Section 47
BILLS
OF EXCHANGE, ETC
[1946] 16 COMP CAS 214 (ALL.)
HIGH COURT OF
v.
Jaitly And Company
SINHA AND BENNETT, JJ.
FIRST APPEAL NO. 82 OF 1942
OCTOBER 26, 1945
P.L.
Banerji, Harnandan Prasad and
Dr. S.N. Sen, A. Sanyal, Navak Chand, K.L. Misra, P.N. Sharma B.N. Misra, J. Swamp, C.B. Agarwala and Triloki Nath, for the Respondents.
Bennett, J.—This appeal, preferred in 1940, has arisen out of a suit filed by one Joshi Parshotamji of Benares on July 22, 1937, to recover from a number of defendants the sum of Rs. 38,474-7-4. It was also prayed that certain shares which had been pledged with the plaintiff as security for the debt might be sold in pro tanto satisfaction of the decree for this sum.
Joshi Parshotamji died on November 25, 1938, and his widow, Mst. Suraj Bahu, was substituted for him. She preferred the appeal, but died during its pendency, and substitution of the present appellants for her was made on November 25, 1941.
There were originally nine defendants. Of these eight were members of a joint Hindu family which has for many years done business under the name of P.L. Jaitly and Co. The business was started by one Murlidhar, who died in the year 1934. He had three sons, Parshotam Lal, Narotam Lal and Kesri Narain. Though Murlidhar was the formal head of the family, the business from 1929-1930 was managed by the eldest son, P.L. Jaitly.
Of the eight defendants mentioned, the first is P.L. Jaitly and Co. and the second and third are P.L. Jaitly's brothers. The next three are sons of P.L. Jaitly and the following two are sons of Kesri Narain.
As P.L. Jaitly was an insolvent, he was not sued personally and in his place, we find as the ninth defendant the Official Assignee of Calcutta.
Before proceeding further, we may mention that P.L. Jaitly and Co. were managing agents of the Lower Ganges Jumna Electric Distributing Co. Ltd. which is in liquidation. We shall refer to it hereafter as the L.G.J.E.D. Co In circumstances to be described later, P.L. Jaitly took a loan of Rs. 35,000 from Joshi Parshotamji on July 22, 1934, and it not disputed that the money was paid into Court on behalf of the L.G.J.E.D. Co.
In the original plaint it was stated that, a claim against the L.G.J.E.D. Co. would be made before the Liquidator, but permission was obtained from the Court on January 28, 1938, to sue the company and the company (through the Liquidators) was accordingly added as a tenth defendant, and there was thereafter some consequential amendment of the plaint.
The. question for consideration is whether all or any of me defendants are liable on account of this loan of Rs. 35,000. The Additional Civil Judge of Benares decreed the suit on July 24, 1940, against the two brothers of P.L. Jaitly and the two sons of Kesri Narain, limiting there liability to the joint family property in their Lands and directing that the shares which had been pledged as security should first be sold in satisfaction of the decree. He also said that the defendants (meaning the defendants against whom the suit was decreed) would get credit for the sums, if any, which the plaintiff, as a creditor of P.L. Jaitly, might receive from the Official Assignee. The suit was dismissed against the other defendants.
The appeal contests the dismissal of the suit against two of P.L. Jaitly's sons and against the L.G.J.E.D. Co. We have been concerned in the appeal for the most part with the dismissal of the suit against the company.
For reasons which will appear later, it is of some importance to see how the plaint was drafted. The suit is based primarily on a promissory note for Rs. 35,000 executed on July 22, 1934, by P.L. Jaitly. It is stated in the plaint that it was executed by him on behalf of P.L. Jaitly and Co., Mauaging Agents of the L.G.J.E.D. Co. It is then said that the money was borrowed for the purposes of this company, "but it was borrowed on the personal responsibility also of the Managing Agents, P.L. Jaitly and Co. through its Manager, P.L. Jaitly."
In the next paragraph it is stated that over and above this promissory note, P.L. Jaitly, in the same capacity, viz., as manager of P.L. Jaitly and Co., also pledged 6,500 fully paid up shares held by the family in the name of P.L. Jaitiy "and gave a letter to that effect and further transferred in blank the shares to the plaintiff."
In the next three paragraphs, it is claimed that the plaintiff is entitled to recover the amount due by sale of the shares, from the joint family business and estate, and also from the L.G.J.E.D. Co.
The amount claimed, Rs. 38,474-7-4, it is explained, is the amount due after deducting a sum of Rs. 4,708-15-8 paid by P.L. Jaitly and Co.
It is further explained that no personal claim is made against P.L. Jaitly (apart from the shares which it is prayed may be sold) as he has been declared an insolvent and a claim as regards his personal liability will be laid in the insolvency proceedings.
Written statements filed by the members of the family allege that the money was borrowed by P.L. Jaitly as agent of the L.G.J.E.D. Co. on behalf of and for the purposes of that company and that the plaintiff was aware of this fact. It is contended, therefore, that that company alone is liable.
In a written statement filed by the L.G.J.E.D. Co., this is denied. It is said that the money was advanced to P.L. Jaitly in his personal capacity and that he alone is liable for payment. Reference is made to a letter dated July 22, 1934, written by P.L. Jaitly to Joshi Parshotamji and it is alleged that it was written collusively long afterwards in order to shift the liability to the L. G. J. E. D. Co. The materiality of this will be explained shortly. Finally it is said that the money never came into the hands of the company and the company never benefited by it.
We may now explain the circumstances in
which the loan was taken. An application had been made by the Secretary of
State for
On July 22, P.L. Jaitly executed the
promissory note in favour of Joshi Parshotamji, receiving Rs. 10,000 in cash
and Rs. 25,000 by cheque (which was cashed at
Exhibit 16 is the letter which the L.G.J.E.D, Co. alleges was actually written some time later collusively with the object mentioned. It is a brief letter, written in English, not in Hindi, as Ex. 15 was. It states that he, P.L. Jaitly, had that day borrowed Rs. 35,000 from Joshi Parshotamji against his pro-note "for the requirement in connection with the Lower Ganges Jumna Electric Distributing Co. Ltd."
It will be observed that there is no reference in Ex. 15 to the object of the loan and that there is nothing in Ex, 16 but the reference to its object. In both letters P.L. Jaitly states that he has borrowed the money and executed the pro-note. It is not easy to understand why it should have been thought necessary on July 22, 1934, to send Joshi Parshotamji this second letter.
There were numerous issues, the most important of which is the second, which reads:—
"2. Whether the money was borrowed by Mr. P.L. Jaitly in his personal capacity or on behalf of Messrs. P.L. Jaitly and Co. as Managing Agents of the L.G.J.E.D. Co. Ltd., only, and if the latter is the case, is defendant only liable for the payment of the debt?"
The Additional Civil Judge held that the creditor had no separate cause of action against the sons of P.L. Jaitly. His property had vested in the Official Assignee and extended to the interest of the sons in the joint family property. The plaintiff must look to the Official Assignee so far as this property is concerned.
There could be no doubt, the Additional Civil Judge found, that P.L. Jaitly had acted in the transaction as manager of the joint Hindu family; hence the entire family was liable and consequently his brothers and their sons were liable.
The learned Judge then considered whether the transaction was entered into by him as Managing Agent of the L.G.J.E.D. Co. He held it clearly established that the major portion of the amount borrowed was deposited by P.L. Jaitly in the High Court in order to secure the postponement of the appointment of a provisional liquidator. "It may be," he remarked, "that P.L. Jaitly contemplated that the debt would be paid out of the company's funds and for this purpose he transferred certain cheques which the company's customers had issued in its favour to the Behar Bank Ltd. (on which bank Joshi Parshotamji had drawn the cheque for Rs. 25,000 in favour of P. L. Jaitly) with the direction to cash them and credit the money to Joshi Parshotamji's account. The amount thus paid back was more than Rs. 4,000. The immediate object of the loan was to save himself and his family from being usted from the lucrative position of Managing Agents of the company. P.L. Jaitly borrowed the money and deposited it in the High Court to prevent the liquidator from taking possession of the concern."
The Additional Civil Judge, in support of this view, referred to an application made by P.L. Jaitly and his brother Kesri Narain to withdraw the money when subsequently a liquidator was appointed (the application being dismissed). This showed, he thought, that the family recognised that the payment had been made on its behalf.
As regards the alleged liability of the L.G.J.E.D. Co., the learned Judge referred to Section 89 of the Indian Companies Act and pointed out that there was nothing in the promissory note to show that it was executed on behalf of the company. Though P.L. Jaitly was authorised to borrow money for the company, the fact remained that he did not choose to execute the promissory note for or on behalf of the company.
The Additional Civil Judge accepted the evidence of the plaintiff's witness, Hari Krishna Bhatt (who is the son-in-law of Joshi Parshotamji) that the letter, Ex. 16, was written at the same time as the promissory note, but did not think that the statement therein that the money was borrowed "for the requirement in connection with the L.G.J.E.D. Co." proved that the money was lent to the company. P.L. Jaitly had referred in this letter to "my pro-note" and stated both in it and in the other letter, Ex. 15, that he had executed it. The learned Judge repelled the contention that the company should be held liable because it benefited by the deposit of the money in Court.
Learned Counsel for the appellant hardly disputed that so far as the suit is based on the promissory note, the L.G.J.E.D. Co. could not be held liable, having regard to the provisions of Section 89 of the Indian Companies Act. Indeed we see from the judgment of the Court below that this was frankly conceded there. But he argued from the fact that the company benefited and that the letter Ex. 16 showed that Joshi Purshotam knew for what purpose the money was being borrowed that the company should be held liable.
Undoubtedly the suit was not a simple suit on a promissory note; there was the additional security of the shares in the Gorakhpur Co. which had been pledged with the creditor. But this in no way affects the liability of the L.G.J.E.D. Co. It affects only P.L. Jaitly himself. It may, therefore, be thought doubtful whether the suit can be said to be based directly on the consideration also, so as to support the claim against the company. But as it is clearly averred that the money was borrowed for the company and that the company benefited, we are not disposed to take a very rigid view about this.
It is with reference to these considerations and facts that we have examined a number of authorities cited on either side.
In Dehra Dun-Mussoorie Electric Tramway Co. Ltd. v. Jagmandar Das, the first case cited by the learned Counsel for the appellant, a bank allowed the company at the request of the Managing Agent an overdraft. He showed the bank the minute book of the company showing that a resolution had been passed so empowering him. Subsequently, it transpired that there had not been a properly convened meeting of the board. It was held that persons contracting with a company and dealing in good faith may assume that acts within the powers of the company have been properly and duly performed and are not bound to inquire whether acts of internal management are regular.
In the present case, there can be no doubt that P.L. Jaitly was empowered by the articles of association to borrow money for the company and if he did obtain this loan for the company in the sense that credit was given by Joshi Parshotam to the company and not to P.L. Jaitly himself there would be nothing more to be said. What we have to consider is whether this was not a loan to the company but a loan to P.L. Jaitly himself and in answering this question we have to take into consideration:—
(1) the circumstances of the company and the admitted fact that its credit had been impaired by the winding-up application;
(2) the fact that the promissory note was executed in the name of P.L. Jaitly alone, without any addition suggesting that he might be acting on behalf of the company, not even the addition of the words "Managing Agent, L.G.J.E.D. Co." (though even such addition might not be enough to bind the company);
(3) the fact that the additional security taken in the form of shares was P. L. Jaitly's personal property.
It is clear that the case cited can have no bearing on the present case.
The next case cited was a recent Privy Council case, Raja Mohan Manucha v. Manzoor Ahmad Khan. This case may have some bearing on the question whether we should be entitled to regard the suit as based on the consideration and not on the promissory note, but otherwise it does not, we think, assist the appellant. The question was whether restitution should be ordered under Section 65 of the Indian Contract Act where the mortgage on which the suit was based was found to be invalid. The Chief Court of Oudh refused to make such an order on the ground that no such claim had ever been pleaded and left the plaintiffs to seek their remedy by separate suit. Their Lordships expressed the opinion that this attitude towards the question of pleading was unduly rigid:—
"A defendant who when sued for money lent pleads that the contract was void can hardly regard with surprise a demand that he restore what he received thereunder."
This dictum too can have no bearing on the present case unless it is first found that the money was lent by Joshi Parshotamji to the company. Certainly on that finding restoration should be made, but then there would be no question of the loan being invalid so as to make it necessary to apply Section 65.
