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M. Rajagopal and ors. Vs. K.S. Imam Ali - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtKerala High Court
Decided On
Case NumberA.S. No. 137 of 1976
Judge
Reported inAIR1981Ker36
ActsPartnership Act, 1932 - Sections 19 and 22; Negotiable Instruments Act, 1881 - Sections 26, 27 and 28; Contract Act, 1872 - Sections 188
AppellantM. Rajagopal and ors.
RespondentK.S. Imam Ali
Appellant Advocate C.M. Devan, Adv.
Respondent Advocate K. Chandrasekharan,; P.N.K. Achan,; K. Vijayan,;
Cases ReferredIn Rangaraju v. Firm Devichand Bhootaji
Excerpt:
.....appears on bill or note - signature of one partner is deemed to be signature of all partners of firm - note drawn on letter head of firm or mere description of executant as partner of firm will not be sufficient to create liability on other partners or on firm. - - 1, 3, 4 and 5 were executed in favour of the plaintiff's mother, wife, sister and mother (?) all of them were subsequently endorsed by the respective promises in favour of the plaintiff. 10. this principle can be best understood with reference to a few decided cases. it is of the utmost importance 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..........barred by limitation and in any case the partnership firm cannot be made liable for the promissory note amounts. the trial court held that the plea of limitation was not available to the defendants since there was an acknowledgment of the liability as per the promissory notes by defendants 1, 2 and 3 in an agreement dated 27-12-1970 to which they were parties. it was also held that all the defendants were liable for the suit amount. hence this appeal.2. the details of the promissory notes are as given below;1) 15-12-1968 by d1 for rs. 12,000/-2) 10-3-1988 by d1 for rs. 20,000/- 3) 25-4-1968 by d1 for rs. 20,000/-4) 15-5-1968 by d1 for rs. 12,000/-5) 31-10-1968 by d1 & d2 forrs. 23,000/-though promissory notes nos. 1, 3, 4 and 5 were executed in favour of the plaintiff's mother, wife,.....
Judgment:

Khalid, J.

1. Defendants 2, 3, 5, 6 and 7 are the appellants in this appeal. Original 1st defendant died pending suit. 4th defendant is his mother, 5th defendant his wife and defendants 6 and 7 his minor children. The suit from which this appeal arises was filed to recover amounts due to the plaintiff on 5 promissory notes. The plaintiff's case was that the amounts as per the promissory notes were taken for the purpose of a partnership firm, K. M. S. Bus Service by name run by defendants 1, 2 and 3 of which the 1st defendant was the Managing Partner. Four promissory notes were executed by the 1st defendant and the 5th promissory note by defendants 1 and 2. Defendants contended that the suit was barred by limitation and in any case the partnership firm cannot be made liable for the promissory note amounts. The trial court held that the plea of limitation was not available to the defendants since there was an acknowledgment of the liability as per the promissory notes by defendants 1, 2 and 3 in an agreement dated 27-12-1970 to which they were parties. It was also held that all the defendants were liable for the suit amount. Hence this appeal.

2. The details of the promissory notes are as given below;

1) 15-12-1968 by D1 for Rs. 12,000/-

2) 10-3-1988 by D1 for Rs. 20,000/-

3) 25-4-1968 by D1 for Rs. 20,000/-

4) 15-5-1968 by D1 for Rs. 12,000/-

5) 31-10-1968 by D1 & D2 for

Rs. 23,000/-

Though promissory notes Nos. 1, 3, 4 and 5 were executed in favour of the plaintiff's mother, wife, sister and mother (?) all of them were subsequently endorsed by the respective promises in favour of the plaintiff. It is not disputed that the suit will be in time, if the agreement Ext. A8 contains an acknowledgment of the liability. The appellants' case is that it does not amount to an acknowledgment in law. Ext. A8 is an agreement entered into by defendants 1 to 4 in the presence of P. Ws. 1 and 2 admitting their liability to pay the amounts due to the plaintiff. The appellants' counsel submits that the statements contained in Ext. A8 will not in law create an acknowledgment of the liability to save limitation. We will examine the statements contained in Ext. A8 presently to find out whether it amounts to an acknowledgment.

