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Nellai Metal Rolling Mills (P) Ltd., Through Its Managing Director Vs. the Southern India Central Benefit Fund (P) Ltd., by Its Managing Director, A.S. Rangaswami - Court Judgment

LegalCrystal Citation
SubjectCompany;Civil
CourtChennai High Court
Decided On
Reported in(1986)1MLJ370
AppellantNellai Metal Rolling Mills (P) Ltd., Through Its Managing Director
RespondentThe Southern India Central Benefit Fund (P) Ltd., by Its Managing Director, A.S. Rangaswami
Cases ReferredS.F.Chit Fund v. Abdul Rahman
Excerpt:
- - the chit commenced on 15.8.1983 and the date of the termination of the chit was 15.11.1976. the defendant company, at the sixth instalment on 17.1.1974 bid and became the prized subscriber and collected the prize amount on 11.2.1974 and a chit promissory note was executed by the then managing director as well as another director of the defendant company, namely, m. the consideration of these pronouncements has brought to light authorities of this court itself, which clearly indicate that & chit transaction is in essence a loan of the common fund to one member, the member being a person who offered the highest discount. the reasoning which weighed with the learned judge of the andhra pradesh high court could hold good only for rendering a decision which the learned judge was called.....s. nainar sundaram, j.1. the defendant company in o.s. no. 103 of 1978 on the file of the first additional subordinate judge, tirunelveli, is the appellant in this appeal. the respondent is the plaintiff in the suit. though the controversy raised has got mostly the tinge of legality, yet, the necessary facts of the case have got to be set out. the plaint proceeds as follows:the plaintiff carries on chit fund business in tirunelveli town. the defendant company enrolled as subscriber no. 34 in respect of the chit registered under m.c. no. 625/13. the capital was rs. 25,000 and the subscription was rs. 625 per month to be paid in forty instalments. the chit commenced on 15.8.1983 and the date of the termination of the chit was 15.11.1976. the defendant company, at the sixth instalment on.....
Judgment:

S. Nainar Sundaram, J.

1. The defendant company in O.S. No. 103 of 1978 on the file of the First Additional Subordinate Judge, Tirunelveli, is the appellant in this appeal. The respondent is the plaintiff in the suit. Though the controversy raised has got mostly the tinge of legality, yet, the necessary facts of the case have got to be set out. The plaint proceeds as follows:

The plaintiff carries on chit fund business in Tirunelveli Town. The defendant company enrolled as subscriber No. 34 in respect of the chit registered under M.C. No. 625/13. The capital was Rs. 25,000 and the subscription was Rs. 625 per month to be paid in forty instalments. The chit commenced on 15.8.1983 and the date of the termination of the chit was 15.11.1976. The defendant company, at the sixth instalment on 17.1.1974 bid and became the prized subscriber and collected the prize amount on 11.2.1974 and a chit promissory note was executed by the then Managing Director as well as another Director of the defendant company, namely, M. Ramasubramaniam and M. Lakshmanan respectively, on 11.2.1974 by way of collateral security for payment of future subscriptions amounting to Rs. 25,052.37. The defendant company paid upto the eighth instalment and from the ninth instalment, which fell due on 15.4.1974, the defendant company committed default. As a result and as per the terms of the transaction, the defendant company became liable to pay all the future subscriptions from the ninth to the fortieth instalment, amounting to Rs. 20,000 in a lump sum with interest at the rate of 12 per cent per annum from the date of default. The following amounts were paid by the defendant company:17. 5.1975 . . Rs. 2,000/-30. 5.1975 . . Rs. 1,000/-27. 5.1975 . . Rs. 9,375/-9. 8.1975 . . Rs. 600/-2.10.1975 . . Rs. 1,200/-

The balance payable by the defendant company is Rs. 11,801.03. The plaintiff issued a notice through counsel, which was received by the defendant company on 1.4.1978. The defendant Company sent a reply on 8.4.1978, putting forth untenable contentions. The plaintiff wants recovery of the amounts due.