The appellant's learned Counsel strongly relied on Secretary of State for India v. G. T. Satin. In that case the plaintiff, a contractor, supplied food for the horses of a cavalry regiment. The officer who gave him the contract was not authorised to do so under the provisions of Section 30 (2) of the Government of India Act. It was held that under Section 70 of the Indian Contract Act, the plaintiff having lawfully supplied the food and not having intended to do so gratuitously, and the latter having enjoyed the benefit thereof, was entitled to compensation.
It seems to us that this case goes no further. The ruling is based entirely on the fact that the food was supplied by the plaintiff to the person sued. Before the L.G.J.E.D. Co., can be held liable, it must be found, not only that the money came into their hands, but that it was in effect put into their hands by the plaintiff through the Managing Agents, it being understood by both parties when the promissory note was executed that the company would be liable for re-payment.
In answer to the contention that there was such an understanding, it may well be asked how the plaintiff thought the company could be liable when P.L. Jaitly had personally assumed sole liability and could, in law, alone be held liable on the promissory note. The learned Counsel could only reply when this question was put to him, that both P.L. Jaitly and the lender may have thought, though wrongly, that the company would be bound by P.L. Jaitly's signature. As there is no indication whatever on the promissory note that Jaitly was acting for anyone but himself, we find it difficult to believe this.
Clearly the mere fact the company benefited is not by itself sufficient to bind the company. If B borrows money from A in order for his own purposes to lend it to C, C cannot be held liable to A, even if A knew with what object the money was being borrowed. Before he can be held so liable, it must be found that the loan was actually a loan to C. All the indications in the present case are that the loan was made to Jaitly personally and on his personal security, there being very good reasons why Joshi Parshotamji should not lend the money to the company.
The case of Krishnanand Nath Khure v. Raja Ram Singh was referred to as showing that the managing member of a joint Hindu family can execute in his sole name a promissory note which shall be binding on the family as a whole. That no doubt is authority for the view taken by the Court below that P.L. Jaiitly executed the promissory note as manager of the joint family, but there is no justification for extending the principle to a company, for which there is a special provision in Section 89. The Allahabad ruling was followed by another Bench the following year in Raghunath Singh v. Sri Narain. A stricter view was taken by a single Judge of the Calcutta High Court in Ramgopal Ghose v. Dhirendra Nath Sen where it was held that a suit based solely on a promissory note can be brought only against the person signing it, but in a suit aptly framed, it was added, the plaintiff might claim in the alternative the amount of the original debt for which the promissory note was given as security, proceeding against the property of the joint family as a whole. The view taken by the Privy Council in Abdul Majid Khan v. Saraswatibai" was that where a promissory note is signed by the manager of a joint Hindu family in his own name, the money may have been borrowed by him for his own individual purposes or for the purpose of the joint family business. If the latter is pleaded, it must be proved; there can be no presumption that it was. In the present case, it is not disputed that P.L. Jaitly signed as manager of the joint family.
The general principle to be followed in cases of negotiable instruments was laid down by their Lordships of the Privy Council in Sadasuk Janki Das v. Sir Kishan Prasad. It was that the name of a person or firm to be charged upon a negotiable document should be clearly stated on the face or on the back of the document, so that the responsibility is made plain and can be instantly recognised as the document passes from hand to hand. It is not sufficient that the name of the principal should be in some way disclosed; it must, be disclosed in such a way that on any fair interpretation of the instrument his name is the real name of the person liable on the bill In that case, the hundi was signed by one Mohan Lal who added after his name: "Acting Superintendent of the Private Treasury of His Excellency Sir Maharaj the Prime Minister of H.H. the Nizam."
This was held not sufficient to make the Prime Minister liable.
Similarly in Sreelal Mangtulal v. The Lister Antiseptic Dressing Co. Ltd., it was held that hundis signed by "Mitra and Sons" followed by the words "Managing Agents, Lister Antiseptics and Dressing Co. Ltd.," did not bind the latter company. Another case to much the same effect was that of Japan Cotton Trading Co., Ltd. v. Jajodia Cotton Mills Ltd., when it was held that a promissory note signed by two directors of a company did not bind the company. The English case of Chapman v. Smethurst can be distinguished without difficulty for the promissory note in tint case was signed by the managing director of the company in the following form: "J.H. Smethurst's Laundry and Dye Works Limited. J.H. Smethurst Managing Director", this signature directly indicating where that liability lay.
As to the construction of Section 89 of the Companies Act, it was indeed held by a single Judge of the Bombay High Court in The New Fleming Spinning and Weaving Co, Ltd., In re that a bill or note may be in a certain sense on behalf of or on account of a company, though there be upon its face no reference to the company, and a distinction was drawn between the contracting parties and third parties, it being said that so far as third parties are concerned, a company can be made liable on a bill or note only where it expresses on the face of it that it was made, accepted of endorsed by or no behalf of or on account of the company or where that fact appears by necessary inference from what the face of the instrument itself shows. This was with reference to Section 47 of the Act of 1866. It is doubtful whether such a distinction would now be held sound. The decision in that case that the company was not liable was upheld on appeal to a Bench, vide The New Fleming Spinning and Weaving Company Ltd., In re. The suit had been brought by a third party in whose favour the note had been endorsed. The Bench did not refer to the distinction suggested by the learned single Judge. They based their decision on the general principle which the Privy Council have since emphasized.
In
Dutton v. Marsh
four directors of a joint stock company signed a promissory note and the
company's seal was affixed at one corner of the note. It was held that they
were personally liable, for there was nothing in the note itself to exclude
this personal liability. The fact that the company's seal was affixed was not
sufficient to show that the note was signed on behalf of the company.
In the Privy Council case of Karmali Abdulla Allarakia v. Vora Karimji Jiwanji, the facts were rather complicated. Separate hundis were executed by the partners in a joint venture of a strictly limited character and the question was whether one partner could be held liable for the hundis drawn by the other. Their Lordships held that in such circumstances, when there is no document of debt which, on the face of it, binds one partner, liability can only be enforced against him if it is shown that what he did was within the operations natural to the partnership and for the partnership. They held that it was so shown in that case and further that the plaintiff knew the whole terms and conditions of the agreement between them.
Reference was made in this case to Gouthwait v. Duckworth. In that case, purchases were made by two defendants on an agreement to share the goods with a third. All three had an interest in them by virtue of the agreement and it was held that all were liable for their value, even though the seller did not know of the agreement.
A case of partnership recently came before a Bench of this Court of which one of us was a member. This was Lalmani Pande v. Gopal Sah. Here a promissory note was executed by one of two partners (who were brothers), the money being borrowed for the joint partnership business, and the question was whether the other partner was liable. The Bench held (referring to the provisions of Sections 11 and 22 of the Partnership Act) that both partners were liable. But it was made clear that there must be an intention to bind the firm and further that the lender of the money must have been informed at the time of execution that the money was being taken for the business and both partners would be jointly liable for it. Reference was also pointedly made to the fact that the Bench were not dealing with a case of an agent executing a document and the master being bound by it.
Even assuming that the same principles are applicable where money is borrowed on a promissory note for a company by its managing agent, it appears to us difficult on the facts of the present case to hold that there was an intention to bind the company, and that, even if Joshi Purshotamji was informed at the time of execution that the loan was being taken for the company, the company would be liable. The circumstances suggest just the reverse. We are also disposed to regard with the greatest suspicion the letter .Ex. 16, for writing which on July 22, 1934, there appears to have been no necessity at all. We are not prepared to accept the evidence of Hari Krishna Bhatt about this. We have little doubt that the letter was written later, probably with the object suggested by the company. For these reasons, we are satisfied that the suit against the company was rightly dismissed.
It
was further contended on behalf of the appellants that a decree should have
been passed against P.L. Jaitly's three sons, though, apparently by
inadvertence, only two are referred to in this connection in the memorandum of
appeal, these being Trilok Nath and Loknath (Amar Nath being excluded). The
Additional Civil Judge observed that the Official Assignee was competent to
seize the entire share of P.L, Jaitty and his sons in the joint family
property. He assumed that he had done so and held that the creditor could not
be allowed to bring a separate action against the sons. The learned Judge is no
doubt correct in what he says about the power of the Official Assignee. The
Official Assignee can exercise the power which the father had of selling family
property, including his sons' share, to pay his own private debts, provided
they are not illegal or immoral, viz., Narayanan v. Veerappa. But we do
not know to what extent, if any, that power has been exercised, or whether in
fact it has been exercised at all. We do not agree with the Additional Civil
Judge that it can be assumed that the Official Assignee has seized all their
shares. We think that the appellants are entitled to ask for a decree against
these to respondents also, to the extent of their share in the family property.
It was objected that no such claim can be made against the sons unless the father is also impleaded and we were referred to certain authorities in support of this. But we find that this view was based on the belief that the obligation of a son to discharge his father's debts cannot be enforced during the father's lifetime, a belief which is no longer entertained. We are of opinion that P.L. Jaitly was sufficiently represented in the suit by the Official Assignee and that there is no force in the objection.
Finally it was contended that no order could be passed for sale of the shares, in view of the provisions of Section 176 of the Indian Contract Act, under which it is for the pawnee to dispose of the security himself. As to this, we need only say that no cross-objection was filed and we are not, therefore, prepared to entertain the objection.
In the result, the appeal fails and is dismissed with costs, except as regards respondents Nos. 5 and 6, who are also made liable under the decree to the extent of the joint family property in their hands. As between these respondents and the appellants, the parties will bear their own costs in both Courts.
[1973]
43 Comp. Cas. 232 (Mad)
HIGH COURT of
v.
R. Krishnaswami Reddiar
OCTOBER 27, 1972
N. Srivatsamani and K.V. Durairaj for appellants.
M.A. Sadanand for G. Ramaswami
and M. Kalyanasundaram for the respondents.
JUDGMENT
V. Ramaswami J.—2nd and 3rd defendants are the appellants.
The suit was filed by the plaintiff, 1st respondent, for the recovery of a sum
of Rs. 4,000 due under a promissory note dated August 12, 1960. The promissory note
was executed by the 1st defendant. The 3rd defendant Sri Rajagopal Transports
Private Ltd. was incorporated on April 7, 1959, with the 1st defendant and his
two wives as its only shareholders. The 1st defendant by a resolution dated
April 8, 1959, was appointed as the managing director of the company. The suit
promissory note was executed by the 1st defendant on August 12,1960, and he
described himself as the proprietor of Sri Rajagopal Transports P. Ltd.
Subsequently, on July 29, 1961, all the shares of the company were transferred
in the name of the 2nd defendant and his son, Rajaram. It was the case of the
plaintiff that the money was borrowed by the 1st defendant for the purchase of
a bus for the company and that
when the shares were transferred to the 2nd defendant, the 2nd defendant also took over the
liabilities on the promissory note. The 2nd and 3rd defendants resisted the
claim and contended that the suit promissory note has not been executed in the
name of, or for and on behalf of, the 3rd defendant-company and that,
therefore, the suit was not maintainable against the 2nd and 3rd defendants.
The second contention was that there was no resolution of the company as
required by section 292(c) of the Companies Act, 1956, for borrowing the money on
promissory note. The 3rd contention was that the liability under the promissory
note was not taken over by the 2nd defendant and that in any case the suit was barred by limitation. Both
the courts below have rejected the contentions of the defendants and decreed
the suit as prayed for. In this appeal, the learned counsel for the appellants
raised the same contentions.
The promissory note is written in
Tamil and in the description of the promissory note the promissor is stated as
"Sri Rajagopal Transport bus proprietor Ramanatha Reddiar" The
contention of the appellants is that since the promissory note is not executed
in the name of the company or for and on behalf of the company, the suit is not
maintainable against the company. Section 47 of the Companies Act, 1956,
requires that a promissory note shall be deemed to have been made, accepted,
drawn or endorsed on behalf of the company if drawn, accepted, made or endorsed
in the name of or on behalf of the company by any person under its authority,
express or implied. It is clear, therefore, that in order to make the company
liable, the instrument on the face of it must show that it was executed on
behalf of the company. Normally, if the promissory note had been in English one
would have expected a recital that the promissor is executing the document for
and on behalf of the company. But the promissory note is in vernacular and the
promissor is given as Sri Rajagopal Transport bus proprietor Ramanatha Reddiar.
