1. This appeal is against the order of V. Ramaswami J. dismissing Appln. No. 1176 of 1977 which had been filed for setting aside the Master's order dated 7-2-1977 made in Appln. No. 3826 of 1976 in C. S. 152 of 1976.
2. C. S. 152 of 1976 had been filed for recovery of a sum of Rs. 50,000 with subsequent interest at 12 per cent per annum, from the date of the plaint on the basis of the promissory note dated 27-7-1973, alleged to have been executed by S.R. Swami, the second defendant, a partner of the first defendant-firm, for and on behalf of the first defendant-firm of which defendants 3 to 6 also are said to be partners. It was alleged in the plaint that defendants 1 and 3 to 6 (the appellants) are not only well aware of the lending of the amount by the respondent (plaintiff) but were also promising to pay the amount due under the promissory note before they changed their attitude later and chose to make all sorts of false and frivolous allegations. The suit was filed as an under Chapter suit under the provisions of Order VII, Rule 1 of the Original Side Rules of this Court.
3. The appellants filed Appln. No. 3826 of 1976 before the Master under Order 37, Rule 3, C. P. C. and under Order VII, Rule 6 (1) of the Original Side Rules of this court, for leave to defend the suit. The allegation made in the third defendant's affidavit filed in support of that application for grant of leave was that though the second defendant 'was in charge of the effective running of the affairs of the firm' and 'looking after the affairs of the firm, he was never empowered either explicitly or impliedly to borrow any amount singly and bind the firm for the unauthorised borrowing'. The further allegations made in that affidavit are-
"A reading of the Deed of Partnership clearly shows that he was not at all authorised to borrow any amounts on behalf of the firm. Suffice it to say, the firm or the defendants 3 to 6 are not liable for the alleged borrowing by the second defendant from the plaintiff. If at all the second defendant had borrowed any amount from the plaintiff it could only be in his individual capacity and hence cannot bind the firm or the defendants 3 to 6. I further submit that I have reasons to believe that the consideration for the alleged borrowing was not utilised for the benefits of the firm and I have reasons to believe that the consideration, if at all any, received by the second defendant from the plaintiff, was appropriated by the second, defendant."
4. The respondent opposed the application for grant of leave to defend, contending inter alia that she was not aware of the recitals in the partnership deed and was not, in any event, concerned with the same 'as the amount borrowed under the suit promissory note was utilised by the first defendant-firm for its own benefit and in any event the same was ratified by the first defendant-firm by issuing account payee cheques towards payment of interest.'
5. The Master took note of the allegation made in the reply notice dated 17-5-1976 sent by the appellants that the second defendant had misused his position both as a partner and as a power-or-attorney agent and executed a number of promissory notes in favour of third parties, purporting to do so for and on behalf of the first defendant-firm. He observed that there was no whisper in that reply notice that the second defendant was not authorised explicitly or impliedly to borrow any amount for and on behalf of the firm and that the contention that the second defendant had no implied authority to borrow any amount for and on behalf of the firm had been trotted out only in the application for grant of leave, and the dismissed the application holding that no triable issue arises.
6. The appellants took the matter before V. Ramaswami J. on appeal in Appln. No. 1176 of 1977. The learned Judge dismissed the application observing-
"The contention of the applicants was that the second defendant was not empowered expressly or impliedly to borrow any money on behalf of the firm. The applicants did not produce any partnership deed before the Master showing any restriction on the authority of the second defendant in borrowing money. As a partner the second defendant is entitled to borrow money on behalf of the firm and that is authorised under the provisions of the Partnership Act. The only provision which the learned counsel for the applicants would rely on in support of his contention that the second defendant had no authority to borrow under the Partnership Act is Section 19(2)(e) of the Act. Under that provision it is stated that, in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to admit any liability in a suit or proceeding against the firm. I am wholly at a loss to find what this clause has to do with the defence taken by the applicants. The plaintiff is not suing the firm on the basis of any admission of liability by the second defendant. The suit is filed on the basis of the promissory note executed by the second defendant on behalf of the firm. The second defendant, as already stated, is entitled to execute a promissory note unless there is a prohibition with regard to his power in the deed of partnership. As already stated, the applicant did not produce the document. Nor any application is filed even on this day to receive additional documents, any partnership deed, if there is one".