2. The defendant company contested the suit, putting forth various contentions, and the gist of the relevant contentions may be summarised as follows:

The transaction was ultra vires the powers of the Directors of the defendant company, because the transaction did not have the backing of a requisite resolution passed in the meeting of the Board of Directors. The documents purporting to evidence the transaction were not executed for and on behalf of the defendant company. The defendant company has not been given credit of the dividends out of the amounts of discount from the ninth to the fortieth instalment. The court below framed as many as seven issues and assessed the evidence, oral and documentary, placed by the parties and ultimately it countenanced the case of the plaintiff except with regard to its claim for interest from 15.4.1974. The court below allowed the plaintiff interest only from 1.4.1978, the date of acknowledgement by the defendant company of the notice issued by the plaintiff. The court below granted a decree in favour of the plaintiff as per its findings. This appeal is directed against the judgment and decree of the court below.

3. Mr. V.Shanmugham, learned Counsel for the defendant company, appellant herein, would develop and project the legal contentions, to covet interference in appeal at the hands of this Court. It would be convenient if I take up the contentions put forth by the learned Counsel for the defendant company, one by one. The first contention advanced by the learned Counsel is that the defendant company, which is a company governed by the Companies Act I of 1956, hereinafter referred to as the Act, had no power to enter into a chit transaction and hence, the suit transaction is ultra vires the powers of the defendant company itself. In answer, Mr.T.R. Mani, learned Counsel for the plaintiff, respondent herein, would submit that Ex.B-1 is the certified copy of the Memorandum of Association of the defendant company and, as per Clauses 14 and 24 found therein, there is power for the defendant company to borrow and raise money and to issue promissory notes. Clauses 14 and 24 of the Memorandum of Association read as follows:

14. To borrow or raise money, with or without security, or otherwise, in such manner as the company may think fit..

*** ****24. To open banking accounts and to draw, accept, make, endorse, discount, execute and issue cheques, promissory notes, bills of exchange, bills of lading, warrants, debentures and other negotiable or transferable instruments.

There cannot be any dispute that the Memorandum of Association of a company is its charter defining the objects of its existence and operations, and it is ultra vires for a company to act beyond the scope of its Memorandum of Association. Mr. V. Shanmugham, learned Counsel for the defendant company, does not dispute that the Memorandum of Association did authorise the borrowing or raising of money, but what the learned Counsel states is that entering into a chit transaction would not amount to borrowing or raising of money and hence, such a transaction must be held to be ultra vires the powers of the defendant company. In support of his submission, learned Counsel relies on two pronouncements, one of a single Judge of the Andhra Pradesh High Court and the other of a Bench of the Kerala High Court. The consideration of these pronouncements has brought to light authorities of this Court itself, which clearly indicate that & chit transaction is in essence a loan of the common fund to one member, the member being a person who offered the highest discount. These authorities are binding on me. The two pronouncements relied on by the learned Counsel for the defendant company are also distinguishable and need not necessarily be taken note of to decide the question which has been directly raised in this case, as to whether entering into a chit transaction and getting the bid amount by participation therein would amount to borrowing or raising of money.

4. Scotland, C.J. and Freer, J. in Kamakshi Achari v. Appavu Pillai (1863) 1 M.H.C.R. 48 summed up the core of the chit transaction by observing -

It is simply a loan of the common fund to each subscriber in turn.

5. In Vaithinatha Iyer v. Govindasami Odayar : AIR1921Mad650 the learned Judges viewed the advance to the successful bidder at an auction as a loan to him, for they observed:

The subscription at each of these intermediate instalments was available for loan to the successful bidder at the auction, which was held every six months, the successful bidder being the bidder who offered to accept the lowest proportion of the total subscription.

6. Ananthakrishna Ayyar, J. in Kunju Nair v. Narayanan Nair : AIR1933Mad252 held that the transaction was in essence a loan of a common fund to one member and that it was,

a debt in praesenti to be paid by particular instalments if certain conditions be 'duly observed, but otherwise to be paid up at once irrespective of the benefit of time and instalments.