If really the promissor was not executing the document on behalf of the company
it would not have been necessary for giving such a description. It is true that
no evidence de hors the instrument would be admissible to prove that the
promissory note was executed on behalf of the company. But, in my opinion,
since the promissory note is in Tamil and the description is Sri Rajagopal bus
Transport proprietor Ramanatha Reddiar, the intention is made clear in the
instrument itself and shows that the instrument was executed on behalf of the
company.
A similar question came up for
consideration before a Full Bench of this court in Sivagurupatha v. Padmavathi . It
was held in that case that when, in a promissory note written in Indian
language, the person after giving his own description adds that he is the agent
of another it means that he is acting as the other's agent in the matter of
execution of the document. This decision concludes the point against the
appellants.
The next contention of the appellants is that there is no resolution by
the board of directors of the company in terms of section 292(c) of the
Companies Act enabling the managing director to borrow money on promissory
notes. Apart from the fact that this plea had not been raised in the written
statement, there is no substance also in this contention. It is not disputed
that the memorandum and articles of association allow borrowing by the
directors. The transaction is a loan which is, therefore, authorised under the
memorandum and articles of association. Article 21 of the articles provides
that the directors may raise or borrow money on promissory notes. By resolution
4 of exhibit A-2, which is a certified copy of the registration of resolutions,
the 1st defendant was appointed as the managing director. Resolution 6 vested
in him full powers for the management of the company's affairs and also
authorised him to sign all papers of the company. The transaction is,
therefore, one which could be entered into on behalf of the company by the
first defendant. In such a circumstance, the creditor is entitled to presume
that all formalities required in connection therewith have been complied with.
A bona fide creditor in the absence of any suspicious circumstance is also
entitled to presume its existence. The creditor being an outsider or a third
party so far as the company is concerned is entitled to proceed on the
assumption of the existence of such a power. That in fact the money was
utilised for the purpose of the company is not in dispute and the 2nd defendant
himself has made a part payment towards this promissory note. In this
connection it is also useful to refer to the decision of the Allahabad High
Court in L.R. Cotton Mills Co. v. J.K. Jute Mills Co. It was
held in that case that even where there was no actual resolution authorising a
director to enter into a transaction on behalf of the company either by the
board of directors or by the board of managing agents, a claim of a creditor
could not be affected if the terms of its memorandum and articles of
association authorised such a transaction. It was also held that in such a case
the person negotiating with a company is entitled to presume that all the
formalities in connection therewith have been complied with. There is no
dispute in this case as to the bona fides of the plaintiff. This contention of
the appellants is therefore unsustainable.
It is next contended by the learned counsel for the appellants that the
2nd defendant had not taken over the liability under the promissory note when
the shares were transferred to him and the suit was also barred by limitation.
As already stated that the money was utilised for the purpose of the company
was not in dispute. In fact the 2nd defendant himself has paid a sum of Rs. 280
towards the promissory note on August 24, 1962, and has made an endorsement in
his own hand in the promissory note describing himself as the managing director
of Sri Rajagopal Transport Private Ltd. This endorsement would save the
limitation as the suit itself was filed on August 24, 1965. The finding of the
courts below also is that the 2nd defendant had taken over the liability under
the promissory note when he purchased the entire shares of the company.
For the foregoing reasons, the second appeal fails and it is dismissed.
No costs. No leave.
Appeal dismissed.
[1931] 1 COMP AS 17 (ALL)
v.
The official Liquidators of
the Dehra Dun
Mussoori
Electric Tramway Company, Ltd.
MUKERJI, AND BENNETT, JJ.
MARCH 27, 1930
Iqbal Ahamad, Peary Lal Banerji and Hazari
Lal Kapoor, for the appellants.
K.N. Katju and Bhagwati Shankar, for the respondent.
March, 27.—This is a Letters Patent appeal from
a judgment of the learned Company Judge, dismissing
the claim of the appellant-applicant, Messrs. Jhandoo Mal and Sons,
through Lala Bool Chand. The appellant put in a petition on August 3, 1928, to
the learned Company Judge, containing certain items of claim Nos. 1 to 9
amounting in all to Rs. 6,490-7-0. Of these items the order of the Company
Judge deals with items Nos. 1 to 4, which are calims by the appellant on two
promissory notes of November 7, 1924, and November 21, 1924. These promissory
notes are signed by Mr. T. B. Gilani, and below his
signature there appear on one promissory note the words "Managing Agent,
Dehra Dun Electric Tramway Company Limited" On the other promissory
note below the signature of Mr. Gilani the words written
are "Agent, Dehra Dun Mussorie Electric Tramway Company, Limited."
The learned Company Judge has held that the Dehra Dun Mussoori Electric Tramway
Company, Limited, now in liquidation, are not rendered liable by these
promissory notes. It is contended on behalf of the appellant that this decision
is incorrect.
Under s. 27 of the
Negotiable Instruments Act "Every person capable of binding himself
or of being bound, as mentioned in s. 26, may so bind himself or be bound by a
duly authorized agent acting in his name."
Under s. 89 of the Indian
Companies Act "a promissory note shall be deemed to have been made on
behalf of a company if made…..in the name, or by, or on behalf or on account
of, the company by any person acting under its authority, express or implied."
The first thing, therefore,
which the appellant has to show is that Mr. Gilani was the authorized agent of
the company for the purpose of making promissory notes within the language of
s. 27 of the Negotiable Instruments Act, or that he was acting under the
authority of the company, express or implied, as laid down in s. 89 of the
Indian Companies Act. The appellant has been unable to satisfy us on these
points. He has referred to the memorandum of association of the company, cl.
(t), which merely states that one of the objects of
the company is to make promissory notes. It is not stated that the managing
agents are to make these promissory notes. In the articles of
association, paras. 120 and 121, power is given to the
managing agents to make contracts and sign receipts on behalf of the company;
but there is no power given to the managing agents to make promissory notes on
behalf of the company. It accordingly follows that Mr. Gilani is not shown to
be the duly authorized agent of the company for the purpose of making
promissory notes. Accordingly, therefore, even if Mr. Gilani had acted in the
proper form which would have bound the company, the company is not bound
because Mr. Gilani was not the authorized agent of the company for this
purpose. The next point in this connection is whether the form employed in the
promissory note would bind the company if Mr. Gilani had been duly authorized
to bind it. Reference has been made to several cases and the appellant relied
on Chapman v. Smethurst. In that
case the promissory note was signed by "J.H.
Smethurst's Laundry and Dye Works Limited, J.H. Smethurst, Managing
Director." It was held that the company was bound by this promissory note.
But that promissory note is easily distinguished from the two promissory notes
in the present case, because in Chapman v. Smethurst the name
appearing as the maker of the promissory note was the
name of the company, and J.H. Smethurst, Managing Director, merely signed below
the name of the company to show which official signed the name of the
company. On the contrary in the present case the name of the maker of the
promissory note is Gilani, and the words appended after his name are mere
description of Gilani. In Sree Lal Mangtu Lal v. The Lister Antiseptic Dressing
Company, Limited
a hundi was drawn in favour of a firm "M. and
Sons " and was endorsed twice by them "M. and Sons" and "M.
and Sons, Managing Agents L.A. and Co." It was held that the company "L.A.
and Co." were not bound by this promissory note, and that the words "Managing Agents L.A. and Co." were merely description
of M. and Sons. That case is practically the same as the present case, and
following that ruling we hold that the form in which the two promissory
notes were drawn up precludes the appellant from
making the company liable on these two promissory notes.
The next point in regard to
which we have been addressed is about that portion of the order of the
learned Company Judge which states: "accordingly I direct that the costs
in the Calcutta case incurred or that will properly
be incurred by the company in liquidation shall be borne by Messrs.
Jhandoo Mal and Sons according to the compromise."
This compromise between the parties in
"That the costs incurred by the parties in Calcutta High Court will be decided as payable to and by the parties according to the order of this Hon'ble Court."
It is admitted that
"this Hon'ble Court" refers to the Allahabad High Court in
which this application was made. Objection is taken on behalf of the appellant that the Official Liquidator claims a large sum
as his travelling expenses to Calcutta. It is denied on behalf of the Official
Liquidator that any such claim has been made and we consider that when the
application for costs is actually made to the learned Company Judge, it will be
a matter for him to decide. The order of the Company
Judge before us is, in our opinion, in accordance with the term 9(f) in the
compromise between the parties.
The order of the learned
Company Judge before us deals with items No. 1 to 4 only in the
application of August 3, 1928, and does not deal with items Nos. 5 to 9 in that application. On those items we express
no opinion, and it will be for the learned Company Judge to decide those
items if application is further made to him on the
subject. Accordingly we dismiss this appeal with costs.
[1960]
30 COMP. CAS. 131 (MYS.)
V.
HEGDE,
J.
SECOND
APPEAL NO. 476 OF 1955
APRIL
16, 1958
HEGDE, J.- The plaintiff in O.S.No. 387 of I953 on the
file of the learned Munsiff at Davanagere is the appellant in this court. He
sued the defendants on the basis of exhibit P I, a demand promissory note for a
sum of Rs. I,000. The said promissory note had been executed by defendants Nos.
I to 3 in favour of a company by name "Universal and Engineering Co.
Ltd.", Bangalore City. That company had a branch at Davanagere. The fifth
defendant was the manager of the Davanagere branch. He endorsed the promissory
note in question in favour of the plaintiff as per exhibit P I(a). Both the
courts below have come to the conclusion that the promote in question is
genuine and supported by consideration. They have opined that the assignment
exhibit P I(a) is a genuine one. The trial court decreed the suit as prayed
for. The first appellate court came to the conclusion that out of the
consideration of Rs. I,000 included in exhibit P I, a sum of Rs. 400 had been
discharged by the first defendant even prior to the assignment, exhibit P I(a),
and that this fact was known to the plaintiff at the time of the assignment in
question. This is a finding of fact and is conclusive.
The first
appellate court dismissed the suit against defendants Nos. I to 3 on the ground
that the fifth defendant had no authority to assign the promote in question.
The company in whose favour exhibit P. I had been executed is a registered
company and its liability is limited. Its affairs are governed by its articles
of association. The relevant article so far as this case is concerned is
article 59. I shall quote the relevant portion of this article 59:
"The
managing director shall subject to the supervision of the directors have the
following powers........(d) to draw, accept, endorse and negotiate all bills of
exchange, promissory notes, hundis, cheques, drafts, Government promissory
notes and other Government instruments from time to time."
Clause (f) is
as follows: "to delegate all the above or any of the powers to managers,
agents or other persons as he may deem fit."
Admittedly the
fifth defendant is the manager of the Davanagere branch. He was in sole charge
of that branch; it was he who was taking promissory notes from the
constituents. It is admitted that he took the promote exhibit P. I from
defendants Nos. I to 3. The evidence in the case now establishes that no
delegation had been made in his favour as required by clause (f) of article 59.
But the point that is urged before me is that the plaintiff was right in
assuming that the fifth defendant had authority to negotiate exhibit P.1. Now
we can turn our attention to section 89 of the Indian Companies Act of I9I3. It
is as follows:
"A bill
of exchange, hundis or promissory note shall be deemed to have been made,
drawn, accepted or endorsed on behalf of a company if made, drawn, accepted or
endorsed in the name of or by or on behalf of or on account of, the company by
any person acting under its authority, express or implied."
The point for
determination in this case is, was the fifth defendant a person acting under
the authority of the company express or implied. It is proved that there is no
express authority. The only point that remains to be considered is whether he
had implied authority.
In Hindustan
Assurance and Mutual Benefit Society Ltd. V. Gurdit Singh a Bench of the Lahore
High Court held that under section II8 (Negotiable Instruments Act) there is a
legal presumption that every negotiable instrument is made or drawn for
consideration and that every transfer is also for consideration; further, that
the holder of a negotiable instrument is a holder in due course. The onus is
upon the person challenging the rights of the transferee to prove the facts
which would show that such transferee was not in fact a holder in due course.
This is the true position of the law. in the instant case it is on defendants
Nos. I to 3 establish that the fifth defendant had no authority to endorse the
promote in question and that the plaintiff is not a holder in due course.
The contention
advanced on behalf of the plaintiff is that he assumed that the fifth defendant
who was managing the affairs of the Davanagere branch had authority to assign
the promote in question. The plaintiff proceeded on the footing that necessary
delegation had been made to him under article 59(f) of the articles of
association. In Dey v. Pullinger Engineering Co., this point was considered.
