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The Secretary of State for India Vs. the Bank of India Ltd. - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtMumbai
Decided On
Case Number O.C.J. Appeal No. 14 of 1936 and Suit No. 1408 of 1935
Judge
Reported inAIR1937Bom145; (1936)38BOMLR1205
AppellantThe Secretary of State for India
RespondentThe Bank of India Ltd.
DispositionAppeal dismissed
Excerpt:
.....16, 12, 21 - government promissory note- renewal by government-old note bearing forged endorsement renewed note constitutes fresh contract-renewed not affected by forged endorsement--covenant of indemnity not necessarily applicable to such endorsement.;where a government promissory note, one of the endorsements on which is a forged one, is renewed by government by the issue of a fresh promissory note, the latter constitutes a fresh contract, under section 16(1) of the indian securities act, 1920, between the government and the person in whose favour it is issued and inherits none of the disabilities and is free from any infirmities of the old note. in such a case, the secretary of state is not entitled to the return of the renewed note, or the value thereof, either on the ground that it..........by acting on the request of the bank for the renewal of the note. alternatively he claims that the renewed note, or the value thereof, may be returned to him on the basis that it was issued without consideration, or under a mistake of fact.4. the principle of law, on which the secretary of state relies, is not disputed. there are many cases on the subject, but it will be sufficient to refer to the well-known case of the sheffield corporation v. barclay [1905] a. c. 392 in that case stock of the sheffield corporation had been transferred to barclays by a transfer which was ultimately found to have been forged in respect of the signature of one of the transferors, so that in fact the transfer was invalid. barclays sent the transfer to the registrar of the sheffield corporation and.....
Judgment:

John Beaumont, Kt., C.J.

1. This is an appeal from a decision of Mr. Justice B. J. Wadia which raises a question of considerable importance to Banks and not, I think, altogether free from difficulty.

2. The facts are not in dispute. A lady called Gangabai was entitled, by endorsement, to a Government promissory note, which she had acquired through a broker named Acharya. Subsequently Acharya obtained possession of the note from Bai Gangabai, and he forged her endorsement on the note to himself. Subsequently he endorsed the note over to the defendants, the Bank of India, Ltd. The Bank sent the note, with other notes, to the Government Securities Department with a request for its renewal, and the note was in due course renewed by the prescribed officer of the Government Securities Department. When it was ultimately established that the signature of Bai Gangabai on the note had been forged by Acharya, Bai Gangabai sued the Secretary of State for the value of the note, and she recovered judgment for the amount due on the note with interest and costs.

3. In this suit the Secretary of State sues the Bank of India, Ltd., and claims that the Bank is liable to indemnify him against the loss which he incurred by acting on the request of the Bank for the renewal of the note. Alternatively he claims that the renewed note, or the value thereof, may be returned to him on the basis that it was issued without consideration, or under a mistake of fact.

4. The principle of law, on which the Secretary of State relies, is not disputed. There are many cases on the subject, but it will be sufficient to refer to the well-known case of the Sheffield Corporation v. Barclay [1905] A. C. 392 In that case stock of the Sheffield Corporation had been transferred to Barclays by a transfer which was ultimately found to have been forged in respect of the signature of one of the transferors, so that in fact the transfer was invalid. Barclays sent the transfer to the Registrar of the Sheffield Corporation and requested him to register them as transferees, and that request was complied with. Subsequently the Corporation had to make good the loss to the proper holders of the stock, and they sued Barclays on their implied indemnity. Both Lord Halsbury and Lord Davey, who gave the only two reasoned judgments, point out that in registering the transfer the Sheffield Corporation were performing a merely ministerial Act. They had power under their special Act to require evidence of the title of the person claiming the right to make a transfer; but once the validity of the transfer was established, the Corporation had no power to do anything but to register it. If the Corporation had required evidence of the title of the transferee and had refused to register, they could have been compelled to register if a Court of competent jurisdiction was satisfied that infact the transfer was valid. So that, once you have a valid transfer, the Act of the Corporation in registering is merely ministerial. Lord Davey in stating the general proposition of law confines that proposition to the case of somebody exercising a statutory or common law duty. The form in which he states the proposition is this. He says (p. 399):-

I am further of opinion that where a person invested with a statutory or common law duty of a ministerial character is called upon to exercise that duty on the request, direction, or demand of another (it does not seem to me to matter which word you use), and without any default on his own part acts in a manner which is apparently legal but is, in fact, illegal and a breach of the duty, and thereby incurs liability to third parties, there is implied by law a contract by the person making the request to keep indemnified the person having the duty against any liability which may result from such exercise of the supposed duty. And it makes no difference that the person making the request is not aware of the invalidity in his title to make the request, or could not with reasonable diligence have discovered it.

