The Oriol Industries Ltd. v. The Bombay Mercantile Bank Ltd

S. N. Andley, J. B. Dadachanji, Rameshwar Nath and P. L. Vohra, for the appellants, r96r A. V. Viswanatha Sastri ,and Tamiharul Brijmohan Oriol Industries Lal, for the respondents.

Ltd. 1961. January 31. The Judgment of the Court was v. delivered by Bombay M ercantilc

Bank Ltd. GAJENDRAGADKAR, J.-This appeal which has come

-- to this Court with a certificate issued by the Boiµbay G•Jendragadkar J. High Court raises for our decision a short and interest-

ing question about the scope and effect of the provisions contained in s. 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 a.s its managing a.gents M/s. 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, th.e Bombay Mercantile Ba.nk, Ltd. (hereafter called the bank) and in accord-ance 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:dratvn by K. Podda.r and M. J. Chacko in pursuance of the authority conferrad on them by the company. On September 28, 1948, by, its liquidator the company brought the p~esent 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 the said amount had been ma.de 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 Iiquida.tl?r 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 wrongfully honoured by the bank was seriously disputed by the bank in its statement. Mr. 1961 Justice Tendolkar, who tried the suit on the Original Oriol Industri" Side of the Bombay High Court, however, upheld the Lid. plea raised by the company and came to the con-v. clusion that the cheques had been wrongfully Bombay Mercanl•I• honoured. Even so, Mr. Justice Tendolkar held that Bank Lid. out of the total amount fo. dispute an amount of Gajendragadkar J. Rs. 8,882-13-0 had been actually received by the com-pany 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 honoured 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 appli· cability 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 un-sustainable the Appeal Court has misjudged the effect of the provisions of s. 89 of the Indian Companies Act in relation to the conduct of the bank in the present oase. That is how the principal question which fa.lls for our decision is a.bout the scope and effect of the provisions of s. 89 of the Indian Companies Act, r96r Before dealing with the said question of law it is

A necessary di H to dispose of a minor point raised by Mr. Oriol I ndust1'i1s n ey. e contends that the cheques issued by

Ltd v. · K. Poddar and M. J. Chacko and honoured by the Bomboy Mercantile bank had not been issued in the form required by the

Bank Ltd. resolution which gave them authority to operate on

-- the company's aacount with the bank. The relevant Ga;endragadkar f. 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 M/s. 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 bad 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 Manging 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 honouring 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 resolu-tion 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 require-ments of s. 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 s. 89; and so it would be unre11osonable to treat the said requirement as a condition prescribed z96z by the resolution independently of s. 89. Oriel Indw:ries

In this connection the subsequent resolution passed by the comp!l.nY is significant. It appears that on Lid. v. October 22, 1945, a ·resolution was passed by theBombay M"'anlile company authorising M. J. Chacko to sign cheques Bank Lid. for the company, and when thi~ resolution was com- -- municated to the bank it was told that the cheques on Gajendragadkar J. behalf of the company would thereafter be signed 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 chcqu€S signed by M. J. Chaeko in the manner speci-fied 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 s. 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 I 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 pro'f'ision of substantive or procedural law. The latter part of the section merely brings out that a com-pany 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 rillevant provisions of the Companies Aot

658 SUPREME COUR1' REPOR1'S [1961] t

z96z itself. We must, therefore, turn to s. 89 of the said

Act.

Oriol lndust,i1s Section 89 provides that " a bill of exchange, hundi

Ltd.

v. or promissory note shall be deemed to have been Bombay Mercantile made, drawn or accepted or endorsed on behalf of a

Bank .Ltd. company if made, drawn, accepted or endorsed in the d -~k name of, or by or on behalf of, or on account of, the •J•• "' 1 • company by· any person acting under its authority

raga

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 con-ditions must be satisfied; the instrument must be I 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 instru-ment one of the essential conditions is that the instrument on its face must show that it has been drci.wn, 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 va:lidly treated as an instrument drawn by the company. This position is not disputed. I

The importance and significance of the said require-ment can be illustrated by reference to a decision of the Privy Council which had occasion to consider a similar requirement under s. 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 auU!orised agent acting in his name." In Sadasuk Janki Das v. Sir Kish.an Pershad (1) 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

(1) (1919) I.L.R. •6 Cal. 663.