7. Order VII of the Original Side Rules of this court relates to special procedure in respect of certain suits. In any case in which the plaint and summons are in the form prescribed in that Order, the defendant shall not defend the suit unless he obtains leave to defend the suit from the Master as provided in Rule 5 of the Order. Under Rule 6 (1) an application for leave to defend the suit has to be made to the Master, supported by such evidence by way of affidavit as the defendant desires to place before the court. Order 37, C. P. C. provided summary procedure for the disposal of certain class of cases. Rule 3 of that Order lays down that in a suit to which that Order applies, the plaintiff should, together with the summons under Rule 2, serve on the defendant a copy of the plaint and annexures thereto and the defendant may, at any time within ten days of such service, enter an appearance either in person or by pleader. Sub-rule (5) of Rule 3 lays down that the defendant may, at any time within ten days from the service of such summons for judgment, by affidavit or otherwise disclosing such facts as may be deemed sufficient to entitle him to defend, apply on such summons for leave to defend such suit, and leave to defend may be granted to him unconditionally or upon such terms as may appear to the court or the Judge to be just. The proviso to that sub-rule lays down that leave to defend shall not be refused unless the court is satisfied that the facts disclosed by the defendant do not indicate that he has a substantial defence to raise or that the defence intended to be put up by the defendant is frivolous or vexatious.
8. If the defendant does not appear on proof of service of summons on him, or the leave to defend is not granted, a decree for the amount with costs has to be passed in favour of the plaintiff under Rule 3 of Order VII of the Original Side Rules.
9. In law, every one of the partners in a mercantile firm of ordinary trading partnership is liable upon a bill drawn by a partner in the recognised trading name of the firm for a transaction incidental to the business of the firm, although his name does not appear on the face of the instrument and although he be a sleeping or a secret partner. In order to take a case out of this principle of general law, it must be shown that the holder of the bill knew, at the time the received it, that the transaction was the private affair of a single person. In the case of partnerships which are not of a mercantile character namely, non-trading firms, there is no implied authority of a partner to bind the firm by his individual act. The partnership in this case had been constituted for the purpose of carrying on business as engineering contractors and is different from a commercial or a trading firm. Therefore, we are of the opinion that the observation of V. Ramaswami J. in the order under appeal that as a partner the second defendant was entitled to borrow money on behalf of the firm and that he is authorised under the provisions of the Partnership Act so to do and that he is entitled to execute a promissory note unless there is a prohibition in regard to his power in the deed of partnership, is too wide. No doubt, Section 19(1) of the Partnership Act lays down that subject to the provisions of Section 22 of that Act, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. This authority of a partner to bind the firm conferred by that section is called his implied authority. We find the following passages in 'Lindley on Partnership' 13th Edition pages 168 to 170-
"Every member of an ordinary trading partnership had implied power to bind the firm by drawing, accepting or endorsing bills of exchange, or by making and endorsing promissory notes in its name and for the purpose of the firm in the ordinary course of business, but not otherwise ..... With respect to partnerships which are not trading partnerships, the question whether one partner has any implied authority to bind his copartners by putting the name of the firm to a negotiable instrument, depends upon the nature of the business of the partnership. In the absence of evidence showing usage, the power had 'been denied to one of several mining adventures, quarry workers, farmers, solicitors, and auctioneers ..... If, however, a member of a non-mercantile firm concurs in drawing, or authorises his partner to draw, a bill in the name of the firm, he impliedly authorises its endorsement in the same name for the purpose for which it was drawn". As already stated, the partnership in the present case had been constituted for carrying on business as engineering contractors. Where the nature of the business carried on by the firm is such that any of the partners has or should have the authority to bind the firm by his individual act is a question of fact which has to be decided on the materials to be made available to the court.
10. The learned counsel for the respondent invited our attention to the decision of the Supreme Court in Mechalec Engineers and Manufacturers v. Basic Equipment Corporation, , where the principles applicable to cases covered by Order 37, Civil P. C. as stated by Das J. in Sm. Kiran-moyee Dassi v. Dr. J. Chatterjee, (1945) 49 Cal WN 246.
253. have been extracted. They are-
"(a) If the defendant satisfies the court that he has a good defence to the claim on its merits the plaintiff is not entitled to leave to sign judgment and the defendant is entitled to unconditional leave to defend.