3. The court below has discussed the genuineness of Ext. A8. P, Ws. I and 2 have proved it. They were present at the time when the agreement was executed. We do not find any reason why 'this finding should not be confirmed.

4. Ext. A8 is dated 27-12-1970. There are two schedules to the agreement. A schedule are the assets and B schedule the liabilities. Item No. 5 in the B schedule is the debt due to the plaintiff. The executants of the agreement agreed that the total liabilities are as shown in schedule B and that No. 2 will have no liability over the existing liabilities and further debts incurred by Nos. 1. 3 and 4, if any. P. W. 1 has deposed that liability No. 5 shown in the B schedule represents the promissory note amounts and chitty amounts. The 1st defendant and 2nd defendant have not been examined. The 3rd defendant who was a young boy did not deny the existence of the promissory notes but pleaded ignorance why they were executed. The evidence of P. W. 1 and P. W. 2 is to the effect that the liability shown as No. 5 represents promissory notes amount also. On a consideration of the evidence in this case, it has to be held that the court below was justified in holding that defendants 1 to 3 have acknowledged their liability to pay amounts due to the plaintiff which include the promissory notes amounts also and that the suit is not barred by limitation. We confirm this finding.

5. What remains then is the question whether all the defendants are liable for the promissory note amounts. The court below relied upon Section 19 of the Partnership Act to hold that the promissory notes were executed and amounts raised for the partnership firm consisting of defendants 1, 2 and 3 and therefore all the defendants were liable for the amount. This finding is subjected to serious attach by the appellants' counsel and needs closer scrutiny. According to him the promissory notes do not show that the amounts were raised for the partnership firm. The account books of the firm do not reflect receipt of the promissory note amounts to prove that the amounts were taken for the firm. Unless the promissory notes on their face show that the amounts were raised for the firm and unless there is clear evidence to show that the beneficiary of the promissory notes is the firm, no decree can be passed against defendants 2 and 3.

6. Before considering the question of law on this aspect, it is necessary to see how the promissory notes themselves read. Ext. A1 is executed by the 1st defendant. It is written in a letter-head which bears the name K. M. S. Bus Service. Palghat. The executant describes himself as Proprietor, K. M. S. Bus Service. Palghat. Ext. A2 is also executed by the 1st defendant in the same letter-head describing himself as the Proprietor. K. M. S. Bus Service. Ext. A3 is executed by the 1st defendant describing himself as Managing Partner, K. M. S. Bus Service, Palghat but on a plain paper. Ext. A4 is executed by the 1st defendant describing himself as Managing Partner. K. M. S. Bus Service which is also on a plain paper. Ext. A5 is executed by the 1st defendant and the 2nd defendant on the letter-head wherein they are described as Proprietors of the K. M. S. Bus Service. The question for consideration is whether on the details supplied by the promissory notes, the partners of the firm could be made liable.

7. It is not disputed that defendants 1, 2 and 3 were partners of the firm. The question would still remain whether the promissory notes liability could be fastened on the firm. The cause of action for the suit is based on the promissory notes and not on the admission of the liability contained in Ext. A8, P. W. 1 in his chief-examination gave a stray answer that the promissory notes were executed for the purpose of the firm. The 3rd defendant is a young man just fresh from school and could not give any details about this. The evidence of P. W. 1 is to the effect that amounts were due to him both under the promissory notes and under kuri transaction. If the suit was based on the acknowledgment in Ext. A8, the liability of defendants 1 to 3 would have perhaps assumed a different character. But since the suit is based solely on the promissory notes the case has to be examined with reference to the provisions of the Negotiable Instruments Act and also the Partnership Act and then see which should prevail.

