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United Commercial Bank Ltd. and anr. and Indian Overseas Bank Ltd. Vs. Reliable Hire Purchase Co. (Private) Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtChennai High Court
Decided On
Case NumberO.S. Appeal Nos. 5 and 38 of 1968
Judge
Reported in[1976]46CompCas403(Mad)
ActsNegotiable Instruments Act, 1881 - Sections 10, 85(1) and 131
AppellantUnited Commercial Bank Ltd. and anr. and Indian Overseas Bank Ltd.
RespondentReliable Hire Purchase Co. (Private) Ltd. and ors.
Appellant AdvocateR. Narasimhachari, Adv. in O.S.A. No. 5 of 1968 and ;C. Ramakrishna, Adv. in O.S.A. No. 38 of 1968
Respondent AdvocateR. Narasimhachari, Adv. in O.S.A. No. 38 of 1968 and ;C. Ramakrishna, Adv. in O.S.A. No. 5 of 1968
Cases ReferredLloyds Bank v. Chartered Bank of India
Excerpt:
.....cheque not to be debited to his account - bank a issued money on basis of endorsement by bank b - bank b ought to have detected forgery committed before endorsing said cheque - cheque clearly specifies payee - endorsement in favour of person other that payee or agent admittedly due to bank b's negligence - plaintiff sought to relief claimed and bank a relieved from its liability. - - the first respondent, reliable hire purchase co. , as it then was, for collection, which was done the very next day, that is, on november 11, 1960. quite some time thereafter, on the failure of manasuba & co. the plaintiff's case was that the first defendant did not act in good faith, but acted negligently in making payment relying upon the guarantee and that, in any case, as the first..........bank ltd., [1941] ac 1 put it thus :'in these days every bank clerk sees the red light when a company's cheque is endorsed by a company's official into an account which is not the company's.'9. this red light not only applies to cases of companies or persons standing in a fiduciary position, but also to a cheque drawn in favour of an incorporated company, which has purportedly endorsed the cheque in favour of another incorporated company. the reason is that every credit and debit by cheques for or against are normally expected to find a place in the accounts and the usual way by which a company acts is that, when it receives cheques, it also makes payment by cheques and not through endorsements as in this case. our attention was invited to a few of the decided cases in the united.....
Judgment:

K. Veeraswami, C.J.

1. These appeals, one by the first defendant and the other by the second defendant banks, arise out of the suit instituted by the first respondent for a declaration that moneys paid out on the basis of a cheque issued by it should not be debited to its account and in the alternative for recovery of the amounts covered by the cheque and also damages with interest on the former amount from the date of the plaint from the first defendant, or the second defendant, or both. The first respondent, Reliable Hire Purchase Co. Private Ltd., drew a cheque on the Indian Overseas Bank Ltd., as it then was, on November 10, 1960, for a sum of Rs. 56,000 in favour of Sundaram Motors Private Ltd. One Raman, the managing director of Manasuba & Co. Private Ltd., received the cheque with a covering letter addressed to Sundaram Motors Private Ltd., on the understanding that he would purchase a motor vehicle on a hire purchase basis with that money. But, admittedly, Raman forged an endorsement as if by Sundaram Motors Private Ltd. acting through the sales manager, made it payable to Manasuba & Co. Private Ltd. He made a further endorsement as director for Manasuba & Co, Private Ltd. and forwarded the cheque to the United Commercial Bank Ltd., as it then was, for collection, which was done the very next day, that is, on November 11, 1960. Quite some time thereafter, on the failure of Manasuba & Co. Private Ltd., the true facts came to light. The first defendant, the Indian Overseas Bank, having refused to comply with the request of the first respondent to cancel the debit against it in relation to the cheque amount, it filed the suit asking for the reliefs we have mentioned. We may mention that, before sending the cheque to the clearing house, the endorsements on the reverse of the cheque were guaranteed by the United Commercial Bank, the second defendant. The plaintiff's case was that the first defendant did not act in good faith, but acted negligently in making payment relying upon the guarantee and that, in any case, as the first defendant could enforce the guarantee given by the second defendant, but failed to do it, the first defendant must be directed to pay the amount covered by the cheque to the first respondent. Alternatively, the plaintiff also claimed that the second defendant had converted the cheque in collecting the same with its endorsement and was liable to the first respondent as the true owner for damages for such conversion; The total claim made by it was for Rs. 60,200 against both the defendants or either of them. Kunhamad Kutty J., who tried the suit, found that the first defendant did not make the payment in due course and was, therefore, liable for the suit claim. On the basis of a third party petition taken out by the first defendant under Order VIII-A of the Civil Procedure Code, the learned judge also found that the second defendant acted negligently and, therefore, would be liable to the first defendant for the amount of decree granted against the first defendant.