7. In Kannan v. Subramania (1946) 2 M.L.J. 927 : I.L.R. (1941) Mad. 486 : 52 L.W. 857 : A.I.R. 1941 Mad 231, a Bench of this Court, consisting of Wadsworth and Patanjali Sastri, JJ. accepted the contentions of the judgment-debtors in that case that a subscriber after he bid for and received the amount at an auction was only a borrower of the sum received in the following terms:

Learned Counsel for the judgment-debtors, on the other hand, contends that whatever might be the position with regard to the liability of a subscriber to pay the instalments of his subscription to the kuri before he bids for and receives the amount at an auction, he can thereafter be regarded only as a borrower of the sum received less the instalments already paid by him, undertaking to repay the loan in instalments that still remain to be paid, and the liability under the security bond which he executes for the due payment of such instalments is a debitum in praesenti solvendum in futuro, incurred on 'the date of bond itself. The question is one of some difficulty not the least part of which arises from the somewhat conflicting decisions dealing with these peculiar kuri transactions which are so common in some parts of this Presidency. On the whole however we are of opinion that the judgment-debtors' contention is supported by a preponderance of authority and must be accepted....

As the authorities supporting the above view, the Bench referred to the three pronouncements cited above.

8. In Sri Visalam Chit Funds Ltd. v. P.N. Srinivasa Mudaliar (1975) 88 L.W. 415 a Bench of this Court, consisting of Ramaprasada Rao, J. as he then was, and Maharajan, J. observed as follows:

For a considerable time ranging beyond a century, chit fund transactions were resorted to as a means to earn profit and incidentally to save. The engagement between a stake-holder and a chit fund subscriber is special and has a distirict connotation. The stake-holder, throughout the period of the chit acts as a sentinel he having taken the sole responsibility for being answerable to all the subscribers as between whom there is no link, contractual or otherwise....

When a subscriber bids at an auction and becomes the lowest bidder entitling him to be recognised as the successful bidder and takes the bid amount after executing the usual document along with a surety, his debt to the chit fund is solved in praesenti but solvendum in futuro according to the terms of the arrangement reflected in the document contemporaneously executed by him.

The learned Judge referred to the earlier pronouncements in Kamakshi Achari v. Appavu Pillai (1863) 1 M.H.C.R. 448; Vaithinatha Iyer v. Govindaswami Odayar : AIR1921Mad650 and Kunju Nair v. Narayanan Nair (1963) 65 M.L.J. 29 : A.I.R. 1933 Mad. 252 and an unreported judgment of Ganesan, J. in Bathma Industrial and Finance Private Limited v. Rajammal C.R.P. No. 717 etc of 1971.

9. N.S. Ramaswami, J. in M. Abdul Aziz v. Yasodammal (1978) 91 L.W. 223, held that a decree debt, which arose under a chit transaction, is a debt as defined under Section 2(2) of Tamil Nadu Act 38 of 1972, following the pronouncement of the Bench in Sri Visalam Chit Fund Ltd. v. P.N. Srinivasa Mudaliar (1975) 88 L.W. 415 that there is an element of borrowing in a chit transaction. In view of this pronouncement of the Bench, the learned Judge did not follow the view of Suryamurthy, J. in Arunagiri Chit Fund v. Md. Hanafi (1976) 89 L.W.687 that the purchase of a chit in auction gives rise to a liability, which is not a 'debt' within the meaning of the word 'debt' as defined in Section 2(c) of Tamil Nadu Act 15 of 1976, or as defined in Section 2(1) of Tamil Nadu Act 16 of 1976.

10. Jeevan Reddy, J. in Margadarsi Chit Fund P. Ltd. v. Jogi Krishna Murthy (1981) 51 Comp. Cas. 399 had occasion to consider the question as to whether the amount due in respect of a chit fund transaction is a 'debt' and whether a chit fund company and the subscriber can be called 'creditor' and 'debtor' respectively, as defined by the Andhra Pradesh Agricultural Indebtedness (Relief) Act, 1977, so as to treat it as having had abated and got extinguished. The reasoning which weighed with the learned Judge of the Andhra Pradesh High Court could hold good only for rendering a decision which the learned Judge was called upon to do in that case and I am afraid, the ratio decidendi in that decision cannot be imported for the purpose of considering the question arising in the present case, namely, whether the entering into a chit transaction as it happened in the present case, and the liability arising thereon would not amount to borrowing and raising of money and the incidence arising thereupon. The expressions 'creditor', 'debt' and 'debtor' occurring in the Andhra Pradesh Act were considered to hold that the relationship between the stake-holder/foreman and the subscriber is not that of a creditor and debtor. The learned Judge referred to and relied on an earlier pronouncement of a Bench of the same High Court in Dhoosa Narsimloo v. Yalala Rajanna (1958) 2 An.W.R. 5.