(b) If the defendant raises a triable issue indicating that he has a fair or bona fide or reasonable defence although not a positively good defence, the plaintiff is not entitled to sign judgment and the defendant is entitled to unconditional leave to defend.
(c) If the defendant discloses such facts as may be deemed sufficient to entitle him to defend, that is to say, although the affidavit does not positively and immediately make it clear that he had a defence, yet shows such a state of facts as leads to the inference that at the trial of the action he may be able to establish a defence to the plaintiffs claim the plaintiff is not entitled to sign judgment and the defendant is entitled to leave to defend but in such a case the court may in its discretion impose conditions as to the time or mode of trial but not as to payment into court or furnishing security.
(d) If the defendant has no defence or the defence set up is illusory or sham or practically moonshine then ordinarily the plaintiff is entitled to leave to sign judgment and the defendant is not entitled to leave to defend.
(e) If the defendant has no defence or the defence is illusory or sham or practically moonshine then although ordinarily the plaintiff is entitled to leave to sign judgment, the court may protect the plaintiff by only allowing the defence to proceed if the amount claimed is paid into court or otherwise secured and give leave to the defendant on such condition, and thereby show mercy to the defendant by enabling him to try to prove a defence."
11. The learned counsel for the respondent relied upon the decision in Saremal Punamchand v. Kapurchand Puramchand. ILR 48 Bom 176 : (AIR 1924 Bom 260). in which the defendants 1 and 2 had entered into a partnership for carrying on the business of buying and selling copper and brass utensils in March 1920. On 23-5-1930, defendant 1 borrowed Rs. 6.000 from the plaintiff on promissory note passed by him in the name of the firm for purposes of the business. The partnership came to an end on the 28th of that month (March 1920) and in April 1923, the plaintiff sued both the defendants on the promissory notes. It has been held that the partnership in question having been one of a commercial nature, defendant 1 had an implied authority to borrow money for the firm, and that, therefore, defendant 2 was also liable for the loan. The firm in that case was a trading firm. The other decision relied upon by the learned counsel for the respondents is of the Court of Appeal in Reversion Fund and Insurance Co. Ltd. v. Maison Cosway Ltd., 1912-1 KB 364. In that case the Managing director of the defendant-company had been prohibited by the terms of his appointment from borrowing money on behalf of the company, unless specially authorised to do so by the Company. However, he borrowed money on behalf of the company from the plaintiff-company without authority from the defendant-company. But the money was applied by him in discharging existing legal debts of the defendant-company. The plaintiff-company knew through its officers, when the advance was made, that the Managing director of the company had no authority to borrow on its behalf. However, it has been held by Bucklav L. J. and Kennedy L.J., Vougham Williams L.J. dissenting, that the plaintiff-company was entitled to recover from the defendant-company the amount borrowed, notwithstanding its knowledge as before mentioned. The appellants have alleged in the third defendant's affidavit filed in support of the application for grant of leave that the consideration for the alleged borrowing by the second defendant was not utilised for the benefit of the firm. No doubt the respondent had contended in the counter affidavit of her son that the amount borrowed under the -suit promissory note was utilised by the first defendant firm for its own benefits, and in any event, it was ratified by the first defendant firm by issuing account payee cheques towards payment of interest. Therefore, the question whether the money borrowed by the second defendant under the promissory note was utilised for the purpose of the firm had to be decided on the evidence to be made available to the court during the trial. In these circumstances, we are of the opinion that the aforesaid two decisions relied upon by the learned counsel for the respondents do not held the respondent.
12. The other decision relied upon by the learned counsel for the respondent is of Curgenven J. inRamanathan Chettiar v. Annamalai Chettiar, AIR 1931 Mad 825 where the learned Judge has observed-
"The only reasonable way of reading Order 7, Rule 14 with Order 11, Rule 15 is to hold that the expression 'referred to' is equivalent to 'entered in the list'. It seems to me that for this purpose the list must be deemed to be part of the plaint, as for instance would be a schedule of property".