2. Mr. Narasimhachari, who appears for the second defendant-appellant, made several submissions to get rid of his client's liability. The first of them was that the learned judge was not right in his view that the first defendant's payment for the cheque was not in due course and that the first defendent was entitled to rely on the guarantee by the second defendant endorsed on the cheque. Kunhamad Kutty J. thought that the payment made by the first defendant was not in due course, because any endorsement on a crossed cheque in favour of one other than the original payee should serve as a red light warning so that there was an obligation on its part to make an enquiry, more especially when the cheque covered such a large sum as Rs. 56,000. We are unable to concur in this view. Section 85(1) of the Negotiable Instruments Act provides that, where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. The expression 'payment in due course' is defined by Section 10 to mean payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. The question whether the first defendant complied with these requirements will depend on the circumstances in the instant case, the most important one of which is that another well-known bank on behalf of its customer had guaranteed the endorsement. There is no reason why the first defendant should suspect the guarantee which implied that the second defendant had exercised the necessary care and caution and acted in good faith in making the guarantee. If it were otherwise, banking practice would become unrealistic and burdensome and would not tend towards facilitating normal banking business. We do not mean to say that there was no obligation on the first defendant at all irrespective of circumstances to act as expected by Section 10 of the Negotiable Instruments Act. But, in the instant case, we are satisfied that, in view of the guarantee given by the second defendant which appeared on the reverse of the cheque as to the reliability of the endorsement, the first defendant would be justified ex facie in accepting it and acting on that basis. We are unable to find that there was any failure on the part of the first defendant to make enquiry which the circumstances called for. On that ground, we do not sustain the decree against the first defendant.

3. Mr. Narasimhachari then contends that, if the first defendant is not liable and the decree against it is set aside, inasmuch as the decree as against the second defendant resulted from a third party application, that decree also should be set aside. We are afraid that this result does not necessarily follow. We have already referred to the frame of the suit. The first respondent had prayed for a decree against both the defendants, or one or the other of them, as the court might deem fit. If we find that the second defendant is independently liable, the technical argument addressed on behalf of the second defendant-appellant loses its force. We may at once state, at this stage, for the reasons which will appear hereafter that, although the decree against the second defendant may not be rested on the basis of the third party petition, it is justifiable on the merits of the first respondent's claim itself and on that view we may well invoke our equitable jurisdiction under Order XLI, Rule 33, of the Code of Civil Procedure, and sustain the decree.

4. What is strenuously forced on us by Mr. Narasimhachari is that the endorsement made by the second defendant was done in good faith and without negligence. He says that Manasuba & Co. Private Ltd. was known to be a flourishing company of respectability and there was no reason why the second defendant's suspicion should be aroused as to the genuineness of the endorsements. The question, therefore, becomes one of fact as to whether, in the instant case, the second defendant acted in good faith and without negligence.

5. In our opinion, there are circumstances which if the second defendant had applied its mind to it would certainly have aroused its suspicion calling for an enquiry as to the genuineness of the endorsement purported to have been made by Sundaram Motors Private Ltd. through its sales manager. Normally, when a cheque is drawn in favour of a company and the same is crossed, the payee remits it into its own bank for collection and then draws on its account for making payment to others. It is not a very usual feature for incorporated companies to endorse the cheques drawn in their favour for payment to another company as a mode of payment. Secondly, the cheque covered a large amount, namely, Rs. 56,000. Thirdly, though the cheque was drawn on November 10, 1960, it was presented for collection probably on the same day or the next and actually the collection through the clearing house was made on November 11. The endorsement by Sundaram Motors Private Ltd. as forged appears thus :

'Pay Manasuba & Co. Private Ltd.

