, if the directors thought it prudent to have Government's approval for the valuation, thinking that it was better equipped to scrutinize the same, it cannot be said that the Directors had not exercised due care and caution or had abdicated their function. After all the arrangement was in the nature of a partnership between Government, the boat owners and the employees with Government practically footing the whole bill, and keeping a close watch over its nominees in the Director Board, as is disclosed by paragraph 59 of Ext. A-10, as also the minutes of Board meetings. That the Government had faith in the valuation committee, notwithstanding the comments in Ext. A-9, was clear from the reference subsequently made to the same committee. 29. Yet another aspect deserving notice is that the company itself was formed under circumstances, and its decisions inspited by considerations, which are ordinarily foreign to a company formed by a few business men getting together and bending their energies to the creation and working of a profit making adventure. Normally, when a company thinks of acquiring the assets of another or others, it will consider whether those assets were being profitably used and capable of being so used in the future. In the case of boat services, the intending purchaser would certainly enquire about the condition of the boats and their route permits, what boats were good and what routes were economic, what their collections and expenses were, and whether their acquisition in a lot or in part would create a unit that could be economically operated. It is only after a detailed study of all such relevant aspects that a decision would be taken. It is only after a detailed study of all such relevant aspects that a decision would be taken. Even then, the purchaser would hold some negotiations with the boat owners about the value, etc., before finally acting upon such decision. But in the present case, the decision to acquire all the boats and all the workmen had been taken even before the company was formed and the directors appointed. The value of the boats had to be fixed with the assistance of a committee answerable only to the Government and this had to be paid in part in the form of allotting shares to the transferees. The directors, when they met, were faced with almost a fait accompli which only required the formality of acceptance through resolutions of the company. They had no freedom to take over some boats and reject the others. They were not free to consider whether the taking over of the assets was in the interests of the company, viewed as a business proposition. The valuation and acquisition of the boats were not done in a manner decided upon by them. Ext. A-10 report which does not mince words for adversely commenting upon the work of the valuation committee also contains indirect admissions that the structure of the company, its setup and method of working, and the influence that was being brought to hear upon its decisions were such that the majority of the directors, at any rate, were not free to take independent decisions on matters vital to the Corporation. 30. Under the above circumstances, I find it difficult to hold that the directors were guilty of misfeasance in passing the resolutions dated 19th April 1958 and CaseSearch 2011 (Full Text) Copyright © Em Tee En Publications This Product is Licenced to Unnikrishnan V., Adv, Ekm Page:20 30th May 1958. They cannot therefore be called upon to contribute Rs. 8.5 lakhs to the assets of the company, as prayed for by the liquidator. 31. The claim for Rs. 15.5 lakhs towards the estimated accumulated losses of the company seems to rest on foundations still more slender. Here again, the allegation is that the directors had not bestowed due care and attention in the management of the company's assets. S.542 is not invoked, and there is no allegation of fraudulent trading. 31. The claim for Rs. 15.5 lakhs towards the estimated accumulated losses of the company seems to rest on foundations still more slender. Here again, the allegation is that the directors had not bestowed due care and attention in the management of the company's assets. S.542 is not invoked, and there is no allegation of fraudulent trading. Admittedly, there were full time General Managers, at all times, in charge of the day to day affairs of the company, but they have not been brought on the party array, though they too are covered by S.543. No explanation at all has been offered as to why these persons who were obviously more responsible for managing the company's affairs have not been proceeded against. Sri A. G. Menon was Chairman of the company for some time from 21st November 1959, and going by paragraph 4 of his report (Ext. A-10), he was so appointed with a view to minimise losses and tone up the company's working. He too is not among the 28 respondents sought to be held liable under this head. This omission also eludes explanation. If mismanagement, want of care, failure to avoid recurring losses, etc., are the basis of an application under S.543, it appears to me that persons who were at the helm of affairs full time, and a chairman appointed to give effect to economy proposals should have been more responsible than the other part time directors sought to be made liable. 32. The allegations in the points of claim under this head have already been set out earlier, and the evidence in support of them is again said to be contained in Exts. A-9 and A-10. It is said that there was no stocktaking at the time the assets were taken over; but the loss estimated by the Comptorller under this head in Ext. A-9 is only Rs. 28,326. The next allegation is that optimum staff strength was not fixed and surplus hands not retrenched. There is no evidence whatsoever as to what the staff actually required was, how many were retained as surplus and, how much was lost on this count. The third allegation is that porters and jetty masters were taken over as monthly paid staff instead of being continued as pieceearners or commission agents. There is no evidence whatsoever as to what the staff actually required was, how many were retained as surplus and, how much was lost on this count. The third allegation is that porters and jetty masters were taken over as monthly paid staff instead of being continued as pieceearners or commission agents. Assuming that a public sector undertaking with employees' representatives participating in management could cling on to such outmoded notions of personnel management, there is still no evidence as to the loss sustained on this count also. Keeping large number of boats in reserve is the next charge, but there is no evidence as to the frequency of breakdowns and the actual reserve requirements. Diversion of the bank guarantee for ways and means adjustment, which is another allegation raised, could not have resulted in loss at all, if the operation of the existing services were to be continued. Allegations regarding wastage of materials and operation of uneconomic services have turned out to be vague. How these acts of mismanagement could add up to a loss of Rs. 15.50 lakhs also remains a mystery. 