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The Secretary, Naguneri Peace Memorial Co-operative Urban Bank Ltd., Naguneri Vs. Alamelu Ammal - Court Judgment

LegalCrystal Citation
SubjectCivil
CourtChennai High Court
Decided On
Case NumberCivil Revn. Petn. No. 766 of 1957
Judge
Reported inAIR1961Mad419; [1961]31CompCas705(Mad)
AppellantThe Secretary, Naguneri Peace Memorial Co-operative Urban Bank Ltd., Naguneri
RespondentAlamelu Ammal
Appellant AdvocateR. Ramamurthi Iyer, Adv.
Respondent AdvocateS.V. Rama Aiyangar, Adv.
Cases ReferredLloyd v. Grace
Excerpt:
.....and agent--bank-secretary, servant of company--bye-law--secretary having no authority to issue fixed deposit receipt to non-member--forging of signature of directors by secretary and granting of receipt--bank whether liable to depositor--effect of wrongful appropriation by secretary--bank, if absolved from liability.; it is well-established that the principle, strangers are entitled to assume that all things connected in the transactions and pertaining to the internal arrangement of a company have been validly done, has no application to cases of fraud and forged instruments, as forged instruments are simply null and void.; a secretary of a company is a mere servant. his position is that he has to do what he is told and no person can assume that he has any authority to represent..........business. the respondent is a lady who had dealings with the bank from the year 1952. she made two fixed deposits with the bank one for a sum of rs. 2300 on 24-1-1955 and another for a sum of rs. 550 on 5-4-1952 for three years, the interest payable being 5 per cent per annum. the fixed deposit receipts bearing nos. 1293 and 1192 respectively were issued to her by the secretary. as she did not receive interest once in six months as per the rules of the bank, she issued a notice calling upon the bank to pay the interest accrued due on the said two deposits.the petitioner (bank) promptly denied its lability and replied to her letter stating that only a sum of rs. 1000 had been deposited under fixed deposit receipt no. 1223. the respondent filed the suit sc no. 926 of 1956 for a decree.....
Judgment:
1. This civil revision Petition belongs to the unfortunate class of cases in which the courts have to decide which of the two innocent parties has to suffer for the fraud of a third party.

2. The petitioner is a Co-operative Bank doing banking business. The respondent is a lady who had dealings with the bank from the year 1952. She made two fixed deposits with the bank one for a sum of Rs. 2300 on 24-1-1955 and another for a sum of Rs. 550 on 5-4-1952 for three years, the interest payable being 5 per cent per annum. The fixed deposit receipts bearing Nos. 1293 and 1192 respectively were issued to her by the secretary. As she did not receive interest once in six months as per the rules of the bank, she issued a notice calling upon the bank to pay the interest accrued due on the said two deposits.

The petitioner (bank) promptly denied its lability and replied to her letter stating that only a sum of Rs. 1000 had been deposited under fixed deposit receipt No. 1223. The respondent filed the suit SC No. 926 of 1956 for a decree directing the bank to pay Rs. 237-8-0 for the interest accrued due on the fixed deposits. The petitioner, who was the defendant in the suit, contended that the fixed deposit receipt No. 1293 for a sum of Rs. 2300 and No. 1192 for a sum of Rs. 550 were not issued by the bank, that there was no entry in the account books of the bank either for the alleged deposits of Rs. 2300 or Rs. 550, that the fixed deposit receipts were never signed by the directors except the secretary and that the fixed deposit receipts now held by the respondent are bogus ones and not binding on the bank.

3. The learned District Munsif who tried the suit found that the fixed deposit receipts were not genuine and the secretary of the bank committed a forgery by affixing the signatures of the three directors. Nevertheless he came to the conclusion that as the secretary was authorised to receive the money according to the bye-laws of the bank, the bank was liable to pay the amounts due on the fixed deposit receipts held by the respondent and he accordingly decreed the suit. The bank has filed this revision petition and as an important question is involved in this case, namely, how far a bank is answerable to third parties for the fraudulent acts of its servants or officers, the civil revision petition has come up before a Bench for consideration.

4. Before considering the question of law involved in this case it is necessary to set out the relevant bye-laws framed by the bank. They are:

Bye-law 14: Deposits may at the discretion of the Board of Directors be received at any time from members or non-members.

Bye-law 15 : Deposits from members shall be given preference to deposits from non-members.