The facts of
that case were that the articles of association of a company empowered the
directors to authorize one of their body as managing director to draw bills of
exchange on behalf of the company. The managing director drew a bill on behalf
of the company without having in fact received any authority from the directors
to draw bills. In an action on the bill against the company on the drawers,
their Lordships held as follows:
"that the
managing director, in drawing the bill on behalf of the company, was 'a person
acting under its authority' within the meaning of section 77 of the Companies
(Consolidation) Act, I908, and that the company was liable. As by the
constitution of the company the managing director might have been authorized to
draw the bill, a person taking the bill in due course was entitled to assume
that he had authority in fact."
Section 77 of
the Companies (Consolidation) Act, I908, is in pari materia with section 89 of
the Indian Companies Act. This decision applies on all fours to the facts of
the present case.
Sri
Gopvallabha Iyengar, the learned counsel for the contesting respondents tried
to distinguish this case on the ground that the negotiation is valid in action
by the company or in an action against the company. But the same is invalid in
actions against third parties. I am unable to appreciate this distinction.
Either the plaintiff is a holder in due course or he is not a holder in due
course. If he is a holder in due course, he is a holder in due course against
the whole world. The essential point for consideration is as to whether the
assignment made by the fifth defendant is a valid assignment. If it is valid as
against the company whom he purports to represent, it must be more so as
against the debtor of the company. There are no equities in favour of the
debtor.
The next point
urged by the learned counsel for the respondents Nos. I to 3 is that the
company has not been made a party in the suit. It is possible that the company
may proceed against them in separate action. Hence there is a danger of their
being made liable to pay over again the same debt. This objection had not been
taken in the courts below. If that objection had been taken in the trial court,
the company could have been imploded as a party. All the same to protect the
interests of defendants Nos. I to 3, I direct that the plaintiff, before
drawing the amount decreed in the suit, shall execute an indemnity bond in
favour of defendants Nos. I to 3 guaranteeing to indemnify them in the event of
the Universal Commercial and Engineering Co. Ltd. obtaining any decree against
them on the suit transaction. This should be sufficient to protect the
legitimate interests of defendants Nos. I to 3.
In the result,
the judgment and decree of the first appellate court is set aside and the
decree of the trial court is modified by granting a decree for Rs. 600 and
interest. The parties shall pay and receive costs according to their success in
the case in all the courts.
Appeal
allowed.
Andhra Pradesh High Court
companies act
[2003]
42 scl 798 (ap)
High
Court of Andhra Pradesh
v.
G. Venkata Rao
P.S.
Narayana, J.
October 8, 2002
Section 47 of the Companies Act, 1956 - Bills of
exchange and promissory note - Chief executive of company, D-1, borrowed money
from respondent to pay electricity dues of company and executed promissory note
to repay same - When assets of company were acquired by transferees, D-2 and
D-3, they denied their liability in relation to promissory note as said
transaction did not find place in company’s accounts - Trial court decreed suit
personally against D-1 and also against assets of D-2 and D-3 - Whether where
chief executive of company at relevant time executed promissory note and
borrowed amount for company’s sake, it could not be said that amount was
borrowed by him, D-1, in his personal capacity - Held, yes - Whether in view of
clear language of section 47, especially in light of evidences of prosecution
witnesses and also clear admission by defence witness relating to authority of
executive to enter into said transaction, trial court’s findings fastening
liability in relation to promissory note as against D-2 and D-3 could not be
said to be unsustainable - Held, yes - Whether making of entries or maintenance
of account books predominantly relates to internal management of affairs of
company and creditor having no control over its maintenance, cannot be non-suited
on that ground - Held, yes - Whether, therefore, appeal being devoid of merits
was to be dismissed - Held, yes
The
plaintiff/respondent filed the suit for recovery of a certain sum towards
balance of the principal and interest due on a promissory note executed by
first defendant. The first defendant , D-1, acting as Chief Executive of the
company, had borrowed the sum for the purpose of paying electricity dues to the
AP Electricity Board. He executed the demand promissory note to repay the same
with interest. Since the assets were transferred, defendants 2 and 3 were added
as parties. On a suit filed by the plaintiff, the trial court decreed the same
personally against D-1 and also against the assets of D-2 and D-3. On appeal,
the defendants 2 and 3 alleged that they had not admitted the borrowing of the
amount by the first defendant and also execution of the promissory note; that
the account books of the company did not show any such liability and, hence,
they were not liable to pay the suit amount. The first defendant did not,
however, contest.
If the
promissory note was read as a whole, it was specifically stated that D-1 had
executed as the Chief Executive and had undertaken to pay the amount borrowed
with interest. The promissory note was attested by two witnesses and the first
defendant not only had signed the same but also the seal of the company was
affixed. Apart from that, even in the payment endorsement, the first defendant
signed as the Chief Executive affixing the stamp of company. Thus, the
promissory note was executed by the first defendant as the Chief Executive of
the second defendant company at the relevant point of time.
On appreciation
of oral and documentary evidence available on record in the instant case, the
first defendant as Chief Executive of the company at the relevant point of time
had not denied the execution of the promissory note. The third defendant was
only a successor-in-interest of the second defendant company who was in the
present management of the affairs of the company. The material on record also
showed that several other liabilities of the company also had been discharged
by the present management but, however, the appellants-defendants 2 and 3 in
the instant suit had taken a stand that inasmuch as the transaction did not
find a place in the accounts of the company, the company could not be made
liable. The Chief Executive of the company at the relevant point of time
executed the document and borrowed the amount for the purpose of payment of the
electricity bills of the company only. Hence, the said borrower paid for the
sake of the company and at any stretch of imagination, it could not be said
that the amount was borrowed by the first defendant in his personal capacity.
Making of
entries or maintenance of account books by the company predominantly relates to
the Indoor Management or the Internal Management of the affairs of the company
with which a creditor is not concerned with and the creditor cannot have any
control over the maintenance of the accounts and, hence, on that ground a
creditor of the company cannot be non-suited. In the light of the clear
language of section 47, especially in the light of the evidence of prosecution
witnesses and also clear admissions made by defence witness relating to the
authority of the executive to enter into the transaction, the findings recorded
by the trial court fastening the liability in relation to promissory note as
against defendants 2 and 3 could not be said to be unsustainable. Hence, there
was no reason to disturb any of the findings which had been recorded by the
trial court in that regard. Thus, all the findings recorded by the trial court
were confirmed.
G. Vasu v. Syed
Yaseen Sifuddin Quadri AIR 1987 AP 139 (FB), Visvanata Raghunath Audi v.
Mariana Colaco AIR 1976 Goa, Daman and Diu 60, Jhandu Mal & Sons v.
Official Liquidators of the Dehradun Mussoori Electric Tramway Co. AIR 1930
All. 778, Probodh Chandra Chakravarty v. Jatindra Mohan Chakravarty AIR 1940
Cal. 177, Brindaban Chandra Mitra v. Atul Krishna Basu [1936] 164 Indian Cases
728 (Cal.), Edula Ayyappa Reddy v. Amma Bai [1970] 1 ALT 246, Mangal Bahu v.
Jaitly & Co. [1946] 16 Comp. Cas. 214 (All.), Gopal Krishnaji v. Mohamed
Haji Latif AIR 1968 SC 1413, Oriol Industries Ltd. v. Bombay Mercantile Bank
Ltd. AIR 1961 SC 993, P. Rangaswami Reddiar v. R. Krishnaswami Reddiar AIR 1973
Mad. 251, Lohia Properties (P.) Ltd. v. Atmaram Kumar 1993 (2) APLJ 58 (SC),
Bharat Barrel & Drum Mfg. Co. v. Amin Chand Pyarelal AIR 1999 SC 1008, Mir Niyamath
Ali Khan v. Commercial & Industrial Bank Ltd. AIR 1969 AP 294, Ganesh
Trading Co. v. Moji Ram AIR 1978 SC 484, Manjushri Raha v. B.L. Gupta AIR 1977
SC 1158 and Surve Kedarappa v. D.G. Bhimappa AIR 1959 Mys. 36.
Srinivas Chitturu for the
Appellant. M. Ram Mohan for the Respondent.
1. The unsuccessful
defendants 2 and 3 in OS No. 61 of 1987 on the file of the Subordinate Judge,
Pithapuram are the appellants and the plaintiff in the said suit is the
respondent.
2. The parties will
be referred to as arrayed in the trial Court for the purpose of convenience.
The plaintiff filed the suit in OS No. 184 of 1984 on the file of the
Subordinate Judge, Kakinada which was renumbered as OS No. 61 of 1987 on the
file of Subordinate Judge, Pithapuram for recovery of a sum of Rs. 48,882.40 ps
towards balance of the principal and interest due on a promissory note dated
30-3-1982 executed by the 1st defendant in favour of the plaintiff for Rs.
40,000 repayable with interest at 24 per cent p.a. together with subsequent
interest and for costs of the suit.
3. In the trial Court
on the strength of respective pleadings of the parties, framed issues. On
behalf of the plaintiff PWs. 1 and 2 were examined and Exs. A-1 to A-8 were
marked. Likewise on behalf of the defendants D.W.1 was examined and Exs. B1 to
B3 were marked.
4. The trial Court on
appreciation of the oral and documentary evidence ultimately decreed the suit
as prayed for personally against the 1st defendant and also against the assets
of the 2nd and 3rd defendants. Aggrieved by the said judgment and decree,
defendants 2 and 3 preferred the present appeal.
5. The respective pleadings of the parties
are as hereunder.
6. It is pleaded in
the plaint that the 1st defendant during the time when he was acting as Chief
Executive of M/s. Kirlampudi Sugar Mills Limited, Pithapuram borrowed a sum of
Rs. 40,000 from the plaintiff for the purpose of paying huge amounts due to the
A.P. Electricity Board and executed the demand promissory note dated 30-3-1982
undertaking to repay the same with interest at 2 per cent per month to the
plaintiff or to his order on demand. It was also pleaded that the 1st defendant
executed the promissory note in the capacity of Chief Executive of M/s.
Kirlampudi Sugar Mills Limited and bound himself personally also. Since the
assets are transferred to defendants 2 and 3, they are added as parties. It was
also further pleaded that subsequent thereto the 1st defendant on behalf of
M/s. Kirlampudi Sugar Mills Limited paid a sum of Rs. 10,000 on 29-9-1982 as
part payment and endorsed the same on the reverse of the said promissory note.
Inasmuch as no further payments were made, the plaintiff got issued a notice on
26-7-1983 to the defendants and though the notice was received there was no
reply from the defendants. It was also further pleaded that as the management
of M/s. Kirlampudi Sugar Mills, Pithapuram did not pay the value of sugarcane
to the growers, the mills, premises and machinery and stocks of sugar etc.,
were seized by the District Collector and subsequently certain amounts were
deposited by the management of the Kirlampudi Sugar Mills with the District
Collector, East Godavari District and the 3rd defendant management had taken
possession of the premises, undertaking to receive and pay all assets and
liabilities. Certain other details had been pleaded and however, it was stated
that since the said Sugar Mills became very heavily indebted, it was trying to
give up the debt.
7. The defendants 2
and 3 had filed a written statement with the following allegations that these
defendants had not admitted the borrowing of the amount by the 1st defendant
and also execution of the promissory note dated 30-3-1982 agreeing to repay the
same with interest at 24 per cent p.a. It was further pleaded that there is no
credit in the accounts of the factory that the plaintiff lent Rs. 40,000 to the
factory. It was also stated that these defendants had not admitted that the 1st
defendant borrowed Rs. 40,000 from the plaintiff for the purpose of paying dues
of the factory. It was also pleaded that these defendants represent the public
limited company and the management of the defendants 2 and 3 was Patwaris and
their group previously. In April, 1983 Morarkas of Bombay and their group have
taken the controlling interest by way of transfer of shares from Patwaris and
their group. After the Morarkas and their group had taken the controlling
interest, the Board of Directors was reconstituted on 7-4-1983 and new
management came into existence. It was also pleaded that the new management
deposited 33 lakhs of rupees into the State Bank of
8. On the strength of
the respective pleadings of the parties, the following issues were framed by
the trial Court—
(a) Whether there is no cause
of action against D-2 and D-3 and whether D-2 and D-3 are not liable to pay the
suit amount ?
(b) Whether D-1 executed the suit promissory
note dated 30-3-1982 in favour of the plaintiff and whether the plaintiff is
entitled to recover the suit amount from D-1 ?
(c) To what relief ?
