Case Note & Summary
The dispute arose between a limited company and its banker over the honouring of twenty-eight cheques drawn by the company's managing agents. The company was incorporated on 15 May 1945 and appointed M/s. Poddar Chack & Co. as its managing agents. On 21 May 1945, the company passed a resolution to open a bank account with the respondent bank, and the account was opened on 28 May 1945. Between 28 May 1945 and 31 July 1945, twenty-eight cheques aggregating Rs. 28,882-13-0 were drawn on this account by the two directors of the managing agents firm, K. Poddar and M. J. Chacko, pursuant to the authority conferred by the resolution. The resolution provided that the managing agents could operate the account, and the bank was authorised to honour cheques drawn on behalf of the company if signed by both directors. The cheques were signed by the two individuals, but without describing themselves as directors of the managing agents firm and without indicating that they were drawn on behalf of the company. On 28 September 1948, the company, then in liquidation, filed a civil suit against the bank for recovery of the amount, alleging that the bank had wrongfully and negligently honoured the cheques and wrongfully debited the company's account. The winding-up resolution was later held null and void, and the plaint was amended to remove the liquidator, making it a suit by the company itself. At trial, Mr. Justice Tendolkar of the Bombay High Court held that the cheques had been wrongfully honoured, but found that Rs. 8,882-13-0 of the amount had actually been received by the company and on equitable grounds rejected that part of the claim. The trial court decreed the balance of Rs. 20,000 in favour of the company. The bank appealed, and the company filed cross-objections regarding the rejected amount. The Bombay High Court appeal court reversed the trial court, holding that the bank had accepted and honoured the cheques in good faith and was not liable to repay any amount. The appeal court did not consider limitation or the equitable doctrine. The company obtained a certificate from the High Court and appealed to the Supreme Court. Before the Supreme Court, the company argued that the appeal court misjudged the effect of Section 89 of the Indian Companies Act, 1913, in relation to the bank's conduct. The company also contended that the cheques were irregular because they did not conform to the resolution requirements of describing the signatories as directors and stating that they were drawn on behalf of the company. The Supreme Court rejected this contention, holding that the object and effect of the resolution was merely to conform to Section 89, not to prescribe independent conditions. The subsequent resolution of 22 October 1945, which specified the form of signature, was held to be an eloquent contrast. On the principal question of law, the Court examined Section 26 of the Negotiable Instruments Act, 1881, and Section 89 of the Indian Companies Act, 1913. Section 89 provides that a bill of exchange, hundi or promissory note is 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 Court held that two conditions must be satisfied: the instrument must show on its face that it was drawn on behalf of the company, and the person signing must have authority. The Court relied on Sadasuk Janki Das v. Sir Kishan Pershad, (1919) I.L.R. 46 Cal. 663, which held that before a negotiable instrument can be enforced against a company under Section 89, it must on its face show that it was drawn by the company. However, the Court clarified that this principle applies only to a 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 based on the bank acting improperly. The Court referred to Mahony v. East Holiford Mining Co., (1875) 7 Eng. & Irish Reports 869, and held that Section 89 could not be invoked by the company in the present case. The Supreme Court dismissed the appeal, upholding the High Court's decision that the bank was not liable to repay any amount because it had honoured the cheques in good faith. The company's suit was dismissed.
Headnote
A) Negotiable Instruments - Authority to Bind Company - Section 89 Indian Companies Act, 1913 - Conditions for Company Liability - To bind a company on a negotiable instrument, the instrument must on its face show that it was drawn, made, accepted or endorsed in the name of or on behalf of the company, and the person signing must have express or implied authority. Held that the principle in Sadasuk Janki Das v. Sir Kishan Pershad applies; an instrument not showing the company name or agency cannot be enforced against the company. (Paras 1-8) B) Banking Law - Banker-Customer Relationship - Section 89 Indian Companies Act, 1913 - Applicability to Dispute Between Bank and Constituent - The principle under Section 89 applies only to claims against a company on a negotiable instrument, not to a dispute where a customer alleges the bank acted improperly in honouring cheques. Held that the bank is not liable if it honoured cheques drawn by authorised agents in good faith even though agency was not stated on the face of the instruments. (Paras 1-8) C) Company Law - Board Resolution Interpretation - Section 89 Indian Companies Act, 1913 - Resolution Conforming to Statutory Requirement - A resolution authorising managing agents to operate a bank account is construed as intended to conform to Section 89, not to impose an independent condition that cheques must state agency. Held that cheques signed by agents without describing themselves as directors or stating they were acting on behalf of the company are not irregular for that reason. (Paras 1-8) D) Negotiable Instruments Act - Corporate Capacity - Sections 26 and 27 Negotiable Instruments Act, 1881 - Section 26 clarifies that a company's power to issue negotiable instruments is governed by the relevant company law, namely Section 89 of the Indian Companies Act, 1913. Held that Section 26 does not itself create a substantive right; the requirements for corporate liability must be found in company law. (Paras 1-8)
Issue of Consideration
Whether Section 89 of the Indian Companies Act, 1913, applies to a dispute between a bank and its customer regarding wrongful honouring of cheques, or only to claims against a company on a negotiable instrument. Also, whether the cheques honoured by the bank were irregular because the drawers did not describe themselves as directors or state that they were acting on behalf of the company, contrary to the company's resolution.
Final Decision
The Supreme Court dismissed the appeal and upheld the Bombay High Court judgment. The company's suit for recovery against the bank was dismissed. The bank was held not liable to repay any amount because it had honoured the cheques in good faith, and Section 89 of the Indian Companies Act, 1913 did not govern the bank-customer relationship.
Law Points
- For a company to be bound by a negotiable instrument under Section 89 of the Indian Companies Act
- 1913
- the instrument must on its face show that it was drawn
- made
- accepted or endorsed in the name of or on behalf of the company
- and the person executing it must have express or implied authority. This principle applies only to claims against a company on a negotiable instrument
- not to a dispute between a bank and its customer alleging wrongful honouring of cheques. A resolution authorising managing agents to operate a bank account is construed as intended to conform to Section 89 and does not impose independent conditions requiring that cheques state agency. Section 26 of the Negotiable Instruments Act
- 1881 clarifies that a company's power to issue negotiable instruments is governed by the relevant company law.