Bye-law 21 : The Board of Directors shall appoint a paid secretary who shall have no seat jn the Board. The Board shall fix the nature and extent of the security to be furnished by the secretary.

Bye-law 25: Receipts shall be issued for all moneys paid to the society. For moneys paid by members, the receipt shall be signed, by the president or the Secretary whoever is selected by the Board of directors to discharge his function. In the case of borrowings from non-members Or from other societies the receipt or bond shall be-executed by at least four members of the Board of Directors of whom the President shall be one.

Mr. Ramamurthi, the learned counsel for the petitioner, contends that the Bank is not liable for the unauthorised and fraudulent act of a secretary committed for his own benefit unless there has been negligence on the part of the bank. His further contentions may be stated 'bus: There is no warrant or justification either in the act or rules or bye-laws, that the secretary was authorised to receive money from the customers. Apart from the forged fixed deposit receipts tlic bank accounts did not contain any entry regarding the alleged deposits.

The fixed deposit receipts were not signed by the Director's but on the Other hand were forged by the secretary himself. These fixed deposits are simply null and void. They are merely a piece of waste paper. Thus the Bank is not liable to pay the respondents any amount found on the fixed deposit receipts but they would be liable only to the extent of the amount found in the account book.

5. In order to fortify his argument, the learned counsel referred to a leading case, viz. Ruben v. Great Fingell Consolidated, 1906 AC 439. The facts in that case are similar to our case. The plaintiff advanced in good faith a sum of money to thy secretary of the defendant company for his own purposes on the security of a share certificate of the company issued to them by the secretary. This certificate was in point of form in accordance with the Articles of Association in as much as it bore the seal of the company and appeared to he signed by the Directors and counter-signed by the secretary.

The seal of the company was however affixed to it by the secretary fraudulently and without authority and the signatures of the two directors were forged by him. On the discovery of the fraud, the plaintiff filed a suit against the company cm the certificate issued by the secretary. Their Lordships held that the documents were forged and could not bind the company unless some official acting with his authority had warranted that it was genuine. Even assuming that the secretary might be taken to have impliedly warranted this he had no colour of authority, actual, usual, or apparent to do and therefore the company was not bound. Lord Love-born L.c. in his speech observed:

"I cannot see upon what principle your Lordships can hold that the defendants arc liable in this action. The forged certificate is a pure nullity. It is quite true that persons dealing with limited liability companies are not bound to inquire into their indoor management, and will not be affected by irregularities of which they had no notice. But this doctrine, which is well established, applies only to irregularities that otherwise might affect a genuine transaction. It cannot apply to a forgery.''

Another noble Lord Macnaghten said:

"The thing put forward at the foundation of their claim is a piece of paper which purports to be a certificate of shares in the company. This paper is false and fraudulent from beginning to end. The representation of the company's seal which appears Upon it, though made by the impression of the real seal of the company, is counterfeit, and no better than a forgery. The signatures of the two directors which purport to authenticate the sealing are forgeries pure and simple. Every statement in the document is a lie. The only thing real about it is the signature of the secretary of the company, who was the solo author and perpetrator of the fraud. No one would suggest that this fraudulent certificate could of itself give rise to any right or bind or affect the company in any way. It is not the company's deed, and there is nothing to prevent the company saying so".

This case was considered on two occasions by the court of Appeal in Kreditbank Cassel v. Schenkers Ltd., 1927 All ER 425, and South London Greyhound Racecourses Ltd. v. Wake, 1931-1 Ch. 496. In the former case, a bill of exchange was signed by the manager of a company with his. own signature under words stating that he signed on behalf of the company in favour of this payee to whom the manager was personally indebted. As it was found to be a forgery it was contended before the Court of Appeal that the holders were not entitled to enforce Payment of them against the company.

Following the principle laid down in Ruben's case, 1906 A.C. 439 Scrutton L.J. observed that the doctrine that everybody is presumed to know the contents of registered articles of association did not extend to a forgery, a forged instrument being simply null and void. He further observed: "It seems to me clear that this document is a forgery within the language of the Forgery Act. It contains a false ' statement, namely, that the manager is acting for the company and it purports to bind the company. That statement is in fraud of the company, and those two elements appear to make the document a forgery within the Forgery Act. That being so, I feel bound by the decision of the House of Lords to hold that in this case, it is not open to the plaintiffs to say: 'This matter whether authority has or has not been delegated to Clarke, the Manchester Manager, is a matter of internal management about which I need not inquire under the rule in Royal British Bank v. Turquand, (1856) 6 E and B 327-"

6. Atkin L. J. also observed:

"This is the ordinary case of a person having. exercised or purported to exercise an authority to bind the company in fraud of the company, outside the scope of his ordinary ostensible authority .....To my mind, inasmuch as the act was done within the ostensible authority of the agent, the principal is not precluded from setting up the want of authority.''

