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Nagar Damodar Shanbhogue Vs. Gudlimar Rama Rao and ors. - Court Judgment

LegalCrystal Citation
SubjectBanking
CourtChennai
Decided On
Reported in(1915)28MLJ444
AppellantNagar Damodar Shanbhogue
RespondentGudlimar Rama Rao and ors.
Cases ReferredTurner v. Bank of Bombay I.L.R.
Excerpt:
- - it is well settled that, where there are provisions in an act which are only directory and not mandatory, any disregard of those provisions will not make the transaction void altogether......not enable third parties with whom contracts have been entered into to deny their liability to the bank, if the bank chooses to act upon the contract of its directors. in a very elaborate judgment mr. justice russel in turner v. the bank of bombay i.l.r. (1900) b. 52 points out that the action of the director under such circumstances will not be malum prohibition. on appeal sir lawrence jenkins c.j. and tyabji j. accepted this view. we are of the same opinion. mr. aiya iyer referred to sections 7 and 24 of the act and contended that the directors are identical with the bank, and that if there is a prohibition against the directors, it is also a prohibition against the bank. we are unable to agree with this contention. as pointed out in buckley on companies (9th edition) p. 626, 'the.....
Judgment:

1. The defendants 1 to 4 the father of defendants 4 to 6 and the 6th defendant executed to the Bank, the 12th defendant in this case a deed of mortgage (Exhibit E) on the 5th August 1898. The property was to be regarded as security for a sum of Rs. 54,000 already advanced to the defendants, and 'for other credits and advances' which may be made to them from time to time. Payments were made towards the debt. On the 2nd June 1905 the Bank transferred the balance due to it from the defendants to the plaintiff under Ex. A. The plaintiff sued under the assignment. The defendants admitted the execution of Ex. E., but pleaded payment in full before the date of the transfer. There were subsidiary pleas of limitation with reference to portions of the claim. The defendants also contended that the document Ex. E, cannot be sued upon, as it was made to secure future advances. The Subordinate Judge came to the conclusion that the claim was based upon an invalid document, and dismissed the plaintiff's suit.