11. Subba Rao, C.J. as he then was, and Srinivasachari, J. in Dhoosa Narasim-loo v. Yalala Rajanna (1958) 2 An.W.R.5 had occasion to consider as to whether the amount drawn by a member of a chit fund, who bids at the periodical auction, giving the largest discount can come within the definition of a loan within the meaning of the Hyderabad Money Lenders Act, and as to whether such a transaction could be regarded as a money-lending transaction. While giving the answers in the negative, the Bench of the Andhra Pradesh High Court assessed the nature of the chit fund organisation in the following terms:

The chit fund organisation, as is well-known, is an organisation of a number of people who join together and subscribe amounts monthly so that that person or the subscriber who is in need of funds may draw the amount less discount. It is an organisation run on a co-operative basis for the benefit of the subscribers, the funds to be utilised by them as and when a particular subscriber needs it. It is to help thirty persons to invest their savings with good chances of profit.

The following observations were also made indicating that there is no relationship of creditor and debtor between the stakeholder and a subscriber:.Looked at from another point of view also the Chit Fund transaction cannot be regarded as a loan transaction. A loan envisages the relationship of a creditor and a debtor in so far as the lender and the borrower are concerned. There cannot be the 'relationship of creditor and debtor between the stake-holder and a subscriber, in a Chit Fund transaction. If the stakeholder advances any amount he advances only to one of the members, the funds of the whole body of the Chit Fund, as the funds belong to the whole lot of the subscribers, the members; borrower is as much a creditor as a debtor. The amounts are in deposit with the stake-holder only as a trustee for the benefit of the members of the fund.

As pointed out above, the ratio decidendi of these pronouncements could not be availed of to decide the question which is being raised by the learned Counsel for the defendant company. I am not called upon in this case to decide a question as to whether the money which gets disbursed on a subscriber bidding successfully in an auction is a debt as between him and the stake-holder/foreman, assuming the character of debtor and creditor within the meaning of any special statute, according reliefs to specified individuals, or dealing with matters akin to such subjects. So far as the pronouncements of this Court are concerned, they have leaned to hold that even such a transaction would amount to a debt and the relationship of debtor and creditor will evolve between the concerned subscriber and the stake-holder/foreman. Vide M. Abdul Aziz v. Yasodammal (1978) 91 L.W.223.

12. With regard to chit transactions as such, the pronouncements referred to above are uniform in holding that there is definitely the element of advancing from the common fund. May be the money advanced is not the money of the stake-holder/ foreman. Even the pronouncements of the Andhra Pradesh High Court do recognise this feature of advancing from the common fund in a chit transaction. That would suffice the purpose of this case. When a subscriber bids at an auction and obtains the amount, he receives it only as a loan from the common fund, undertaking to repay as per terms and conditions agreed upon. This implication is certainly present, according to the pronouncements referred to above, though with regard to the nature of the relationship between the stakeholder/foreman and the subscriber, there seems to be some discord. Hence, I have to hold that when a subscriber to a chit transaction bids at the auction successfully for a discount and takes the amount, there is a borrowing from the common fund, which borrowing has got to be wiped out as per stipulations mutually agreed upon.