8. The court below was influenced by the fact that defendants 1 to 8 were partners in a firm and therefore held that the acts of one partner bound the others. Under Section 18 a partner is said to be an agent of the firm for the purpose of the business of the firm. Under Section 19 the act of a partner done to carry on a business of the kind carried on by the firm binds the firm. Section 22 provides that in order to bind a firm, an act or instrument done or executed by a partner shall be done or executed in the firm name or in any ether manner expressing or implying an intention to bind the firm. These provisions of the Partnership Act lay down the mutual relationship between the partners and the effect of their acts in relation to themselves or on third parties. Where the act of a partner or the execution of a document lay a partner is the subject-matter in a litigation and relief is claimed against all partners, these provisions come into play. But when the claim is made on the strength of a promissory note or on a document within the scope of the Negotiable Instruments Act, the question of law assumes an entirely different character. The court below after discussing the promissory notes observed that the incorrect description of the executants of the promissory note was of no consequence since it was the admitted case of the defendants that the K. M. S. Bus Service was a partnership firm. Liability was fastened on all the defendants an this finding and in doing so the court below relied upon Section 19 of the Partnership Act which provided that an act done by one partner was binding on the other partners. The learned Judge did not advert to any of the provisions of the Negotiable Instruments Act.

9. The law as to negotiable instruments is different from the rule of law applicable to simple contracts in writing. In the latter ease oral evidence can be Riven to fasten liability on an undisclosed principal. The peculiar feature of a negotiable instrument is that it passes right by mere delivery and every successive holder has a claim against the parties on it For this reason a negotiable instrument must indicate on its face the persons who ate bound for its payment. In cases of partnership firms, if the name of the firm appears on the bill or note, a partner can be bound by it, though he has not signed it, for the signature of the firm is deemed to be the signature of all the persons who are partners of the firm. If the note, on its face, discloses the name of the firm bound for its payment, execution by the firm or by one partner, will be sufficient to fasten liability on all the partners by the operation of the provisions of the Partnership Act. The mere fact that a note is drawn on the letterhead of a firm or a mere description of the executant as the partner of the firm will not be sufficient to create liability on the other partners or on firm. This is a very welcome and salutary principle, having regard to the peculiar characteristics of negotiable instruments by virtue of their negotiability.

10. This principle can be best understood with reference to a few decided cases. In Janki Das v. Kishan Parshad, (AIR 1918 PC 146) the drawer of a hundi described himself beneath his signature as 'Acting Superintendent of the Private Treasury of his Excellency Sir Maharaja the Prime Minister of H. E. H. the Nizam'. In a suit filed on this hundi, a decree was passed only against the person who executed the hundi but not against the Maharaja. In appeal, the said judgment was reversed and the case was remanded to be disposed of on merits holding that the hundis were drawn in a form sufficient to charge the Maharaja if agency was proved. This was reversed by the Resident at Hyderabad. The matter went before the Judicial Committee. The law on the point is stated thus by the Privy Council.

'It is of the utmost Importance 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 principal's name 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 upon the bills'.

A decree against the Maharaja was disallowed.

11. In Sitaram v. Chimandas, (AIR 1928 Bom 516) the hundi was in the following terms:

'Fifty six days after date I promise to pay Seth Chimandas Fatehchand or order the sum of Rs. 600 only for value received in cash. G. V. Athale, Managing Proprietor, Gangadhar & B. Friends. Sandhurst Road. Bombay No. 4.'

The plaintiff sued on this hundi and prayed for a decree against the firm. The court held that the words 'Managing Proprietor' was merely a description of the executant. The court observed that ii the words used were 'Athale, for Gangadhar & B. Friends', or if the name of the firm had been put first, the case might be different. On a construction of the description of the executant the court held that the person liable on the hundis was Athale and not any alleged firm passing under the name of Gangadhar and B. Friends. The original decree against the firm was set aside.

12. In Johnstone v. Mt. Jan Bibi, (AIR 1928 Lah 722) a pro-note executed by G. with the name shown as below fell for consideration. 'The Lahore Cotton Baling Press', signed by G alone. A suit was brought against G and H on the ground that H was a partner and a decree against H was also prayed for. The High Court accepted the appellant's case that the heading of the paper with the name of the firm did not necessarily lead to any inference that G was acting on behalf of the Press. The heading was given, according to the learned Judge, merely as his address. The prayer to make the other partner liable was disallowed, and the court declined to go into the question whether there was a partnership firm in existence. Thus the mere use of a letter-head, it was held, did not by itself lead to an inference that there was an undisclosed principal which was bound by the promissory notes.