2. In appeal, it has not been argued by the appellant that the directors had power under the Presidency Banks Act XI of 1876 to take a security upon immoveable property or in respect of future advances, as it was not necessary for the disposal of this appeal. The main contention pressed before us was that the limitations on the powers of the directorsonly affected the relationship inter se between them and the bank, and that even if the directors exceeded their powers, transaction entered into by them would not be legal. Section 36 of Act XI of 1876 defines the scope of banking transactions and enumerates the various powers conferred upon a bank. Section 7 deals with the duties of the directors of the bank. In our opinion Section 37 must be regarded as containing instructions for the guidance and governance of the directors and as defining the powers exercisable by them. If the directors act in disregard of those powers, they render themselves liable to the bank for any loss it may sustain by the unauthorised acts. That section does not enable third parties with whom contracts have been entered into to deny their liability to the bank, if the bank chooses to act upon the contract of its directors. In a very elaborate judgment Mr. Justice Russel in Turner v. The Bank of Bombay I.L.R. (1900) B. 52 points out that the action of the director under such circumstances will not be malum prohibition. On appeal Sir Lawrence Jenkins C.J. and Tyabji J. accepted this view. We are of the same opinion. Mr. Aiya Iyer referred to Sections 7 and 24 of the Act and contended that the directors are identical with the bank, and that if there is a prohibition against the directors, it is also a prohibition against the bank. We are unable to agree with this contention. As pointed out in Buckley on Companies (9th Edition) p. 626, 'the directors of a company fill a double character, They are (1) agents of the company and (ii) trustees for the share-holders of the power committed to them'. It is this dual capacity that is recognised throughout the Indian Act. If an agent exceeds the authority conferred upon 'him by the principal, it is open to the principal to adopt it as if the agent acted within the scope of his authority. The party with whom the contract has been entered into is not entitled to repudiate the transaction. Of course if the unauthorized dealing is opposed to public policy, there can be no ratification. In Great Eastern Railway Company v. Turner (1872) L.R. 8Ch. App. 149 Lord Selborne defines the position of directors thus: 'The directors are the mere trustees or agents of company--trustees of the company's money and property--agent in the transactions which they enter into on behalf of the company ' and then he says: 'I entirely assent to what was said by Sir Richard Baggallay, that there is no difference between an unauthorized investment of the money of a public company by its trustees, and an unauthorised investment of the moneys belonging to any other trust by the trustees of that trust. It would be monstrous--at would be extravagant to the very last degree--to say, that because of cestuis que trust has been laid out in an unauthorised manner, that therefore they are not to have the benefit of whatever value there is in the property bought with their money.' The reason of the rule is that, whatever may be the extent of liability inter se between the directors and the bank or the trustee and cestui que trust, it does not affect transactions with outsiders so as to enable the latter to claim exemption from the performance of their obligations. The view enunciated in Turner v. The Bank of Bombay I.L.R. (1900) B. 52 has been applied in Madras to cases arising under the Indian Trusts Act. In Kadir Abrahim Rowther v. Arunachellam Chettiar I.L.R. (1909) M. 397 the learned judges held that where a trustee exceeded his powers in granting a lease, the transaction was only voidable at the option of the cestui que trust and was not void altogether. In Chinnayya Pillai v. Munisami Iyan I.L.R. (1899) M. 289 where a guardian exceeded the powers given to him by the Guardian and Wards Act the learned judges held that his act was only voidable at the option of the ward. We must, therefore, hold that the action of the directors, in taking the security to cover future. advances although it may be in excess of the powers not void ab initio; and that it was open to the bank to have accepted the contract as concluded by the directors. Mr. Aiya Iyer relied very strongly upon the decision in the National Bank of Australasia v. Cherry (1870) L.R. 3 P.C. 299. One essential difference between that decision and the case before us is that in the former the prohibition which was contravened was against the bank itself and not against the directors. Lord Cairns in delivering the judgment of Judicial Committee came to the conclusion that as the bank was prohibited from entering into transactions of a certain class, a contravention of such an express prohibition vitiated the contract altogether. Courts have recognised that if a prohibition is in the interests of the shareholders and is based on considerations of public policy, it must be regarded as malum prohibitum See per Blackburn J. at page 379 in Taylor v. Chicester and Midhurst Ry. Company (1867) L.R. 2 Ex. 356 In the present case, the contract does not affect the rights of the shareholders nor does it offend public policy. It is not the bank that is prohibited from taking security (in regard to future advances or in the shape of immoveable property) but only the directors. Therefore the decision relied upon by Mr. Aiya Aiyar does not affect the present case. Moreover, the 'Act of 1876 regulating Banking transactions in this country was passed after the decision in the National Bank of Australasia v. Cherry (1866) L.R. 1 Q.B. 183 and when the legislature has advisedly not prohibited the bank but only the directors by Section 37 from entering into transations of a particular nature, it is reasonable to hold that the section only contains instructions to the directors as to how they should manage the business of banking. It is well settled that, where there are provisions in an Act which are only directory and not mandatory, any disregard of those provisions will not make the transaction void altogether. (The Queen v. Lofthouse (1866) L.R. 1 Q.B. 183 and the Queen v. Ingall (1876) L.R. 2 Q.B.D. 199. In our opinion Section 37 is only directory of the powers of the directors. The parties with whom the contract has been entered into are not entitled to plead that they are absolved from liability because the transaction is one which the directors had no power to enter into. Curiously enough the Subordinate Judge quotes Turner v. Bank of Bombay I.L.R. (1900) B. 52 but entirely misunderstands the decision. We must therefore, reverse his decision and direct him to take back the case on his file and to dispose of it upon the other points arising in the case.

3. As the decree itself is reversed it is not necessary to pass separate orders on the memorandum of objections. The costs in this Court of all parties will abide the result and should be provided for in the revised decree.


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