9. As already stated
supra after recording evidence ultimately the suit was decreed and hence
defendants 2 and 3 had preferred the present appeal.
10. Sri Chitturu
Srinivas, learned Counsel representing the appellants/defendants 2 and 3 while
making elaborate submissions had contended that the plaintiff had filed the
suit for recovery of money against the defendants based on promissory note
dated 30-3-1982 alleged to have been executed by the 1st defendant as Chief
Executive of the 2nd defendant, having borrowed the said amount for payment of
electricity charges of the 2nd defendant Company. The learned Counsel further
submitted that the 3rd defendant is the new management which had taken over the
2nd defendant during April, 1983. It was also further contended that the 1st defendant
left the 2nd defendant long prior to 3rd defendant taking over the management
of the 2nd defendant from the Collector, East Godavari District. The learned
Counsel also submitted that the 1st defendant had remained ex parte and had
chosen not to contest the suit at all. It was further submitted that the 2nd
and 3rd defendants/appellants herein had denied the very execution of the
promissory note and also had taken a stand that the company books do not show
this loan transaction at all and hence it cannot be said that the company is
liable to pay the amount. The learned counsel also had drawn my attention to
the evidence of P.Ws.1 and 2 and had contended that the evidence of P.W.1 is in
total variance of the pleadings. The learned Counsel also pointed out that the
details narrated by P.W.1 had not been pleaded in the plaint at all. It was
also further contended that here is a case where the plaintiff had not chosen
to enter into the witness box and P.W.1 is the cousin of the plaintiff and had
been examined on this ground only. The trial Court should have non-suited the
plaintiff. The learned Counsel also had taken me through the promissory note
and had contended that neither the body nor the recitals of the promissory note
go to show that the 1st defendant executed the promissory note representing the
Company and at the best it can be said that the promissory note was executed by
the 1st defendant in his individual capacity and hence in such case on the
strength of such document, the company cannot be fastened with the liability.
The learned Counsel further elaborating his submissions had drawn my attention
to sections 4, 7, 26, 27, 28 and 118 of the Negotiable Instruments Act, 1881
and also to sections 47 and 147(1)(c) of Companies Act, 1956. The learned
Counsel further submitted that a reading of the promissory note Ex.A-1 would
show that D-2 and D-3 are not the makers of the promissory note and hence the
essential requirement of a promissory note as contemplated under section 4 of
Negotiable Instruments Act is violated. The unconditional promise to pay is not
there as far as 2nd defendant and Ex.B-3 are concerned and hence the company is
liable to pay the amount. The learned Counsel also submitted that the identity
of the maker also must be certain and Ex-A-1 simply shows the 1st defendant as
the maker of the promissory note and an unconditional promise is made only by
the 1st defendant. The learned Counsel also stressed on the body of Ex.A-1
showing that the 1st defendant son of Ramgilal Patwari executed the promissory
note in his personal capacity and at any rate it does not show that the 1st
defendant executed the promissory note as Chief Executive of 2nd defendant
Company. The learned Counsel also further commented about the evidence of P.W.1
who had deposed that he does not know whether the 1st defendant has power to
borrow on behalf of the 2nd defendant Company. The learned Counsel also
contended that the statements of P.Ws.1 and 2 relating to the payments of
consideration under Ex.A-1, are contradictory and hence at any rate the trial
Court should have arrived at a conclusion that Ex. A-1 is an unenforceable
document as far as the appellants/defendants 2 and 3 are concerned.
11. The learned Counsel
also made elaborate submissions relating to the nature of presumption available
under section 118 of the Negotiable Instruments Act and had contended that the
plaintiff in the present case had miserably failed to discharge the burden and
the trial Court has not considered this aspect in proper perspective. The
learned Counsel also placed reliance on G. Vasu v. Syed Yaseen Sifuddin Quadri
AIR 1987 AP 139 (FB), and Visvonata Raghunath Audi v. Mariana Colaco AIR 1976
Goa, Daman and Diu 60. The learned Counsel also further had submitted that at
any rate inasmuch as the 1st defendant had executed the promissory note in his
individual capacity, his liability cannot be extended or the promissory note
cannot be enforced as against appellants/defendants 2 and 3. Strong reliance
was placed on Jhandu Mal & Sons v. Official Liquidators of the Dehradun
Mussoori Electric Tramway Co. AIR 1930 All. 778, Probodh Chandra Chakravarty v.
Jatindra Mohan Chakravorty AIR 1940 Cal. 177, Brindaban Chandra Mitra v. Atul
Krishna Basu [1936] 164 Indian Cases 728 (Cal.), Edula Ayyappa Reddy v. Amma
Bai [1970] 1 ALT 246 and Mangal Bahu v. Jaitly & Co. [1946] 16 Comp. Cas.
214 (All.).
12. Sri Ram Mohan,
learned Counsel representing the respondent/plaintiff had contended that in
view of the material available on record, it is a clear case where the 1st
defendant as the Chief Executive of the Company had borrowed the amount under
Ex.A-1 promissory note for the sake of the company and 2nd and 3rd defendants
intend to escape the liability by taking such a defence. The learned Counsel
also further contended that when it was specifically pleaded in plaint that the
1st defendant as the Chief Executive had executed Ex.A-1 promissory note and
had borrowed the amount representing the subject company only, there should
have been a specific denial in the written statement and in the absence of such
a denial, it should be taken that the case of the plaintiff in this regard had
not been disputed by the contesting defendants. The learned Counsel also
further submitted that the recitals of the particular promissory note are very
clear and the learned Counsel also had pointed out that the amount was borrowed
for the purpose of paying electricity charges of the M/s. Kirlampudi Sugar
Mills Limited, Pithapuram and as the Chief Executive of the Company he had undertaken
to pay the amount. The learned Counsel also had drawn my attention to the
signature portion and also the seal which had been affixed in Ex. A-1. Payment
endorsement also had been pointed out by the learned Counsel for the
respondent/plaintiff while further making elaborate submissions. The learned
Counsel commented that it is no doubt true that the plaintiff was not examined,
but however P.W.1 who had no knowledge about the transaction was examined and
he had deposed about all the details. The evidence of P.W.1 is well supported
by the evidence of P.W. 2 the attester of Ex.A-1 and hence in the light of this
evidence, it can be said that the cause of action of the promissory note is
duly proved by the respondent/plaintiff. Hence, non-examination of the plaintiff
is of no consequence. The learned Counsel further contended that it is no doubt
true that certain details which had been narrated by P.W.1 had not been pleaded
in the plaint. But, however, while considering the pleadings, the Courts are
expected to take a liberal view so as to advance the substantial justice
instead of taking a narrow and technical view while looking into the pleadings.
The learned Counsel also had drawn my attention to section 47 of the Indian
Companies Act, 1956 and had contended that in the light of the language of the
said provision, it cannot be said that the 1st defendant had no authority to
borrow the amount representing the company. The learned Counsel submitted that
it is not the case of the other side also and had pointed out to the admissions
made by D.W.1 in this regard in the cross-examination that is relating to
authority of the 1st defendant to borrow the amounts on behalf of the company
and representing the company. The learned Counsel further submitted that the 1st
defendant had not chosen to contest the matter of defendants 2 and 3 who are
liable to pay the amount. The company will be in the custody of all the records
and a 3rd party creditor cannot be expected to know about the several internal
affairs relating to the Indoor Management of the company as such and hence the
respondent/plaintiff/3rd party creditor cannot be expected to produce such a
relevant material which would be in the custody of the opposite party and hence
in such a case, non-production of such records by the company should be taken
serious note of and this was rightly done by the trial Court. Strong reliance
was placed on Gopal Krishnaji v. Mohamed Haji Latif AIR 1968 SC 1413. The
learned Counsel further submitted that though sections 4, 26, 27 and 28 of the
Negotiable Instruments Act, 1881 may throw some light on the Negotiable
Instruments, in the case of execution of promissory notes on behalf of the
Company, the provisions of the Companies Act, 1956 have to be looked into for
the purpose of deciding the binding nature of such a document. The learned
Counsel had drawn my attention to the language of section 47 of Indian
Companies Act, 1956 while taking me in detail through the evidence of D.W.1.
The learned Counsel commented that the admissions made by D.W.1 are sufficient
to establish the claim put forth by the respondent/plaintiff. The learned
Counsel placed strong reliance on Oriol Industries Ltd. v. Bombay Mercantile
Bank Ltd. AIR 1961 SC 993, and P. Rangaswami Reddiar v. R. Krishnaswami Reddiar
AIR 1973 Mad. 251. The learned Counsel also had placed reliance on Lohia
Properties (P.) Ltd. v. Atmaram Kumar 1993 (2) APLJ 58 (SC), and also Bharat
Barrel & Drum Mfg. Co. v. Amin Chand Pyarelal AIR 1999 SC 1008.
13. Heard both the
learned Counsel at length and also perused both the oral and documentary
evidence available on record from the respective contentions which had been
advanced by both the Counsels elaborately. The following points for
consideration will arise in this appeal.
(a) Whether the appellants/defendants
2 and 3 are also liable to pay the amounts due under Ex.A-1 promissory note ?
(b) Whether the
respondent/plaintiff has cause of action to file the suit as against the
appellants/defendants 2 and 3 ?
(c) Whether the trial Court
had appreciated the aspect of burden of proof in the context of section 118 of
the Negotiable Instruments Act, 1881 properly ?
(d) To what relief ?
Points a to c.
14. Since points a to c
are closely inter-connected and for the purpose of avoiding overlapping discussion
and for the purpose of convenience, all these points are being discussed
together.
15. The suit is based
on the strength of promissory note dated 30-3-1982 executed by the 1st
defendant in favour of the plaintiff for Rs. 40,000. It was marked as Ex.A-1
and the endorsement on the promissory note was marked as Ex.A-2, Ex.A-3 is the
office copy of notice. Exs. A-4 to A-8 are the postal acknowledgements. The
evidence of P.Ws. 1 and 2 had been let in on behalf of the plaintiff. The 1st
defendant had not chosen to contest the matter. No doubt, defendants 2 and 3
filed written statements taking a stand denying the very execution of Ex.A-1
but however the proper person to take a stand in this regard is the 1st
defendant. As already observed by me, the 1st defendant had not chosen to
contest the matter. P.W. 1 is one Jogarao, the cousin brother of the plaintiff.
P.W. 1 deposed that he worked as Yard Inspector in K.S. Mills, Pithapuram and
had resigned his job in 1984. P.W.1 also deposed that the 1st defendant was the
Chief Executive of D.2 factory and one Narasimha Rao, worked as Cane
Superintendent in D.2 factory. He also had resigned his job and Mohan
Chatterjee was working as cashier in the 2nd defendant’s factory and still he
is working as cashier in the 2nd defendant’s factory. P.W. 1 further deposed
that the 1st defendant asked him for a loan of Rs. 40,000 for paying electrical
charges for 2nd defendant’s factory and he brought the money from his cousin’s
brother, the plaintiff and gave Rs. 40,000 to 1st defendant and on the next
day, the 1st defendant executed a promissory note as the Chief Executive of 2nd
defendant’s factory and agreed to pay interest at 2 per cent p.m. This witness
also further deposed that Ex.A-1 was executed at the premises of the factory
and D.1 also affixed stamp of the mill and signed the pronote so as to show
that the debt is for the mill. P.W. 1 further deposed that the attestors of the
Ex.A-1 were present when the consideration of Rs. 40,000 was passed and the
plaintiff was not present when Ex.A-1 was executed. P.W.1 also further deposed
that the 1st defendant on behalf of the 2nd defendant paid Rs. 10,000 towards
the part payment of debt covered by Ex.A-1 and the said endorsement was marked
as Ex.A-2 and it also contains the stamp of the mill and subsequently, thereto
no other payment had been made. P.W.1 further deposed about the issuance of
notice and the acknowledgement in the cross-examination at length for the
purpose of establishing that D2 and D3 are not liable and the suggestion that
Ex.A-1 is the collusive document to defraud D-2 and D-3 had been specifically
denied by P.W.1
16. P.W. 2 Narasimha
Rao, one of the attestors of Ex. A-1 was examined and P.W. 2 deposed that he
worked as Cane Superintendent in Sugar Mill from 1952 to September, 1982. P.W.2
also deposed that the 1st defendant was the Chief Executive of the 2nd
defendant and he had attested Ex.A-1 and in his presence P.W.1 paid Rs. 40,000
to the 1st defendant and he attested the pronote and he was present at the time
of payment of Rs. 40,000 and also at the time of execution of Ex.A-1 and the
1st defendant executed in his capacity as the Chief Executive of the 2nd
defendant. P.W.2 also deposed about the affixing of the stamp of the Sugar
Mills on the promissory note. P.W.2 also deposed that the promissory note was
executed in favour of G. Venkata Rao but he was not present either at the time
of payment of consideration or at the time of execution of Ex.A-1. No doubt,
this witness was also cross-examined by putting certain suggestions but however
the suggestions had been denied by P.W. 2. As against the oral and documentary
evidence adduced on behalf of the respondent/plaintiff and on behalf of the
appellants/contesting defendants Ex.B-1 entry at page 357 in cash book relating
to Kirlampudi Sugar Mills Ltd., for the year 1981-82; Ex. B-2 ledger at page
223 for the year 1981-82 as expenditure towards Electricity charges and Ex.B-3
is the ledger at page 358 for the year 1981-82 towards cash advance from Andhra
Bank, Pithapuram had been marked. D.W.1 the only witness had deposed that he
has been working in the D.2 factory since 1970 as accounts clerk and no doubt
he deposed about the entries made in the regular course of his business and had
spoken about the electrical Charges. D.W.1 also had deposed that from the
plaintiff there is no credit entry in the books of the Company and hence the
company is not liable to pay anything to the plaintiff. D.W.1 also deposed that
the factory accounts do not show any payment of Rs. 10,000 on 29-9-1982 to the
plaintiff. This witness was cross-examined at length and in cross-examination,
D.W.1 admitted that there will be vouchers when the loans are taken on
promissory notes by the company. D.W.1 also deposed that cashier prepares the vouchers
and send them to him and if the vouchers are misplaced or not received by him
for any reason, that will not be accounted for and he has nothing to do with
the balance in the account or the cash in hand and he does not deal with cash
and therefore he cannot say whether the cash balance represented is there or
not. D.W. 1 also deposed that he does not know personally where from the cash
was paid for electricity bills. D.W. 1 also deposed that Sri Mahesh Kumar
Patwari was the Chief Executive and he is D1 in this case and he is authorised
to borrow and pay moneys and he is also a general power of attorney holder.