13. The second pronouncement relied on by the learned Counsel for the defendant company is the one reported in Narayana Prabhu v. Janardhana Mallan A.F.R 1974 Ker. 108. There, the question arose this way. A security bond was executed by a Hindu father for payment of all future kurichit subscriptions. There was no default of the subscriptions on the relevant date. While so, he effected an alienation of the properties, directing discharge of the future subscriptions. The question arose as to whether the transaction can be supported on the ground of antecedent debt of the father. The incidence of a kurichit transaction was traced by Subramanian Poti, J. as he then was, who constituted the Bench along with Bhaskaran, J. as he then was, and it was held that a security bond executed for the payment of future instalments cannot be said to be for an antecedent debt. Here again, I do not feel obliged to adopt the reasoning of the Bench of the Kerala High Court, because the question arose in a different context and to solve a different controversy. The Bench of the Kerala High Court was not concerned with the question as to the powers of the company to borrow or riase money as such. The present question never arose before the Bench of the Kerala High Court. The present question is more concerned with the power of the company to borrow or raise money and as to whether entering into a chit transaction could be a means for borrowing or raising money. I must also point out that the Bench of the Kerala High Court declined to follow the ratio decidendi of the Bench of this Court in Kannan v. Subramania : AIR1941Mad231 . But, I stand bound by the said ratio.

14. When the defendant company successfully bid at the sixth instalment on 17.1.1974 and obtained the prize amount subsequently on 11.2.1974, the transaction did culminate in borrowing and the present suit as such is only to enforce the obligations arising thereupon and as per the terms and conditions agreed to, and the defendnat company cannot get rid of the liability on the ground that there is no specification about the methodology of borrowing or raising money in the Memorandum of Association. As per the extract of Clauses 14 and 24 of the Memorandum of Association, there is a power to borrow and raise money. One method of raising money is entering into an arrangement with a chit fund organisation, whereby a number of individuals or concerns join together and contribute subscriptions periodically, and further facilitate a member who is in need of finance at a particular point of time to withdraw the funds by means of bidding at the auction at a discount. This is exactly what did happen in the instant case. Learned Counsel for the defendant company would contend that at the time of entering into an arrangement, thrift could have been the motive. This is purely a desperate and at the same time a futile after-thought. It was not claimed before the Court below or at any point of time earlier that the chit transaction was entered into by the defendant company for any such purpose. In any event, the purpose got exemplified, brought to light and got served when actually the money was raised by successfully bidding at the sixth instalment and obtaining the prize amount. If by entering into the chit transaction the defendant company raised money, it cannot be said that the transaction was entered into without any power therefor reserved in the Memorandum of Association. In this view, I have to eschew the first contention put forth by the learned Counsel for the defendant company.

15. Secondly, Mr. V. Shanmugham, learned Counsel for the defendant company, would contend that the suit transaction was ultra vires the powers of the Directors of the defendant company. Expatiating this contention, learned Counsel would submit that Section 292(1)(c) of the Act contemplates that the Board of Directors of a company shall exercise the power of borrowing only by means of a resolution passed at the meeting of the Board and in the present case, for the support of the suit transaction there is no resolution of the Board of Directors of the defendant company. Learned Counsel would also draw my attention to Article 35 of the Articles of Association of the defendant company, a certified copy of which has been marked as Ex.B-2, which requires approval by the Directors for raising or borrowing money. The said clause reads as follows:

35. The Directors, may from time to time, raise or borrow any sums of money, for and on behalf of the company from Governments, or members, or other persons, companies or banks or any one or more directors on such interest as may be approved by the Directors.

To project a factual support for this contention, learned Counsel relies on Ex.B-7, the Minutes Book of the defendant company for the period 1.6.1973 to 15.5.1975 to show that no such resolution authorising the Directors of the defendant company, to enter into the suit transaction was passed. That Ex.B-7 does reflect the above factual position is not in dispute, but in my view, that need not be given undue significance, because if in fact, the defendant company received and enjoyed the benefits of the suit transaction even though it suffered the infirmity of lack of a resolution by the Board of Directors, then the plaintiff, which is claiming its dues on the basis of such transaction need not be denied the right to recover the dues. This aspect shall be shortly adverted to. Further Mr. T.R. Mani, learned Counsel for the plaintiff, relies on the rule in Royal British Bank v. Turquand (1856)6 E and B 327 to state that even if there was a lack of the requisite resolution of the Board of Directors, the plaintiff could go by the presumption that all matters of internal management had been done regularly and the Directors of the defendant company must be deemed to have had acted within their powers. According the rule in Royal British Bank v. Turquand (1856) 6 E and B 327..While persons dealing with a company are assumed to have read the public documents of the company and to have ascertained that the proposed transaction is not inconsistent therewith, they are not required to do more; they need not inquire into the regularity of the internal proceedings what Lord Hatherley called in Mahony v. East Holy ford Mining Co. (1875) L.R.7 H.L.869 'the indoor management' and may assume that all is being done regularly Omnia Praesumuntur Rite Ac Solemniter Esse Acta.

