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Nagar Damodar Shanbogue Vs. Gudlimar Rama Row and Twelve ors. - Court Judgment

LegalCrystal Citation
SubjectBanking
CourtChennai
Decided On
Judge
Reported in(1916)ILR39Mad101
AppellantNagar Damodar Shanbogue
RespondentGudlimar Rama Row and Twelve ors.
Cases ReferredTurner v. The Bank of Bombay I.L.R.
Excerpt:
presidency banks act (xi of 1876), sections 36 and 37 - directors lending on unauthorised securities (e.g.), mortgage of immoveable property, not ultra vires of the bank. - - 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......entered into by them would not be illegal. section 36 of act xi of 1876 defines the scope of banking transactions and enumerates the various powers conferred upon a bank. section 37 deals with the duties of the director of the bank, in our opinion section 37 must be regarded as containing instructions for the guidance and the governance of the directors and as defining the powers exerciseable 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 acting in excess of their authority. 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.....
Judgment:

Seshagiri Ayyar, J.

1. The defendants Nos. 1 to 4, the father of defendants Nos. 4 to 6 and the sixth defendant executed to the bank, the twelfth 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 So the plaintiff under Exhibit A. The plaintiff sued under the assignment. The defendants admitted the execution of Exhibit 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 (Exhibit 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 directors only affected the relationship inter se between them and the bank, and that even if the directors exceeded their powers the transaction entered into by them would not be illegal. Section 36 of Act XI of 1876 defines the scope of banking transactions and enumerates the various powers conferred upon a bank. Section 37 deals with the duties of the director of the bank, In our opinion Section 37 must be regarded as containing instructions for the guidance and the governance of the directors and as defining the powers exerciseable 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 acting in excess of their authority. 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. (1901) 25 Bom. 52 points out that the action of the director under such circumstances will not be malum prohibitum. On appeal Sir Lawrence Jenkins, C.J. and Tyabji, J., accepted this view. We are of the same opinion. Mr. Ayya Ayyar 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 arc unable to agree with this contention. As pointed out in Buckley on Companies (9th edition), page 626, 'the directors of a company fill a double character. They are: (i) agents of the company, and (ii) trustees for the shareholders of the power committed to them.' It is this dual capacity that is recognized 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 Co. v. Turner (1872) L.R. 8 Ch. Ap.149 Lord Selborne defines the position of directors thus; ' The directors are the mere trustees or agents of the company--trustees of the company's money and property,--agents 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 unauthorized investment of the moneys belonging to any other trust by the trustees of that trust. It would be monstrous--it would be extravagant to the very last degree--to say, that because the money of cestius que trust has been laid out in an unauthorized 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 cestius 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. (1901) 25 Bom 52 has been applied in Madras to cases arising under the Indian Trusts Act. In Kadir Ibrahi Rowthen v. Arunachellam Chettiar I.L.R. (1910) Mad. 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 cestuis que trust and was not void altogether. In Sinaya Pillai v. Munisami Ayyan I.L.R. (1899) Mad. 289, where a guardian exceeded the powers given to him by the Guardians 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 was not void ab initio; and it was open to the bank to have accepted the contract as concluded by the directors. Mr. Ayya Ayyar 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, any contravention of such an express prohibition vitiated the contract altogether. Courts have recognized that if a prohibition is in the interests of the shareholders and is based on considerations of public policy, it most be regarded as malum prohibitum. See per Blackburn, J., at page 379, in Taylor v. Chichester and Midhurset Railway 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. Ayya Ayyar 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 (1670) L.R. 3 P.C. 299 and when the legislature has advisedly not prohibited the bank but only the directors by Section 37 from entering into transactions 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 433 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 was entered into are not entitled to plead that they are absolved from liability because the transaction is one in which the directors exceeded their powers. Curiously enough the Subordinate Judge quotes Turner v. The Bank of Bombay I.L.R. (1901) 25 Bom. 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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