D.W.1 also made several other admissions which may not be necessary to be dealt
with in detail. No doubt, in cross-examination relating to the entries several
questions were put and answers had been elicited in detail. D.W.1 also was
cross-examined relating to the maintenance of several loose sheets relating to
the company in relation to the maintenance of accounts. As can be seen from the
evidence available on record, P.Ws. 1 and 2 had specifically deposed that the
plaintiff was not present at the time of Ex.A-1 transaction and the payment was
made by P.W.1 the cousin brother of the plaintiff and hence P.W.1 was examined
and to further prove the execution of the promissory note though it was not
specifically denied by the 1st defendant, P.W.2 one of the attestors also had
been examined. Thus the execution of the promissory note had been duly proved
that the Executant of the promissory note the 1st defendant had not chosen to
deny Ex.A-1. It is also pertinent to note that in the plaint at para 4 it was
specifically pleaded that the 1st defendant had executed the pronote as the
Chief Executive of the company and this aspect was not specifically denied
though a vacate plea was taken in the written statement.
17. In Lohia Properties
(P.) Ltd.’s case (supra) it was held that when the plaint contains specific
averment as to service of notice of termination of tenancy on the tenant and it
was not denied in written statement and only legality of the notice contested
in the written statement. Non denial of service amounts to implied admission.
18. Not only that the
1st defendant had not chosen to contest the matter but also in view of the
clear evidence of P.Ws. 1 and 2 it can be definitely said that the execution of
Ex.A-1 had been duly proved. No doubt, the learned Counsel for the appellants
had pointed out that in the plaint it was not specifically pleaded that P.W.1
had borrowed the amount from the plaintiff for the sake of the company and paid
the amount to the 1st defendant. The learned Counsel had contended that this is
the variance between the pleading and proof. In Mir Niyamath Ali Khan v.
Commercial & Industrial Bank Ltd. AIR 1969 AP 294, it was held thus :
“...although the evidence let in on issues on
which the parties actually went to trial should not be normally made the
foundation for decision of another and different issue, which was not present
to the minds of the parties and on which they had no opportunity of adducing
evidence, that rule, however, has no application to the present case where the
parties have gone to trial with full knowledge that the very question is in
issue, though no specific issue was framed, and adduced evidence relating thereto.
Normally the Court will not grant relief to the plaintiff on a case for which
there was no foundation laid in the pleadings and which the defendant was not
called upon to meet. It may be either oral or in writing. It may be expressed
or it may even be implied. It might be even inferred from the course of conduct
of the parties concerned. However, whatever may be the form of the contract, it
must be satisfactorily proved....” (pp. 297-298)
19. It
is no doubt true that the details deposed by P.W.1 had not been pleaded in the
plaint but the evidence of both P.Ws.1 and 2 is clear, categorical and
consistent relating to the effect that the plaintiff was not present at the
time of Ex.A-1 transaction and P.W.1 paid the amount and P.W.2 and other
attestors were witnesses who had witnessed the transaction. In the light of
such clear evidence, I do not see that the mere omission to plead these aspects
can be taken to be fatal to the case of the respondent/plaintiff so as to
non-suit him. In Ganesh Trading Co. v. Moji Ram AIR 1978 SC 484, the Apex Court
while dealing with object of provisions relating to pleadings had explained as
follows :—
“2. Procedural law is intended to facilitate
and not to obstruct the course of substantive justice. Provisions relating to
pleadings in civil cases are meant to give to each side intimation of the case
of the other so that it may be met, to enable Courts to determine what is
really at issue between parties, and to prevent deviations from the course
which litigation on particular causes of action must take.” (p. 485)
20. In
Manjushri Raha v. B.L. Gupta AIR 1977 SC 1158, it was held that the pleadings
have to be interpreted not with formalistic rigour but with latitude or
awareness of low legal literacy of poor people.
21. Hence
in the light of the evidence of P.Ws.1 and 2 it cannot be said that the
non-examination of the plaintiff is fatal to the case of the plaintiff
especially in the light of the fact that plaintiff was not present and it is
P.W.1 who had advanced the amount and P.W.2 the other witness who had witnessed
the passing of consideration and also execution of Ex.A-1 and hence, the mere
omission to plead this aspect cannot be taken as a serious defect in the
pleading. Before adverting to the other contentions which had been argued at
length by the learned Counsel representing to the respective parties it may be
appropriate to look into Ex.A-1. Ex.A-1 the demand promissory note reads as
hereunder.
Demand Promissory
Note
Pithapuram,
Dated 30-3-1982
Rs. 40,000
(Rupees forty thousand only)
Promissory note
executed by Mahesh Kumar Patwari son of Ramgilal Patwari of Pithapuram in
favour of Giyyana Venkata Rao son of Appalaraju of Thimmapuram on demand, I
promise to pay Rs. 40,000 (Rupees forty thousand only) borrowed from you today
for the purpose of paying electricity charges of the Kirlampudi Sugar Mills
Ltd., Pithapuram of which I am the Chief Executive and I undertake to pay the
same with interest at Rs. 2 per cent per mensum to you on order. The
consideration is received in cash today from you and undertake to be also
personally liable.
Mahesh Patwari
Witnesses :
1. Narasimha Rao
2. Mohan Chaterjee
It is no doubt
true that the commencement portion of the promissory note reads as though it is
executed by Mahesh Kumar Patwari son of Ramgilal Patwari but however if the
document is read as a whole it is specifically stated that he had executed as
the Chief Executive and had undertaken to pay the amount borrowed with interest
at 2 per cent per month. The promissory note is attested by two witnesses and
the 1st defendant not only had signed Ex. A1 but also the seal of the company
is affixed. Apart from Ex.A1 even in the payment of endorsement of Ex.A2, the
1st defendant signed as the Chief Executive affixing the stamp of M/s.
Kirlampudi Sugar Mills, Limited. Thus a careful reading of Ex.A1 clearly goes
to show that Ex.A1 was executed by the 1st defendant as the Chief Executive of
the 2nd defendant company at the relevant point of time.
Now the question
which had been seriously argued by the learned Counsel for the appellants to
the effect that Ex.A1 transaction is not binding on the 2nd and 3rd defendants,
has to be considered in the light of the elaborate submissions advanced by the
learned Counsel for the appellants/defendants 2 and 3. It is no doubt true that
defendants 2 and 3 are not shown as parties in the main body of the document.
The 3rd defendant is only a successor-in-interest in the present management of
the affairs of the company. The main stand taken by the contesting defendants
is that inasmuch as this amount was not shown in the accounts, defendants 2 and
3 cannot be fastened with the liability on the strength of the promissory note
alleged to have been executed by the 1st defendant. Sections 26, 27 and 28 of
the Negotiable Instruments Act read as hereunder :
“Section 26. Capacity to make, etc. promissory
notes, etc.—Every person capable to contracting, according to the law to which
he is subject, may bind himself and be bound by the making, drawing acceptance,
indorsement, delivery and negotiation of a promissory note, bill of exchange or
cheque.
Minor - A minor may draw, indorse, deliver and
negotiate such instruments so as to bind all parties except himself. Nothing
herein contained shall be deemed to empower a corporation to make, indorse or
accept such instruments except in cases in which, under the law for the time
being in force, they are so empowered.”
Note
Whether company has power to issue cheques -
The power is to be found in the relevant provisions of the Companies Act
itself. Section 26 does not purport to make any provision of substantive or
procedural law. The latter part of section 26 merely brings out that a company
cannot claim authority to issue a cheque under its first part. Oriol Industries
Ltd. v. Bombay Mercantile Bank Ltd. AIR 1961 SC 993-1961 (3) SCR 652-1961 (1)
MLJ SC 163.
Section 27 : Agency - Every person capable of
binding himself or of being bound, as mentioned in section 26 may so bind
himself or be bound by a duly authorised agent acting in his name. A general
authority to transact business and receive and discharge debts does not confer
upon an agent the power of accepting or indorsing bills of exchange so as to
bind his principal.
An authority to draw bills of exchange does
not of itself import an authority to indorse.”
Section 28 : Liability of agent signing - An
agent who signs his name to promissory note, bill of exchange or cheque without
indicating thereon that he signs as agent, or that he does not intend thereby
to incur personal responsibility, is liable personally on the instrument,
except to those who induced him to sign upon the belief that the principal only
would be held liable.”
Sections 47 and
147(1)(c) of the Indian Companies Act, 1956 read as hereunder :
“Section 47 : Bills of Exchange and promissory
notes - A bill of exchange, hundi or promissory note shall be deemed to have
been made, accepted, drawn or endorsed on behalf of a company if drawn,
accepted, made, or endorsed in the name of, or on behalf or on account of, the
company by any person acting under its authority, express or implied.
Section 147 : Publication of name by company -
(1) Every company—
(a) ** ** **
(b) ** ** **
(c) shall have its name (and the address of its
registered office) mentioned in legible characters in all its business letters,
in all its bill heads and letter papers, and in all its notices [***] and other
official publications; (and also have its name so mentioned in all bills of
exchange), hundies, promissory notes, endorsements, cheques and orders for
money or goods purporting to be signed by or on behalf of the company, and in
all bills of parcels, invoices, receipts and letters of credit of the company.”
22. In Oriol Industries Ltd.’s case (supra)
the Apex Court had observed as follows :
“Before a company can be bound by a negotiable
instrument one of the essential conditions is that the instrument on its face
must show that it has been drawn, made accepted or endorsed by the company.
This may be done either by showing the name of the company itself on the
instrument, or by the statement of the person making the instrument that he is
doing so on behalf of the company. In other words, unless the plain tenor of
the negotiable instrument on its face satisfies the relevant requirement the
instrument cannot be validly treated as an instrument drawn by the company. The
inevitable consequence of this requirement is that whenever a negotiable
instrument is issued without complying with the said requirement it would not
bind the company and cannot be enforced against it. The principle enunciated by
section 89 cannot be extended to a claim made by a company against its bank on
the ground that the cheque which the bank accepted and honoured was defective in
that it did not comply with the requirements of section 89 and could not have
been enforced against it.” (p. 993)
It may also be
relevant to note another passage in the same judgment in Oriol Industries
Ltd.’s case (supra). The Apex Court had observed as follows :
“That takes us to the principal question of
law in dealing with the said question it is first necessary to refer to section
26 of the Negotiable Instruments Act, 1881 (26 of 1881). This section provides
that ‘every person capable of contracting according to the law to which he is
subject, may bind himself and be bound by the making, drawing, acceptance,
endorsements, delivery and negotiation of a promissory note, bill of exchange
or cheque’.