the back of the document so that the responsibility is '96' made plain and can be instantly recognised as the Oriol 1'•4..,1,u, document passes from hand to hand. It is not suffici-Liil. ent that the name of the principal should be in some v. way disclosed; it must be disclosed in such a way thatBomb•.l' Mm•.Uilfi on any fair interpretation of the instrument his name Banh Lid. is the ~ea! name of. the perso.n liable on the bill. " G•j•n<l••;u,•, J. Accordmg to the Pnvy Council " ss. 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 s. 27 of the Negoti-able Instruments Act, but the principles enunciated in it apply with equal force to a negotiable instrument issued under s. 89 of the Indian Companies Act.

The inevitable consequence of this requirement is that wherever a negotiable instrument is issued with-out 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 s. 4 7 of the Indian Companies Act, X of 1866, equal to s. 89 of the present Act. In support of this decision Sargent, C.J., has cited the observa-tions 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 the back of the bill. "

Thus there can be no doubt that the failure to comply with the essential requirements of s. 89 must neces-sarily mean that the neg0tiable instrument in question

(1) (1880) l.L.R. 4 Bom. •75· (•) (1874) L.R. 9 Ch. App. 635, 643, 1961 defectively issued cannot be enforced against the OriollndustrieJ company.

But the question which arises for our decision is Lid.

v. whether this principle can be invoked in the present o/Jombay Mercantilecase where the action is not based on a negotiable

Bad Lid. instrument. The present dispute is between the bank

-- , and its constituent the company, and the claim made G•Jendr•gadnar ]. b y t . h e l a tt er procee d s on th e assumpt10n · t h at m ·

honouring the cheques irregularly drawn the bank has acted improperly and exposed itself to the charge that it has honoured 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 levelled against it by the com-pany 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 impugn-ed 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 honours the cheques can it be said that th11 I company on whose behalf the cheques were purported to have been issued can contend that the cheques should not have been honoured aud 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 s. 89 which is a very healthy and salutary principle affords to the companies protection against claims made·on negoti-able 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 ~hen a claim is made against a company on ~ negotiable instrument; in other words, it is only in the matter of enforcement of negotiable r96r instrument against a compa.ny that the principle comes into play. It is, therefore, difficult to see how Oriol Indust1i1s the principle enunciated in s. 89 can be extended to a L~~· claim made by the company against the hank. In our Bombay Mercantil, opiniou, therefore, the High Court was right in coming Bank Ltd. to the condusion that s. 89 cannot be invoked by the - company against the bank in making the present Gojendragadkor J. claim. The decisions on which the company relied are all decisions in cases where a negotiable instru-ment 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 s. 81l has been extended to a claim like the present.

On the other hand, there is 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 H <ilyf ord Mining Go. (' ), 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 defectivllly or irregularly drawn on behalf of the company and honoured by the bank. In reject-ing 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 represent;

ing the company in the operations upon the accou_nt, there is not the slightest pretence 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 aa

(I) (1875) 7 Eng. & Irish Repo1ts, 869.

1961 to the authority given to the bankers to make the Oriollnd..,tries payment, it appears to me that when those who drew

Ltd. and those who honoured the cheque knew the account v. on which it was intended to operate, the result was Bowbay MercanWe the same as if the account had been mentionerl. on the

Bank Ltd. face of the cheque, and that no distincti0n is to be G•j•ndrag•dkar J. mLaddePas to the modneY_tphaihd' upo!l .these dchebques."

or enzance agree w1 t 1s opm10n an o serv-ed that "looking at the way in which the cheques were drawn, and understood by those who dre~·· them, and by those who paid them, they stand in no different way from the rest of the cheques in the case." It I 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 s. 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· honoured was defective in that it did not comply with the requirements of s. 89 and could not ha. ve been enforced against it. We ought to add that s. 4 7 of the corresponding English Act of 1862 is exactly in the same terms as s. 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" (1). 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, monies 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. (i) Chalmers on "Bills of Exchange", p. 63.

(2) Halsbury's Laws of England, 3rd Edn., ·vol. 6, p. '429, paragra.ph

CIVIL APPELLATE JURISDICTION: Civil Appeal No.

221of1956.

Appeal from the judgment and decree dated August 5, i955, of the Bombay High Court in Appeal No.

128/X of 1954.