5. On the other hand, Lord Halsbury adopts the proposition of law laid down in Dugdale v. Lovering (1875) L.R. 10 C. P. 196 in the terms of counsel's argument in that case, which is expressed in more general terms. That proposition is in these terms (p. 397) :-

It is a general principle of law when an act is done by one person at the request of another which act is not in itself manifestly tortious to the knowledge of the person doing it, and such act turns out to be injurious to the rights of a third party, the person doing it is entitled to an indemnity from him who requested that it should be done.

6. That proposition seems to be independent of the question whether the person who acts upon the request was bound to do so or not; and in dealing with this case I will assume-as I think I must do-that the proposition expressed in the wider terms represents the common law.

7. The question, then, is whether that proposition of law applies to the facts of this case; and that must depend on a consideration of the Indian Securities Act of 1920, under which this promissory note was renewed. It is, in my opinion, clear from a perusal of the Act as a whole that one of the principal objects of the Act was to simplify dealings in Government securities; and the right to renew is, I think, part of the general policy of simplifying dealings in securities and thereby making investment in Government Securities more popular. The difficulty, which I apprehend was felt, was that where a promissory note had many endorsements upon it, persons were unwilling to deal with it because of the risk that an endorsement might have been forged, and it was to get over that difficulty that provision for renewal of the note and the giving of a fresh and clean contract to the holder was made.

8. The material sections for the purposes of this case are, first of all, Section 12, which provides that-

Subject to the provisions of section 13, a person claiming to be entitled to a Government promissory note, may, on applying to the prescribed officer, and on satisfying him of the justice of his claim and delivering the promissory note receipted in the prescribed manner, and paying the prescribed fee, if any, obtain from such 'officer a renewed promissory note payable to him.

9. Section 13 deals with the case in which there is a dispute as to the title to a Government promissory note in respect of which an application for renewal has been made, and the section lays down the course to be adopted by the prescribed officer in that event. Then, Section 15 contains certain provisions for conversion, consolidation or sub-division of Government securities. Then, Section 16 is an important section in connection with the general! policy of Government in relation to the renewed notes and provides that-

(1) When a renewed Government promissory note has been issued under section 12, or a new Government promissory note has been issued upon conversion, consolidation or sub-division under section 15, in favour of any person, the note so issued shall be deemed to constitute a new contract between the Government and such person and all persons deriving title thereafter through him.

(2) No such renewal, conversion, consolidation or sub-division shall affect the rights as against the Government of any other person to the security or securities so renewed, converted, consolidated or sub-divided.

It seems to me clear from that section that when a new note is issued, it constitutes a fresh contract between Government and the person to whom it is issued, and is free from any infirmities of the old note. The only other section, which it is necessary to refer to, is Section 21, which provides that-

Notwithstanding anything in section 10, (which deals with lost notes), 12, 13 or 15, the prescribed officer may in any case arising under any of those sections-

(i) issue a duplicate or renewed security or convert, consolidate or sub-divide a security or securities upon the applicant giving the prescribed indemnity against the claims of all persons claiming under the original security or under the security or securities so renewed, converted, consolidated or sub-divided, as the case may be, or

(ii) refuse to issue a duplicate or renewed security or to convert, consolidate or sub-divide a security or securities unless such indemnity is given.

10. Now, the first point taken by the respondents in answer to the appellant's claim, that this implied right of indemnity exists, and the point, which appealed to the learned Judge in the Court below, is this. It is said that the prescribed officer acting under Section 12 is not like the corporation in the Sheffield Corporation case performing a merely ministerial duty. Under Section 12 a person claiming to be entitled to a Government promissory note is only entitled to renewal, amongst other things, on satisfying the prescribed officer of the justice of his claim, which means,-I take it-satisfying the prescribed officer that he is in fact entitled to the Government promissory note. The prescribed officer, therefore, is entitled to require evidence which satisfies him,-not merely evidence which might prove to a Court of law that the title to the note was valid, but which satisfies the officer-, and it is, I think, true to say that the officer cannot be regarded as exercising a merely ministerial duty. Assuming that he acts honestly and brings his judgment to bear on the case and does not act merely capriciously, I take it that if he says that he is not satisfied of the justice of the claim, no Court could compel him to issue a renewed note. To that extent his position is undoubtedly different from that of a corporation or company required to register a transfer, because in such a case the corporation or company could be required to register the transfer on proof that it was a valid transfer. But I am not myself satisfied that that distinction, which exists between this case and the Sheffield Corporation case, is a vital distinction. Taking the rule of law as enunciated by Lord Halsbury, it seems to me that once you have a case in which a request is made to the prescribed officer to renew and that request is in fact acted upon, then, apart from other considerations, the covenant of indemnity, which the common law implies, would arise notwithstanding that the prescribed officer had looked into the matter himself or, at any rate, had power to look into the matter himself. If he acts upon the request, I doubt if it is really relevant to say that he has also considered the matter for himself. I am not, therefore, prepared to agree with the ground on which the learned Judge in the Court below based his judgment on this part of the case. But that is not the only point in the case.