This section further provides, inter alia,
that ‘nothing herein contained shall be deemed to empower a corporation to
make, indorse or accept such instruments except in cases in which, under the
law for the time being in force, they are so empowered’.
This section does not purport to make any
provision of substantive or procedural law. The latter part of the section
merely brings out that a company cannot claim authority to issue a cheque under
its first part. The law in regard to the company’s power to issue negotiable
instruments has to be found in the relevant provisions of the Companies Act
itself. We must, therefore, turn to section 89 of the said Act.” (p. 995)
23. In Visvonata
Raghunath Audi’s case (supra) it was held there is no presumption about
execution of a negotiable instrument and in case of a denial by the opposite
side the party basing its claim on such instrument must fully prove its
execution.
24. In Jhandu Mal &
Son’s case (supra) it was held that Company not liable for promissory note
executed by and in name of agent so authorised. In Probodh Chandra
Chakravarty’s case (supra) it was held thus :
“Where a director of company executing
promissory note thereby promising to pay certain amount both in his personal
capacity as well as on behalf of company. His signature having at its top words
‘on behalf of company’ impressed by rubber stamp. It was held that this
endorsement at the top held did not alter his personal liability.”
Strong reliance was also placed on Brindaban Chandra Mitra’s case
(supra).
25. In Mangal Bahu’s
case (supra) while dealing with the liability of Company in case of a
promissory note executed by managing agent personally it was held as hereunder
:
A firm
belonging to a joint Hindu family of which J was the manager, were the managing
agents of an electric supply company. J borrowed some money from P and executed
in his own name a promissory note in favour of P. J also pledged certain fully
paid up share held by the family in his name and transferred in blank the share
of P. The money borrowed by J was deposited in the High Court on behalf of the
company in order to secure the postponement of the appointment of a provisional
liquidator. There was no indication in the promissory note that J was acting on
behalf of the company. All the indications in the case were that the loan was
made to J personally and on his personal security, there being very good
reasons why P should not lend the money to the company. The question was
whether the company could be made liable for the payment of the loan :
(1) that the mere fact that the company benefited was not by
itself sufficient to bind the company;
(2) that before the
company could be held liable, it must be found not only that money came into
their hands but that it was in effect put into their hands by P through the
managing agents, it being understood by both parties when the promissory note
was executed that the company would be liable for repayment;
(3) that though J signed
as manager of the family and though the managing member of a joint Hindu family
could execute in his sole name a promissory note which would be binding on the
family as a whole, there was no justification for extending the principle to a
company, for which there is a special provision in section 89 of the Indian
Companies Act;
(4) that the company was not therefore liable for the payment
of the loan.
The general
principle to be followed in cases of negotiable instruments is that the name of
a person or firm to be charged upon a negotiable document should be clearly
stated on the face or on the back of the document, so that the responsibility
is made plain and can be instantly recognised as the document passes from hand
to hand. It is not sufficient that the name of the principal should be in some
way disclosed; it must be disclosed in such a way that on any fair
interpretation of the instrument, his name is the real name of the person
liable on the bill.
If B borrows
money from A in order for his own purposes to lend it to C, C cannot be held to
A, even if A knew with what object the money was being borrowed. Before he can
be held so liable, it must be found that the loan was actually a loan to C.
26. Strong reliance was
also placed on the principles of construction of a promissory note as decided
in Edula Ayyappa Reddy’s case (supra).
27. Apart from the
above decisions relating to the aspect of presumption under section 118 of
Negotiable Instruments Act, 1881 no doubt reliance was placed on G. Vasu’s case
(supra) and also Bharat Barrel & Drum Mfg. Co.’s case (supra).
28. In P. Rangaswami Reddier’s case (supra) it
was held thus :
“4. The next contention of the appellants is
that there is no resolution by the Board of Directors of the company in terms
of section 292(c) of the Companies Act enabling the Managing Director to borrow
money on promissory notes. Apart from the fact that this plea had not been
raised in the written statement there is no substance also in this contention.
It is not disputed that the Memorandum and Articles of Association allow
borrowing by the directors. The transaction is a loan which is therefore
authorised under the Memorandum and Articles of Association. Article 21 of the
Memorandum provides that the Directors may raise or borrow money on promissory
notes. By Resolution 4 of Ex. A2 which is a certified copy of the registration
of resolutions, the 1st defendant was appointed as the managing director.
Resolution 6 vested in him full powers for the management of the company’s
affairs and also authorised him to sign all papers of the company. The
transaction is, therefore, one which could be entered into on behalf of the
company by the first defendant. In such a circumstance, the creditor is
entitled to presume that all formalities required in connection therewith have
been complied with. A bona fide creditor in the absence of any suspicious
circumstance is also entitled to presume its existence. The creditor being an
outsider or a third party so far as the company is concerned is entitled to
proceed on the assumption of the existence of such a power. In fact the money
was utilised for the purpose of the company is not in dispute and the 2nd
defendant himself has made a part payment towards this promissory note. In this
connection it is also useful to refer to the decision of the Allahabad High
Court in L.R. Cotton Mills Co. v. J.K. Jute Mills Co. AIR 1957 All. 311. It was
held in that case that even where there was no actual resolution authorising a
director to enter into a transaction on behalf of the company either by the
Board of Directors or by the Board of Managing Agents a claim of a creditor
could not be affected if the terms of its Memorandum and Articles of
Association authorised such a transaction. It was also held that in such a case
the person negotiating with a company is entitled to presume that all the
formalities in connection therewith have been complied with. There is no
dispute in this case as to the bona fides of the plaintiff. This contention of
the appellants is therefore unsustainable.” (p. 252)
In Surve Kedarappa v. D.G. Bhimappa AIR 1959 Mys. 36, it was held
thus :
“The plaintiff, an endorsee of a promissory
note executed by the defendants in favour of a company sued on the basis of
that note impleading as defendant the Manager of the Branch of the Company who
had endorsed the note in his favour. Under the Articles of Association of the
Company the Managing Director of the Company had authority to endorse or
negotiate any bill of exchange, promissory note etc. executed in favour of the
Company and in such circumstances it was :
Held, that the plaintiff was entitled to
assume that the Manager of the branch had authority to assign the pronote in
question within the meaning of section 89, Companies Act. Under section 118,
Negotiable Instruments Act there is a presumption that the holder of a
negotiable instrument is a holder in due course. It was for the defendants to
establish that the Branch Manager had no authority to endorse the note and that
the plaintiff was not a holder in due course.” (p. 36)
29. The learned counsel
for the respondent/plaintiff had placed strong reliance on Gopal Krishnaji’s
case (supra) to the effect that the non-production of documents on the part of
the defendant’s company should be taken serious note of and an inference had to
be drawn as against the company and not as against the respondent/plaintiff. In
the aforesaid decision it was held that a party in possession of best evidence
which would throw light on the issue in controversy withholding it, Court ought
to draw an adverse inference against him notwithstanding that onus of proof
does not lie on him.
30. On appreciation of
oral and documentary evidence available on record in the present case, the 1st
defendant as Chief Executive of the Company at the relevant point of time had
not denied the execution of Ex.A1 promissory note. The 3rd defendant is only a
successor-in-interest of the 2nd defendant company who is in the present
management of the affairs of the company. The material on record also shows
that several other liabilities of the company also had been discharged by the
present management but, however, the appellants defendants 2 and 3 in the
present suit had taken a stand that inasmuch as Ex. A1 transaction does not
find a place in the accounts of the company, the company cannot be made liable.
As already observed by me, the Chief Executive of the company at the relevant
point of time executed Ex.A1 and borrowed the amount for the purpose of payment
of the electricity bills of the company only. Hence the said borrower pays for
the sake of the company and at any stretch of imagination, it cannot be said
that the amount was borrowed by the 1st defendant in his personal capacity.
31. It is pertinent to
note that the making of entries or maintenance of account books by the company
predominantly relate to the Indoor Management or the Internal Management of the
affairs of the company with which a creditor is not concerned with and the
creditor will not have any control over the maintenance of the accounts and
hence on that ground a creditor of the company cannot be non-suited. Even in
section 47 of the Indian Companies Act, 1956 the words implied are “shall be
deemed to have been made” and also “express or implied”. A careful reading of
section 47 clearly go to show that as far as the companies are concerned
relating to binding nature of Negotiable Instruments like bill of exchange and
promissory note. Section 47 has to be looked into though the general provisions
under the Negotiable Instruments Act, 1881 also may be relevant to some extent.
In the light of the clear language of section 47 especially in the light of the
evidence of PW1 and PW2 and also clear admissions made by DW1 relating to the
authority of the Executive to enter into Ex. A1 transaction, I am of the
considered opinion that the findings recorded by the trial Court fastening the
liability in relation to Ex. A1 as against defendants 2 and 3 cannot be said to
be unsustainable. Hence I do not see any reason to disturb any of the findings
which had been recorded by the trial Court in this regard. No doubt, on the
aspect of the burden of proof and also presumption that can be drawn under
section 118 of the Negotiable Instruments Act several contentions had been
advanced by both the learned Counsels. But, however, in the light of the clear
evidence of PW1 and PW2 and admissions made by DW1 and also the different
provisions under sections 26, 27 and 28 of the Negotiable Instruments Act, 1881
and also section 47 and also section 147(1)(c) of the Indian Companies Act,
1956, it is not necessary to further discuss these aspects in detail since it
will not alter the situation in any way in favour of the appellants/defendants
2 and 3. Hence all the findings recorded by the trial Court are hereby
confirmed.
Point d
32. In the light of the
findings recorded above in detail especially in the light of the oral and
documentary evidence available on record the appeal is devoid of merits and
accordingly the appeal is dismissed with costs.
33. This Court also
records its appreciation for the able assistance given by both the learned
Counsels Sri Chitturu Srinivas and Sri Ram Mohan in deciding the matter.
[1961] 31 COMP. CAS. 185 (SC)
v.
P. B. GAJENDRAGADKAR, K. N. WANCHOO AND K. C.
DAS GUPTA, JJ.
JANUARY 31, 1961
GAJENDRAGADKAR, J. - This appeal which has come to this court with a certificate issued by the Bombay High Court raises for our decision a short and interesting question about the scope and effect of the provisions contained in section 89 of the Indian Companies Act, 1913, in relation to the law of banking. This question arises in this way. The appellant, the Oriol Industries Ltd. (hereafter called the company), was incorporated on May 15,1945, and it appointed as its managing agents Messrs. Poddar Chacko & Co. Soon after its incorporation the company passed a resolution on May 21, 1945, whereby it decided to open an account with the respondent, the Bombay Mercantile Bank Ltd. (hereafter called the bank), and in accordance with the said resolution an account was opened with it on May 28, 1945. Twenty-eight cheques were drawn on this account aggregating the total amount of Rs.28,882-13-0 during the period between May 28, 1945, and July 31, 1945. These cheques were drawn by K. Poddar and M.J. Chacko in pursuance of the authority conferred on them by the company. On September 28, 1948, by its liquidator the company brought the present suit claiming to recover from the bank the said amount of Rs.28,882-13-0. The case for the company as set out in the plaint was that the payment of he said amount had been made by the bank wrongfully and negligently and the amount drawn under the said cheques had been wrongfully debited to the company in its account kept by the bank. It appears that the resolution for winding up of the company was held by the court to be null and void, and so the plaint was subsequently amended whereby the name of the liquidator was struck out and the suit then purported to be one which was instituted by the company itself. The plea raised by the company that the cheques in question had been negligently and wrongful honored by the bank was seriously disputed by the bank in its statement. Mr.Justice TENDOLKAR, who tried the suit on the original side of the Bombay High Court, however, upheld the plea raised by the company and came to the conclusion that the cheques had been wrongfully honored. Even so, Mr.Justice TENDOLKAR held that out of the total amount in dispute an amount of Rs.8,882-13-0 had been actually received by the company and so on equitable grounds he rejected the company’s claim in regard to the said amount. The company’s claim was, however, decreed in respect of the balance of Rs.20,000.