33. As against the above, there is the admitted fact that the Government had decided to take over the business knowing fully well that it was a losing proposition. How can operation of boats be discontinued on routes considered uneconomic, when the formation of the Corporation itself was for the purpose of taking over all the boats and operating all the services in the public interest ? How can staff be retrenched when one of the avowed purposes was the ensuring of continued employment for all? The company was holding its annual general body meetings every year and the directors were reporting to the shareholders that the business was incurring heavy losses (see Ext. A-7 series); but the shareholders approved everything. If people subscribe to the shares of a company knowing fully well that its object was to take over a losing business so as to run it as part of a public utility system irrespective of results, if the shareholders are told from time to time that losses are mounting, and if they still permit or insist upon the directors to continue the same activity on the same lines, how can it be said that the directors did not act properly in their agency? This is exactly what appears to have happened in this case, with the difference that it was the Government as the single major shareholder backing up the directors. That apart, there is ample evidence in the minutes of the Board meetings to show that the directors were at all material times racking their brains, to the extent they were free to act, about measures for enforcing economy and reducing losses. Pages 18, 25, 54, 86, 108, 174, 178, 179, 222, etc., of Ext. A-3 show that the problem of surplus staff, and of the jetty masters and porters were being tackled in such manner as any other set of directors would have done. Attempts were made to weed out old hands by fixing the superannuation age at 58. Decisions were taken to stop further recruitments. Timings were rescheduled to increase revenue. Fuel consumption was attempted to be checked by getting expert advice from the Transport Department, and reduction in fuel costs was also planned by changing the suppliers. Advisory committees were setup in regard to almost all important matters. A decision was taken to increase the fares, but this was vetoed by Government. Directors agreed to forego sitting fees, legal retainer was reduced and telephone expenses slashed down. Principles for retrenching surplus staff were evolved. Without referring to all the decisions recorded in the minutes book, it can safely be stated that they do not in general disclose any reckless disregard of the interests of the Corporation or the need for bringing down losses. 34. Reference has already been made to the evidence of R.W. 1 as to the reasons why the company had to incur losses year after year. Ext. A-10 report of Sri A. G. Menon also throws light on some relevant aspects. 34. Reference has already been made to the evidence of R.W. 1 as to the reasons why the company had to incur losses year after year. Ext. A-10 report of Sri A. G. Menon also throws light on some relevant aspects. The report points out that: "(i) the composition of the company and the structure of the Director Board were defective (paragraphs 11 to 17); (ii) cargo services were not taken over, though they were the most profitable, presumably because 'those owners were not in difficulties and did not approach Government to relieve them of their uneconomical burden' (paragraphs 45 and 83); (iii) the Government and certain other interested groups including political supporters of the ruling party were getting things done through the General Manager without due regard to the Corporation's interests (paragraphs 57 to 59); (iv) inclusion of trade union representatives in the Board was a serious constraint, and if at all the right of the workers to participate in the management had to be recognised, the proper course was to form a cooperative society rather than frittering away Government funds through a company (paragraph 61); (v) there was considerable obstruction from the trade unions of those employed in country crafts to the proposal for takeover of cargo services. The Government was not helpful in regard to the proposals made by the Corporation in this regard (paragraphs 62 to 65); (vi) surplus boats would probably have been taken over by the Tourism Department and the State Transport Department, but for the insistence of the trade unions that the crew should also go with the boats (paragraphs 71 to 73); (vii) the General Managers appointed from time to time were not efficient and experienced in the industry or even in engineering (paragraph 86); (viii) payment of bonus to the workers was a heavy liability, but the workmen were not willing to give up their claims (paragraph 100).'' The above are indications that the Corporation suffered losses not because of want of care on the part of the directors, but because of the inherent weakness in its structure and organisation, the nature of the business it was compelled to take over, and other constraints which the directors including the Additional Chief Secretary and Chairman, were unable to overcome in spite of their best efforts and intentions. The report also contains a summary (page 43) of actions taken to stop the rot and also of further proposals which, it is nobody's case, the directors had opposed. In fact, there is no evidence to show that this report was even placed before the Director Board; R.W. 1 would swear that it was not. But what is more significant is that while the report contains an indictment of many others, there is not a word in it against respondents 1 to 28 specifically, or against the directors in general. That means that the second head of claim has also to fail, and the declaration sought for refused. The respondents cannot be directed "to repay" the amounts specified as prayed for. The application therefore stands dismissed, but without any order as to costs.