7. In South London Grayhound Racecourse; Ltd. v. Wake, (1931) 1 Ch. 496, the Articles of Association of the company required that the

"seal of the company shall not be affixed except by the authority of a resolution of the Board of Directors and in the presence of at least one director and the secretary, and the said one director and secretary shall sign every instruments to which this seal shall be so affixed in their presence."

In this case the secretary and one of the directors of the company without any authority of any sort or kind of the Board of Directors fraudulently affixed the company's seal on the share certificate, which they both signed, describing themselves, as in fact they were, as secretary and director respectively of the company, and dishonestly issued the said certificate to the defendant. In the course of the judgment, Clauson J. observed;

"The facts, as they have been proved before me, appear to me to bring the case directly within the principles laid down in 1906 AC

439. It I felt any doubt about it, that doubt would be removed by a statement of the law contained in the judgment of Atkin L. J. in 1927 All ER 425. In that case, the learned Lord Justice said 'But we have the authority of the House of Lords in Ruben's case, 1906 AC 439 for saying that the doctrine that you need not investigate whether or not the conditions regulating the internal management of the company have been strictly carried out in accordance with the articles has no application in the case of a document which is an obvious forgery. In this case the defendants are entitled to say:

"These are not our bills and we are not precluded from denying the authority of the person who purported to sign them on our behalf."

Following these two decisions it was held that as the seal of the company was not affixed under the authority of the Board of Directors, the certificate was not duly and truly sealed in the company's behalf, and was therefore a forgery and not binding on the company, and the company was not, consequently, estopped from denying the validity of the certificate. The doctrine that one need not investigate whether or not the conditions regulating the internal management of the company have been strictly carried out in accordance with the articles has no application in the case Of a document which is an obvious forgery.

8. Mr. Champakesa Aiyanger, the learned counsel for the respondent, argued that the secretary in the instant case had authority to receive the fixed deposits and every act done by him in the course of his employment would bind the bank. He drew our attention to a case decided in our High Court by Justice Gentle: Mathias v. Kilachari Agricultural Co-operative Bank, 1938-E Mad, LJ 241; (AIR 1938 Mad 272). The facts in that case are, the plaintiff's association used to make deposits with the defendant bank through its secretary. In the course of their dealings the secretary of the bank received fixed deposits even outside the bank premises and used to issue fixed deposit receipts-It was contended by the Bank that the secretary had authority to receive the deposits only at the bank premises but as he received the deposits outside the bank premises his conduct in receiving the money and his act in giving the fixed deposit receipt was outside the scope of his authority. But this was negatived, justice Gentle observed:

"It is not contended that the secretary and treasurer had HO authority to receive money and to receive fixed deposit and that he was not their agent so to do and it was not in the course of his employment so to act. Every act done by an agent in the course of his employment on behalf of his principal and within the apparent scope of his authority binds the principals, unless the agent is in fact unauthorised to do that particular act and the person with whom he is dealing is aware that the agent in doing as he does is exceeding the authority given by the principal." The learned counsel for the respondent also cited Lloyd v. Grace, Smith and Co., 1912 AC 716, where the managing clerk of a firm of solicitors in England was authorised to receive deeds and carry trough sales and conveyances. In the course of his employment he received a mortgage deed from a widow which was bequeathed to her with instructions to dispose of the same and give the proceeds to her. The managing clerk taking advantage of his position and opportunity, took two documents from her authorising him to transfer the mortgage deed to himself purporting to be in consideration of the money paid to her.

He also gave her a receipt for her deeds in his own name. When the fraud was discovered she commenced an action against the company where the managing clerk was employed. The House of Lords held when the managing clerk had authority to receive the deeds, to issue receipt, and to deal the transactions and to do the conveyances, he was acting within the scope of his authority and a third party dealing in good faith with such a managing clerk who has apparent authority binds the company.

