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PETITIONER: THE ORIOL INDUSTRIES LTD.

       Vs.

RESPONDENT: THE BOMBAY MERCANTILE BANK LTD.

DATE OF JUDGMENT: 31/01/1961

BENCH: GUPTA, K.C. DAS BENCH: GUPTA, K.C. DAS GAJENDRAGADKAR, P.B. WANCHOO, K.N.

CITATION:  1961 AIR  993            1961 SCR  (3) 652

ACT: Bank--Payment   in  company’s  account--Cheques   drawn   by authorised  agents  without  so  describing  themselves   or stating  as  on behalf the  company--Payment  if  wrongfully made--Indian Companies of Act, 1913 (VII of 1913), s. 89.

HEADNOTE: The  Managing  Agents  of  the  appellant  company  withdrew certain sums of money from its a count with the respondent (1)  (1918) I.L.R. 41 Mad. 871. (2)  (1921) I.L.R. 2 Lah. 133. (3)  [1954] 56 Bom.  L.R. 150. (4)  I.L.R. [1958] A.P. 323. (5)  A.I.R. 1923 Cal. 397. (6)  (1926) I.L.R. 5 Pat. 106 (7)  (1953) I.L.R. K. All. 64. (8)  (1929) I.L.R. 8 Pat. 545. 653 Bank,  which the company had by a resolution authorised  the Managing  Agents to operate on.  The Managing Agents had  no other  account with the said Bank.  The company brought  the suit,  out of which the present appeal arises,  against  the Bank for recovery of the said amounts on the ground that the cheques  issued by the Managing Agents had  been  wrongfully honoured    by  the Bank in that they  were  signed  by them without  describing themselves as Directors of the  Managing Agents firm and on behalf of the company, as required by the resolution.   The trial judge decreed the suit  except  with regard  to  a  part  of the claim which  he  found  to  have actually  been  received by the company.  The  appeal  court dismissed  the suit holding that the Bank had paid  in  good faith and that the company was not entitled to rely on s. 89 of the Indian Companies Act. Held, that the court of appeal was right in holding that  s. 89  of the Indian Companies Act could not be invoked by  the appellant in the present case. There  can be no doubt that before a  negotiable  instrument can be enforced against a company under s. 89 of the  Indian Companies  Act, it must on the face of it show that  it  was drawn,  made, accepted or endorsed by the company, and  this may be done either by showing the name of the company itself

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on the instrument, or by statement of the person making  the instrument that he was doing so on behalf of the company. Sadasuk  janki Das v. Sir Kishan Pershad, (1919)  I.L.R.  46 Cal. 663, applied. The  Bank of Bombay v. H. R. Cormack, (1880) I.L.R. 4  Born, 275 and Miles’ claim, L.R. 9 Ch.  App. 635, referred to. But the said principle is applicable only to the claim  made against  a company on a negotiable instrument and cannot  be extended  to  a dispute between a bank and  its  constituent where  the claim is not so based and proceeds on  the  basis that  in  honouring the cheques wrongfully  drawn  the  bank acted improperly. Mahony  v. East Holiford Mining Co., (1875) 7 Eng.  &  Irish Reports 869, referred to. Held, further, that the object of the resolution as well  as its  effect was merely to conform to the requirements of  s. 89  of the Indian Companies Act, 1913, and not to  prescribe any condition precedent independently of that section.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 221 of 1956. Appeal from the judgment and decree dated August 5,1955,  of the Bombay High Court in Appeal No. 128/X of 1954. S.   N. Andley, J. B. Dadachanji, Rameshwar Nath and ,P.  L. Vohra, for the appellants, 654 A V. Viswanatha Sastri and Tarachand Brij mohan Lal. for the respondents. 1961.  January 31.  The Judgment of the Court was  delivered by 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 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  as  its managing  agents  M/s.  Poddar Chack & 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 the 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  Bo  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 wrongfully honoured by the bank was

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655 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 B, honoured.  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 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  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  unsustainable  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 case.  That is how the  principal question  which falls for our decision is about,  the  scope and  effect  of  the  provisions of  s,  89  of  the  Indian Companies Act. 84 656 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 honoured 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 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  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  Manging  Agents firm and without showing that they had drawn them on  behalf

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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 there  fore 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 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 a. 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 unreasonable 657 to  treat the said requirement as a condition prescribed  by the resolution independently of s. 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  signed as:  it 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  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  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 cages 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 658 itself We must, therefore, turn to s. 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 or 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

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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  instru- ment 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  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  authorised  agent acting  in  his name." In Sadasuk Janki Das  v.  Sir  Kishan 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. 46 Cal. 663. 659 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 "  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 Negotiable 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 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 (1) 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. 47 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 observations of Lord Justice James in  Miles’ Claim  (2) " 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

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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 necessarily mean  that the.negotiable instrument in question (1) (1880) I.L.R. 4 Bom. 275. (2) (1874) L.R. 9 Ch.  App. 635. 643. 660 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 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 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 honours 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  honoured  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  s.  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, 661 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 s. 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 s.  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 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. 89 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 Holyford Mining Co. (1),  a similar point arose for the decision of the House of  Lords. One  of the two points in that case had reference  to  eight

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cheques  which had been defectively 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 cbeques 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  slightes t               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 as (1)  (1875) 7 Eng. & Irish Reports, 869, 662 to  the authority given to the bankers to make the  payment, it  appears  to me that when those who drew  and  those  who honoured  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 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  have been enforced against it.  We ought to add that s. 47 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 " (2). The result is the appeal fails and is dismissed with costs.                                       Appeal dismissed. (1)  Chalmers on " Bills of Exchange ", P. 63. (2)  Halsbury’s  Laws of England, 3rd Edn., Vol. 6, P.  429, paragraph 830. 663

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