11. We have to consider whether this covenant of indemnity which the common law normally implies, where one person acts upon the request of another, can be implied in the facts of this case. The Indian Securities Act, I think, forms a complete code as to the circumstances in which Government Securities can be renewed. Apart from the Act, there is plainly no right of renewal, and the scheme of the Act seems to me to be this. When a request for renewal is made under Section 12, the prescribed officer can consider whether the claim of the person making the request to the note is a valid claim. If he comes to the conclusion that it is, he can renew the note. If he comes to the conclusion that it is not, he can either refuse renewal, or under Section 21 (1), can renew the note on obtaining an indemnity in the prescribed form from the claimant; and where the claimant is, as here, a bank whose solvency is unimpeachable, he might well be willing to act upon an indemnity. If, again, he comes to the conclusion that he is satisfied of the title of the claimant, but at the same time is not comfortable about the note in question, he may then, under Sub-section (2) of Section 21, decline to grant a renewal except on the terms of an indemnity.

12. Now, it is perfectly clear from the combined provisions of Section 12 and Section 21 that the legislature, when they passed this Act, had in view the question of requiring an indemnity when a note was renewed; and if they had intended that in all cases an indemnity should be given, it would have been very easy so to provide under Section 12. Had they done so, the effect might have been to curtail the beneficial operation of the Act by making renewals unpopular; and it seems to me impossible to hold that the legislature omitted to require an indemnity in all cases otherwise than deliberately. Instead of requiring an indemnity in all cases, power is given to the prescribed officer to demand an indemnity, leaving it to Government, by directions to their officer, to determine in what cases an indemnity shall be required. If we read into the Act the indemnity which the common law normally implies, from the mere fact that a request is made and acted upon, it seems to me that we shall be in effect inserting in the Act a provision which, as the terms of the Act satisfy me, the legislature deliberately omitted. The common law rule as to implied indemnity being a rule which affects obligations of a contractual nature between parties must clearly yield to the expression of any contrary intention, and it must always be open to the Court to hold that the dealings between the parties are inconsistent with the implication of the covenant in question; and, in my opinion, taking this Act as a whole, the implication of the suggested covenant of indemnity is inconsistent with the provisions which the legislature has laid down as to the renewal of a promissory note.

13. In my opinion, therefore, the judgment on the first part of the plaintiff's claim is right, though I do not entirely agree with the reasons which the learned Judge gave in his judgment.

14. With regard to the alternative claim, namely, that the Secretary of State is entitled to the return of the renewed note on the ground, first, that it was issued without consideration, it seems to me that the short answer to that is that Government got precisely the consideration which they required. They issued the renewed note in return for the old note accompanied by the prescribed receipt; and if I am right in thinking that the Government officer had the right to satisfy himself as to whether the note was valid or not and as to whether he would require an indemnity, it is clear that there was no failure of consideration. Government got the old note for what it was worth. Therefore, in my opinion, that claim must fail. With regard to the suggestion that Government are entitled to the return of the renewed note, or its value, because admittedly it has been negotiated by the Bank, it seems to me that the answer to that is, first of all, that there is no direct evidence of any mistake, though no doubt it would not be difficult to infer that Government imagined that the note they were renewing was a valid note. But, apart from that, the claim to return of the renewed note, is, it seems to me, clearly inconsistent with the provision of Section 16(1). The renewed note is to constitute a new contract,-not a contract which is void or voidable, but a valid contract-, between Government and the person to whom the note is issued; and to say that the person to whom the note is issued is bound to return it on the basis that it is not a good contract, seems to me inconsistent with the plain terms of the Act. In my opinion, therefore, the alternative claim of the Secretary of State must also be rejected.

15. In the result, the appeal fails and must be dismissed with costs.

Rangnekar, J.

16. I agree and I have nothing to add.


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