The decree
thus passed by TENDOLKAR, J., was challenged by the bank in its appeal, whereas
the rejection of the company’s claim in respect of Rs.8,882-13-0 by the trial
judge gave rise to cross objections by the company. The court of appeal has
reversed the finding of TENDOLKAR, J., and has held that the bank was not
liable to repay any amount to the company since it had accepted and honored the
cheques issued on it in good faith. It may be stated at this stage that the
plea of negligence which had been originally urged by the company in its plaint
was expressly given up at the trial. Since the appeal court accepted the bank’s
case on the principal question of law it did not think it necessary to consider
the question of limitation or the question about the applicability of the
equitable doctrine on which the trial judge had relied. In the result the
appeal filed by the bank was allowed, the cross objections preferred by the
company were rejected, and the suit filed by the company was dismissed with
costs. The company then moved the High Court for a certificate, and on a
certificate being granted it has come to this court; and on its behalf
Mr.Andley has urged that in coming to the conclusion that the company’s claim was
unsubstainable the appeal court has misjudged the effect of the provisions of
section 89 of the Indian Companies Act in relation to the conduct of the bank
in the present case. That is how the principal question which falls for our
decision is about the scope and effect of the provisions of section 89 of the
Indian Companies Act.
Before dealing
with the said question of law it is necessary to dispose of a minor point
raised by Mr.Andley. He contends that the cheques issued by K.Poddar and M.J.
Chacko and honored by the bank had not been issued in the form required by the
resolution which gave them authority to operate on the company’s account with
the bank. The relevant resolution passed by the company provided that “the
banking accounts of the company be opened with the bank and another bank and
that the said banks be and hereby authorised to honour cheques, bills of
exchange and promissory notes, drawn, accepted or made on behalf of the company
by the managing agents, Messrs. Poddar Chacko & Co., by both the directors
of the managing agents firm, namely, Mr.Keshavdeo Poddar and Mr.M.J. Chacko and
to act on any instructions so given relating to the account whether the same be
overdrawn or not or relating to the transactions of the company.” The argument
is that two conditions had to be satisfied before the bank could accept a
cheque issued under this resolution; the cheque had to be signed by both the
directors of the managing agents firm, and it had to be drawn on behalf of the
company. In point of fact, all the cheques have been signed by the two
individuals without describing themselves as directors of the managing agents
firm and without showing that they had drawn them on behalf of the company.
These defects, it is urged, made the cheques irregular and inconsistent with
the mandatory requirements of the resolution, and the bank was, therefore, not
justified in honoring the said cheques. In our opinion, this argument is
unsound. On a fair and reasonable construction of the resolution it is
difficult to uphold the contention that the resolution required the drawers of
the cheques to specify on each cheque that they were made or drawn on behalf of
the company. The object of the resolution as well as its effect merely was to
conform to the requirements of section 89 of the Indian Companies Act to which
we will presently refer. It cannot be said that the resolution required that
the drawers of the cheques had to comply with the said condition apart from the
requirements of section 89; and so it would be unreasonable to treat the said
requirement as a condition prescribed by the resolution independently of
section 89.
In this
connection the subsequent resolution passed by the company is significant. It
appears that on October 22, 1945, a resolution was passed by the company
authorising M.J. Chacko to sign cheques for the company, and when this
resolution was communicated to the bank it was told that the cheques on behalf
of the company would thereafter be singed as : “For and on behalf of the Oriol
Industries Limited, For Poddar Chacko & Co.” ; in other words, by this
communication the bank was told that it is only cheques signed by M.J. Chacko
in the manner specified in the communication that the bank should honour. This
communication affords an eloquent contrast to the communication made by the
company to the bank in regard to the earlier resolution by which M/s.Poddar and
Chacko were authorised to issue cheques on its behalf. Therefore, in our
opinion, the argument that the impugned cheques accepted by the bank were
inconsistent with the specific mandatory requirements authorised by the
resolution cannot be accepted.
That takes us
to the principal question of law. In dealing with the said question it is first
necessary to refer to section 26 of the Negotiable Instruments Act, 1881 (26 of
1881). This section provides that “every person capable of contracting,
according to the law to which he is subject, may bind himself and be bound by
the making, drawing, acceptance, endorsements, delivery and negotiation of a promissory
note, bill of exchange or cheque.” This section further provides, inter alia,
that “nothing herein contained shall be deemed to empower a corporation to
make, endorse or accept such instruments except in cases in which, under the
law for the time being in force, they are so empowered.” This section does not
purport to make any provision of substantive or procedural law. The latter part
of the section merely brings out that a company cannot claim authority to issue
a cheque under its first part. The law in regard to the company’s power to
issue negotiable instruments has to be found in the relevant provisions of the
Companies Act itself. We must, therefore, turn to section 89 of the said Act.
Section 89
provides that “a bill of exchange, hundi or promissory note shall be deemed to
have been made, drawn, accepted or endorsed on behalf of a company if made,
drawn, accepted or endorsed in the name of, or by or on behalf of, or on
account of, the company by any person acting under its authority express or
implied.” It is clear that in order that a company may be bound by a negotiable
instrument purporting to have been issued on its behalf two conditions must be
satisfied : the instrument must be drawn, made, accepted or endorsed in the
name of or by or on behalf of or on account of the company, and the person who
makes, draws, endorses or accepts the instrument must have the authority given
to him by the company on that behalf. This authority may be either express or
implied. There is thus no doubt that before a company can be bound by a
negotiable instrument one of the essential conditions is that the instrument on
its face must show that it has been drawn, made, accepted or endorsed by the
company. This may be done either by showing the name of the company itself on
the instrument, or by the statement of the person making the instrument that he
is doing so on behalf of the company. In other words, unless the plain tenor of
the negotiable instrument on its face satisfies the relevant requirement the
instrument cannot be validly treated as an instrument drawn by the company.
This position is not disputed.
The importance
and significance of the said requirement can be illustrated by reference to a
decision of the Privy Council which had occasion to consider a similar
requirement under section 27 of the Negotiable Instruments Act. The said
section provides that “every person capable of binding himself or of being
bound, as mentioned in section 26, may so bind himself or be bound by a duly
authorised agent acting in his name.” In Sadasuk Janki Das v. Sir Kishan
Pershad the Privy Council held that the name of the person or the firm to be
charged upon a negotiable document should be stated clearly on the face or on
the back of the document so that the responsibility is made plain and can be
instantly recognised as the document passes from hand to hand. It is not
sufficient that the name of the principal should be in some way disclosed; it
must be disclosed in such a way that on any fair interpretation of the instrument
his name is the real name of the person liable on the bill. According to the
Privy Council “sections 26, 27 and 28 of the Negotiable Instruments Act
contained nothing inconsistent with the principles just set out, and there was
nothing to support the contention urged before it that in an action on a bill
of exchange or promissory note against a person whose name properly appears as
a party to the instrument it is open either by way of claim or defence to show
that the signatory was in reality acting for an undisclosed principal.” This
decision was no doubt given under section 27 of the Negotiable Instruments Act,
but the principles enunciated in it apply with equal force to a negotiable
instrument issued under section 89 of the Indian Companies Act.
The inevitable
consequence of this requirement is that wherever a negotiable instrument is
issued without complying with the said requirement it would not bind the
company and cannot be enforced against it. In The Bank of Bombay v. H.R.
Cormack it was held by the Bombay High Court that in order to make a company
liable on a bill or note it must appear on the face of such bill or note that
it was intended to be drawn, accepted or made on behalf of the company, and no
evidence dehors the bill or note is admissible under section 47 of the Indian
Companies Act (X of 1866), equal to section 89 of the present Act. In support
of this decision SARGANT, C.J., has cited the observations of Lord Justice
JAMES in Miles’ claim, “that it is the law of this country, and always has been
the law of this country, that nobody is liable upon a bill of exchange, unless
his name, or the name of some partnership, or body of persons, of which he is
one, appears either on the face or on the back of the bill.” Thus there can be
no doubt that the failure to comply with the essential requirements of section
89 must necessarily mean that the negotiable instrument in question defectively
issued cannot be enforced against the company.
But the
question which arises for our decision is whether this principle can be invoked
in the present case where the action is not based on a negotiable instrument.
The present dispute is between the bank and its constituent, the company, and
the claim made by the latter proceeds on the assumption that in honoring the
cheques regularly drawn the bank has acted improperly and exposed itself to the
charge that it has honored the cheques wrongfully and improperly. In
considering this question it may be relevant to recall that both the courts
below have found that the bank has acted bona fide and that the charge of
negligence leveled against it by the company had been expressly given up. It is
also necessary to bear in mind that when the company opened its account with
the bank it was furnished with a book of cheques and it is from the said book
that the impugned cheques have been issued. Evidence also shows that K.Poddar
and M.J. Chacko had no other joint account with the bank so that it is clear
that when the impugned cheques were issued the bank was justified in thinking
that the said cheques must have been issued by the two drawers on behalf of the
only account on which they could operate, and that the bank thought was done in
pursuance of the authority conferred on them by the company by its resolution.
In such a case, if the bank honour the cheques can it be said that the company
on whose behalf the cheques were purported to have been issued can contend that
the cheques should not have been honored and that the amount debited to the
company by the bank in its accounts has been improperly and wrongfully debited
? It would be noticed that the principle underlying section 89 which is a very
healthy and salutary principle affords to the companies protection against
claims made on negotiable instruments defectively or irregularly drawn; but,
when we deal with a dispute between a company and the bank of which it is a
constituent it is difficult to extend the said principle. The said principle in
terms is applicable only when a claim is made against a company on a negotiable
instrument; in other words, it is only in the matter of enforcement of
negotiable instrument against a company that the principle comes into play. It
is, therefore, difficult to see how the principle enunciated in section 89 can
be extended to a claim made by the company against the bank. In our opinion,
therefore, the High Court was right in coming to the conclusion that section 89
cannot be invoked by the company against the bank in making the present claim.
The decisions on which the company relied are all decisions in cases where a
negotiable instrument was sought to be enforced against the company and had
thus given rise to a cause of action. No case has been cited before us in which
section 89 has been extended to a claim like the present.
On the other
hand, there is the authority of the House of Lords in support of the view which
the High Court has taken in the present case. In Mahony v. East Holyford Mining
Co. a similar point arose for the decision of the House of Lords. One of the
two points in that case had reference to eight cheques which had been
defectively or irregularly drawn on behalf of the company and honored by the
bank. In rejecting the company’s claim against the bank in respect of the
amount covered by the said cheques LORD CHELMSFORD observed as follows :
“With respect
to the objection that the name of the company is not on eight of the cheques
paid by the bank, and, therefore, by the Companies Act, 1862, they are invalid,
and the official liquidator is entitled, at all events, to the amount of these
cheques the short answer is, that although the bankers might have perhaps
required that these cheques should be made formally correct before they were
paid; yet having paid them upon the demand of the only persons whom they knew
as representing the company in the operations upon the account, there is not
the slightest pretense for insisting upon the liability of the bank to repay
the amount of these cheques on the ground of an unauthorised payment of them.”
The Lord
Chancellor, LORD CAIRNS, disposed of the point in these words : “The question
being merely as to the authority given to the bankers to make the payment, it
appears to me that when those who drew and those who honored the cheque knew
the account on which it was intended to operate, the result was the same as if
the account had been mentioned on the face of the cheque, and that no
distinction is to be made as to the money paid upon these cheques.” LORD
PENZANCE agreed with this opinion and observed that “looking at the way in which
the cheques were drawn, and understood by those who drew them, and by those who
paid them, they stand in no different way from the rest of the cheques in the
case.” It would thus be clear that the authority of this decision of the House
of Lords is in favour of the view taken by the High Court that the principle
enunciated by section 89 of the Indian Companies Act cannot be extended to a
claim made by a company against its bank on the ground that the cheque which
the bank accepted and honored was defective in that it did not comply with the
requirements of section 89 and could not have been enforced against it. We
ought to add that section 47 of the corresponding English Act of 1862 is
exactly in the same terms as section 89 of the Indian Act.
It also appears
that Chalmers has expressed the same opinion for he says, “So, too, bankers may
be justified in paying cheques out of the funds of a company, where clearly, by
the form of the cheques, the company would not be liable as drawers if they
should not be paid.” Chalmers on “Bills of Exchange”, p.63. Similarly, Halsbury
approves of the same principle in these words : “Although documents omitting
the name of the company therefore cannot be relied on as against the company,
moneys paid under them to persons known to represent the company are not on
that account payable over again”.
The result is
the appeal fails and is dismissed with costs.
Appeal
dismissed.