While conceding that this contention is not that any evidence must be taken into consideration for deciding the question whether the appellants are entitled to grant of leave, the learned counsel for the respondents sought to rely upon the notice and reply notice exchanged between the parties to substantiate his contention that money borrowed had been utilised for the business of the firm. We are of the opinion that it is not open to the respondent to request the court at this stage to look into any evidence at the stage of considering the question whether the appellants are entitled to grant of leave to defend the suit before ever there could be any trial of the suit. The Supreme Court has observed in Santosh Kumar v. Bhai Mool Singh, thus (at p. 324 of AIR)-
"It is always undesirable, and indeed impossible to lay down hard and fast rules in matters that affect discretion. But it is necessary to understand and the reason for a special procedure of this kind in order that the discretion may be properly exercised. The object is explained in Kesavan v. South Indian Bank Ltd., , and is examined in greater detail in Sundaram
Chettiar v. Valliammal (AIR 1935 Mad 43) to which we have just referred. Taken by and large, the object is to see that the defendant does not unnecessarily prolong the litigation and prevent the plaintiff from obtaining an early decree by raising untenable and frivolous defences in a class of cases where speedy decisions are desirable in the interests of trade and commerce. In general, therefore, the test is to see whether the defence raises a real issue and not a sham one, in the sense that, if the facts alleged by the defendant are established, there would be a good, or even a plausible defence on those facts.
Now, what is the position here? The defendants admitted execution of the cheque but pleaded that it was only given as collateral security for the price of goods, which the plaintiff supplied to the defendants. They said that those goods were paid for by cash payments made from time to time and by other cheques and that therefore the cheque in suit had served its end and should now be returned. They set out the exact dates on which, according to them, the payments had been made and Save the numbers of the cheques.
This at once raised an issue of fact, the truth and good faith of which could only be tested by going into the evidence and, as we have pointed out, the learned trial Judge held that this defence did raise a triable issue. But he held that it was not enough for the defendants to back up their assertions with an affidavit; they should also have produced writings and documents which they said were in their possession and which they asserted would prove that the cheques and payments referred to in their defence were given in payment of the cheque in suit; and he said "In the absence of those documents, the defence of the defendants seems to be vague consisting of indefinite assertions....." This is surprising conclusion. The facts given in the affidavit are clear and precise, the defence could barely have been clear. We find it difficult to see how a defence that. on the face of It, Js clear becomes vague simply because the evidence by which it is to be proved is not brought on file at the time the defence is put in.
The learned Judge has failed to sea that the stage of proof can only coma after the defendant has been allowed to enter an appearance and defend the suit, and that the nature of the defence has to be determined at the time when the affidavit is put in. At that stage all that the court has to determine is whether 'if the facts alleged by the defendant are duly proved' they will afford a good, or even a plausible, answer to the plaintiff's claim. Once the court is satisfied about that, leave cannot be withheld and no question about imposing conditions can arise; and once leave is granted, the normal procedure of a suit, so far as evidence and proof go, obtains"
Even in the subsequent decision of the Supreme Court in Milkhiram (India) Pvt. Ltd. v. Chamanlal Bros., , where
reference has been made to the earlier decision in Santosh Kumar v. Bhai Mool Singh, . the Supreme Court has observed (at p. 1702 of AIR)-
"The trial Judge being already satisfied that the defence raised a triable issue was not justified in imposing a condition to the effect that the defendant must deposit security because he had not adduced any documentary evidence in support of the defence. The stage for evidence had not been reached. Whether the defence raises a triable issue or not has to be ascertained by the court from the pleadings before it and the affidavits of parties and it is not open to it to call for evidence at that stage".
13. In these circumstances, we do not agree with the learned counsel for the respondent that the notices which passed between the parties and had been produced by the respondent along with the plaint, should be looked into to ascertain whether the defence raised is bona fide, For the same reason we think, that V. Ramaswami J. erred in drawing an inference against the appellants as regards their plea that reading of the deed of partnership will clearly show that the second defendant was not at all authorised to borrow any amount on behalf of the firm, from the mere fact that the appellants have neither produced the partnership deed nor made any application, even by the date of his order, to receive as additional document any partnership deed. We find, on the pleadings and the affidavit of the third defendant filed in support of the application, that triable issues arise and that the appellants are entitled to the leave. 14. The appeal is accordingly allowed with costs and the leave is granted. The sum of Rs. 15,000 directed to be deposited into court by the appellants by 7th Sept. 1977, will continue to be in deposit and will abide the result of the suit.