For SUNDARAM MOTORS PRIVATE LTD.

(Sd.)

SALES MANAGER '

6. The company's seal was not put there, but we will assume that this is not in every case necessary. The second endorsement ran thus :

'For MANASUBA & CO. PRIVATE LTD.

(Sd.) Raman

DIRECTOR'

7. In contrast, the first endorsement was by the sales manager on behalf of Sundaram Motors Private Ltd., but the second by the director on behalf of the company. Whether the sales manager of Sundaram Motors Private Ltd. had the authority to act for the company in making endorsements could possibly have raised a query before the second defendant satisfied itself to guarantee the endorsements. The endorsements also were not dated. There is also a further feature and that is this. Manasuba & Co. Private Ltd. was, among other things, carrying on business as a transport owner. One might ask what was the necessity for Sundaram Motors Private Ltd. to endorse the cheque in favour of Manasuba & Co. Private Ltd. which would not be the usual feature. One other thing is that, as disclosed by the record of evidence, the officers of the United Commercial Bank possibly knew every one including Ranian in Manasuba & Co. Private Ltd. One other circumstance is that even before the first defendant bank honoured the cheque, the second defendant had credited Manasuba & Co. Private Ltd, with the amount covered by the cheque. It seems to us that the cumulative effect of all these circumstances is that the second defendant-bank did not take the least precaution to verify the endorsements.

8. It is vehemently contended before us that to lay such a burden on a busy bank like the second defendant is to impose an impossible obligation in view of the numerous transactions that pass through the bank every day and that, when the second defendant was satisfied about the respectability of Manasuba & Co. Private Ltd, it was justified in assuming that the endorsement purported to have been made by Sundararu Motors Private Ltd, was a genuine one. Lord Atkin in United Australia Ltd. v. Barclays Bank Ltd., [1941] AC 1 put it thus :

'In these days every bank clerk sees the red light when a company's cheque is endorsed by a company's official into an account which is not the company's.'

9. This red light not only applies to cases of companies or persons standing in a fiduciary position, but also to a cheque drawn in favour of an incorporated company, which has purportedly endorsed the cheque in favour of another incorporated company. The reason is that every credit and debit by cheques for or against are normally expected to find a place in the accounts and the usual way by which a company acts is that, when it receives cheques, it also makes payment by cheques and not through endorsements as in this case. Our attention was invited to a few of the decided cases in the United Kingdom as Lloyds Bank Ltd. v. E.B. Savory and Company, [1933] AC 201 ; 1 Comp Cas 218 (HL) and Motor Traders Guarantee Corporation v. Midland Bank Ltd., [1937] 4 All ER 90 The second of these cases related to the bad history of the customer of the collecting bank. The first was a case of a stolen cheque which was received by the London office and sent to the clearing house. The paying-in-slips were sent to the county branch, no mention being made of the names of the drawers. The amounts of the cheques were without question credited as directed by the paying-in-slips. Written rules formulated by the bankers for the direction of the managers provided, among other things, that no new current account should be opened without knowledge of, or full enquiry into, the circumstances and character of the customer. There was also a rule, not written, but generally recognised, that banks do not take payments in, without enquiry, of cheques drawn by a firm in favour of a third party and paid in by a person other than the payee, who is or ought to be known to be an employee of the drawing firm. In the circumstances it was held by the House of Lords that the practice of bankers was defective in that the branch which received the cheques in the first instance never informed the crediting branch of the name of the drawers of the cheques, that the managers of the crediting branches had omitted to make sufficient enquiries when accepting P and Mrs. S as customers and that, in these circumstances, the bankers had failed to prove that they had acted without negligence and consequently they were liable. An examination of these and other cases like Babulal Premchand v. Nath Bank Ltd., : AIR1946Bom482 shows that the question of good faith and negligence is a question of fact in the light of the material in each case. In the instant case, we are of opinion, in the light of the circumstances mentioned, that the obligation on the part of the second defendant to satisfy itself was not fulfilled. In the circumstances, therefore, we are unable to hold that the second defendant has shown that it acted in good faith and without negligence in making the collection on the basis of the guarantee of the forged endorsements.