9. All these cases cited above establish two principles. One is that the well established principle that strangers are entitled to assume that all things connected in the transactions and pertaining to the internal management of the company have been validty done hag no application to fraud and forged instruments, as forged instruments are simply null and void. The other principle is: A secretary is a mere servant. His position is that he has to do what he is told and no person can assume that he has any authority to represent anything at all.

If the secretary is shown to have either express authority to perform certain acts or implied authority by a course of dealing the company would be liable. In other words, if he is acting within the scope of his authority, the actions of the secretary will bind the company, even if done tortiously or fraudulently and even though they enure not for the company's benefit but for the secretary himself.

10. These established rules and principles will equally apply whether in the Law of Agency, Or in Law of Master and Servant.

11. In Gower's Modern Company Law, at page 157, the learned author has put the whole proposition of law in a nutshell thus:

"If a document purporting to be sealed by or signed on behalf of the company is proved to be a forgery, it does not bind the company. But the company may be estopped from disclaiming the document as a forgery if it has been put forward as genuine by an official acting within his actual, usual or apparent authority and if a transaction is binding on the company under the foregoing rules the company will be liable notwithstanding that the official has acted fraudulently or committed forgery."

Similarly Bowstead in his well known book A Digest of the Law of Agency has stated under Article 82;

"No principal is bound by any act of his agent which is not done within the agent's actual or implied authority unless the principal in fact authorised the agent to do the particular act."

12. In Smith's Law of Master and Servant" the learned author states the rule thus at page 229:

"A person may be liable for a fraud committed by his agent or servant, if the agent or servant committed it while acting within the scope of his authority, while doing, and purporting to do, something on behalf of his employer although in doing it he commits a wrong which his employer neither sanctioned nor intended.

But if the agent or servant is not acting or purporting to act for his employer, the fraud cannot "be treated as the fraud of the employer."

13. Now we have to consider whether in the light Of the above principles the Bank is liable. According to the bye-laws of the bank, in the case of non-members, deposit receipts should be issued by at least four members of the Board of Directors of whom the president shall be one. The respondent is not a member of this Co-operative Urban Bank. The secretary was not a Director at anytime. Though it was brought to our notice that subsequently bye-law 25 was amended thereby authorising the secretary along with four members of the Board of directors to issue deposit receipts, there is nothing on record to show that after the amendment the secretary was co-opted as a director Or appointed as a director of the petitioner bank.

We do not know whether the bye-law was amended either before or after the suit. Therefore, according to the bye-laws of the bank, the secretary has no right nor even apparent authority nor ostensible authority to issue fixed deposit receipts to a non-member. The fact that the deposit receipt is in the proper form and delivered by the secretary in the ordinary course of duty does not operate as a representation of genuineness and estop the bank from denying its validity. The directors of the bank do not hold the depositors the duty of adopting unusual precautions to discover whether or not such employees or agents are doing their duty or perpetrating frauds.

In any event, the secretary is not authorised or empowered to issue deposit receipts as per the provisions of the bye-laws framed by the petitioner bank. While isuing the fixed deposit receipts to the respondent, the secretary is not acting within his authority or in the course of his employment or within the scope of his agency. The secretary in this case exercised or purported to exercise an authority to bind the bank by committing a fraud and thereby he acted outside the scope of his ordinary ostensible authority.

When he has no such authority, the deposit receipt signed by him is only a waste paper. Further, he has forged the signature of the directors and thereby committed a fraudulent act-Certainly the fraudulent act of the secretary of the bank would not bind the bank. Though the learned District Munsif gave a finding that the fixed deposit receipts were not genuine, still he was of the view that as the secretary was authorised to receive the money, the petitioner bank should be held responsible. We think that this is not a correct view according to law and according to the bye-laws of the bank.

We hold that the fixed deposit receipts bearing No. 1293 for a sum of Rs. 2300 and No. 1192 for a sum of Rs. 550 issued by the Secretary are not valid receipts and they are not binding on the petitioner bank. The learned District Munsif has also given a finding that in any event the bank is liable to pay for the fixed deposit of Rs. 1000 as found in the account books of the bank under the heading F. D. No. 1293 dated 24-1-1955. We agree with him.

14. In the result, we set aside the judgment and decree of the learned District Munsif and de clare that the plaintiff is entitled to interest on the fixed deposit of Rs. 1000 above referred to. The suit is otherwise dismissed. No costs. Order accordingly.


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