13. In Punjab United Bank, Ltd. v. Mohammad Hussain, (AIR 1934 Lah 358) a Division Bench of the Lahore High Court had to consider a promissory note signed by one of the partners describing himself as 'Proprietor, Punjab Alliance Auction Rooms Lahore'. It was held that where one of the partners of a firm signed a promissory note, in order that all the partners were liable under it, it was necessary that not merely the firm's name should be disclosed 'in some way' but it must be disclosed in such a way that on any fair interpretation of the instrument the firm must be the real person liable upon the bill. The prayer for a decree against the firm was disallowed and it was held that the description in the promissory note was not sufficient to justify a decree against the other partners.

14. In Rangaraju v. Firm Devichand Bhootaji, (AIR 1945 Mad 439) the court was dealing with a promissory note executed by one person who was the partner of a Rice Mill. The plaintiff wanted a decree against the firm. The promissory note there was for a purpose binding on the firm but was not executed in the name of the firm but only personally. Patanjali Sastri, J. on a consideration of Sections 19 and 22 of the Partnership Act observed that since it was not disputed that the executant was a partner of the firm, that he had power as Managing Director to execute promissory notes binding on the firm, and since it was recited in the note itself that money was borrowed for the purpose of the partnership business, there should be no question that the debt was binding on the firm. Since the suit was based solely on the note, the question still arose as to whether the note had been executed in such a form as to make the patitioner also liable on the note as a partner. The learned Judge observed as follows:

'Section 27, Negotiable Instruments Act, enacts that every person capable of binding himself or of being bound as mentioned in Section 26 may also bind himself or be bound by a duly authorised agent acting in his name. This involves the consequence that, so far as the making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque are concerned, these acts must in order to bind the firm, be done by a partner in the name of the firm, and it is not sufficient that they are done in any other manner expressing or implying an intention to bind the firm which, under Section 22, Partnership Act, would otherwise be sufficient to bind the firm, for the latter section must yield to the special provisions of the Negotiable Instruments Act.'

Despite the fact that the executant of the promissory note had power as Managing Partner to execute promissory note binding on the firm, the learned Judge declined to give a decree against the other partner since the instrument on a fair interpretation did not disclose the name of the firm as the party liable thereon.

15. The consistent view taken in the above decisions is therefore to hold that when liability is sought to be fastened on an undisclosed principal on the strength of a negotiable instrument, it is not enough if the principal's name is disclosed in some way, but it must be disclosed in such a way that by any fair interpretation of the instrument it should be possible to hold that the undisclosed principal is the real person liable for the debt, When there is a conflict between Sections 19 and 22 of the Partnership Act on the one hand and Sections 26, 27 and 28 of the Negotiable Instruments Act, the latter Act; should prevail, A claim against a firm based on a written contract by one partner in the course of business with authority to act will be held to be binding on the firm. But when such a claim is made on the strength of a promissory note or a bill of exchange, court will have to be satisfied that the negotiable instrument discloses the liability of the firm clearly.

16. With this background when we examine the promissory notes, Exts. A1 to A5, the position becomes abundantly clear. Three of the promissory notes are in the letter-head of the admitted partnership firm. That by itself cannot lead us anywhere. At best the use of the letter-head only helps to ascertain the address of the executant. The letter-head cannot advance the case any further. The description of the executant as the proprietor of the K. M. S.

Bus Service cannot also help the plaintiff. That description is insufficient to bind the firm. The use of the words 'Managing Partner' in one of the promissory notes also cannot help the plaintiff because the promissory note is not signed on behalf of the firm. Nor are there other materials to infer that it was for the firm. For these reasons we hold that the court below was not justified in passing a decree against all the defendants. In the circumstances of the case a decree can be passed only against the executants of the notes.

17. Exts. A1 to A4 were executed by the 1st defendant alone and Ext. A5 was executed by the 1st and 2nd defendants. There will be a decree against the 1st defendant for the amounts covered by Exts. A1 to A4, and a decree against the 1st and 2nd defendants for the amount covered by Ext. A5. In the result we set aside the decree passed by the trial court against the 2nd defendant for the amounts covered by Exts, A1 to A4 and against the 3rd defendant for the amounts covered by Exts. A1 to A5.

18. The appeal against the plaintiff by the 1st defendant fails. The 3rd defendant succeeds in the appeal. The 2nd defendant succeeds in part. There is only one appeal. We direct the parties to suffer the costs.


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