10. It is next contended that, even so, the first respondent could not succped as the company itself had acted negligently inasmuch as, for a period of about six months, it kept quiet without enquiring as to what happened to the cheque which it had issued and without verifying whether Manasuba & Co. Private Ltd. had purchased a vehicle, and if so, asking for the C certificate in respect of it. But we are unable to accept this contention, because the first respondent was a financier who would normally have expected Manasuba & Co. Private Ltd. to have utilised the amount, more especially when the cheque itself was drawn not in favour of Manasuba & Co. Private Ltd. but in favour directly of Sundaram Motors Private Ltd. Further, Manasuba & Co. Private Ltd, was also fulfilling the terms of the hire purchase agreement inasmuch as it was remitting to the first respondent the instalments due under that agreement.

11. Another contention of Mr. Narasimhachari is that the first respondent, at any rate, was not the true owner of the cheque within the meaning of Section 131 of the Negotiable Instruments Act, In support of this contention our attention was invited to certain observations found at page 665 of the Negotiable Instruments Act by Bhashyam and Adiga, thirteenth edition. But it seems to us that until the cheque was cashed, control in respect thereof continued to remain with the drawer. He could, for instance, instruct his banker before the cashing of the cheque, not to honour it. That can only be on the basis that he still continued to be the owner. The position will not in our opinion be altered by mere endorsements so long as the cheque was not cashed. In that sense, therefore, we consider that the first respondent continued to be the true owner of the cheque.

12. The last contention for the second defendant-appellant relates to a sum of Rs. 19,320 paid by Manasuba & Co. Private Ltd. to the first respondent towards the purported hire purchase transaction. That this sum was paid and credited by the first respondent towards this transaction is admitted. The question is whether this amount can go in reduction of the second defendant's liability. In our opinion, it can and it should. Strenuously this is objected to by the first respondent and for this purpose reliance is placed on certain observations in Lloyds Bank v. Chartered Bank of India, Australia and China., [1929] 1 KB 40. But we are not persuaded that we should decide this case strictly on a formal basis. In England a great deal of importance is attached to forms and anything that did not conform to the form would be treated as being outside the scope of the claim. But, as we have already indicated, the first respondent has based its claim in the suit not merely on conversion of the cheque, but on other facts as well. Apart from it, when the first respondent has received payments towards the debt covered by the cheque, it would be a case of unjustified enrichment to allow the first respondent to have the benefit of these instalment payments amounting to Rs. 49,320 and at the same time recover the full amount covered by the cheque. It may be that there were other transactions between Manasuba & Co. Private Ltd', and the first respondent. But we are not concerned with the overall position as between them. Once it is admitted that the sum of Rs. 19,320 was paid in respect of the transaction of hire purchase, though it never came into existence to that extent, the second defendant should be relieved of its liability to make good the loss suffered by the first respondent.

13. On that view, we direct that there be a decree against the second defendant and in favour of the first respondent for a sum of Rs. 36,680 with interest at six per cent. from the date of the trial court's decree. As regards costs, taking all the circumstances into account, especially the conduct of the first respondent in handing the cheque to the director of Manasuba & Co. Private Ltd. we think that it would be fair and proper to direct that each party should bear its costs at the trial court, but the second defendant should bear the costs of the first respondent in the related appeal.

14. The appeal of the first defendant is allowed and the appeal of the second defendant is ordered in the manner we have directed.

15. Mr. Ramakrishna for the first defendant-appellant presses for costs. But having regard to the fact that both the first and the second defendants are nationalised banks and also the fact that at least Kunhamed Kutty J. thought that the first defendant also should be made liable, though we have taken a different view, we do not feel justified in allowing the first defendant's costs.


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