If this rule is to be applied, then, the plaintiff need not suffer with regard to its claims on the basis that while obtaining the loan or raising the money, there was in fact a lack of resolution by the Board of Directors of the defendant company sanctioning the same, which is mostly connected with the indoor management, and the plaintiff could be held to have acted on the assumption that all acts had been done regularly. A stranger dealing with a company has a right to assume, as against the company, that all requirements of internal management have been duly complied with. This was clearly laid down in a number of decisions beginning from Royal British Bank v. Turquand (1856) 6E and B 327 and such cases as Totterdell v. Fareham Blue Brick and Tils Co. (1866) L.R.1 E.P.674, In re Romford Canal Co. (1883) 24 Ch. D. 85, Montreal and St. Lawrence Light and Power Co. v. Robbert (1906) A.C. 196 and in the more recent decision of the House of Lords in Morris v. Kanssen (1946) A.C. 459. This ratio and the above pronouncements have been adverted to by P.B.Mukharji, J. in Shri Kishan Rathi v. Mondal Brothers and Co. (P) Ltd. (1967) 37 Comp. Cas. 256.

16. However, Mr. V. Shanmughan, learned Counsel for the defendant company, would submit that one of the exceptions to the rule in Royal British Bank v. Turquand (1856) 6 E and B 327, is that if a person is put upon enquiry, he cannot claim the benefit of the said rule, in the circumstances under which he would have discovered the irregularity if he had made the proper enquiries. In this connection, learned Counsel for the defendant company would draw my attention to the evidence of P.W. 1, who was the Accountant of the plaintiff. But from his evidence, it is not possible to say that the plaintiff did have knowledge of the feature or should or could have discovered this. P.W. 1 deposed that when he enquired as to whether the Directors had got the right to sign, the answer was given in the affirmative; he was informed that there was a resolution of the defendant company for joining the chit transaction and that M. Ramasubramania Iyer informed him that he has got authority to do so; but no copy of such authority was produced. Certainly this evidence does not make out that there was in fact a knowledge on the part of the plaintiff about the lack of the requisite resolution or there was lack of proper enquiry. This is not a case of fraud or collusion between the concerned Directors of the defendant company and the plaintiff. P.W. 1 did made enquiries and nothing suspicious seemed to have had been brought to his notice, and there was nothing wrong in taking the word of the Directors in this behalf, in the absence of fraud or collusion.

17. I would have been attracted to dwell over this controversy much more, but for one clinching factor which speaks against the defendant company and dissuades the Court from countenancing this argument to negative the claims of the plaintiff. Assuming that the Directors of a company have indulged in borrowing or raising money without authorisation by means of the requisite resolution, yet, the company cannot escape its liability to repay, if in fact, the benefit of the transaction reached the company as such. Before coming to the facts of the present case, which do demonstrate that the defendant company was benefited by and did enjoy the benefits of the suit transaction, I would like to recapitulate the principle to be countenanced in this behalf. The Directors are the agents of the company. Where acts were done by the agent on behalf of the principal, but without the requisite authority in this behalf, the principal by his conduct may ratify such acts. This is what is called as implied ratification. Accepting the results and benefits of the agent's acts or proceedings would amount to ratification and the principal will be bound as if the acts and the proceedings of the agent were effected with the principal's authority. If an agent who did not have the authority to borrow, did borrow and the benefits of the borrowing reached and were enjoyed by the principal and further in due acceptance and recognition of the liability thereunder, the principal did make payments towards discharge of the borrowing, the principal must be held bound by the transaction. In T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon Co. Ltd. (1936) 6 Comp. Cas. 90 it was held that under the general principle of law when an agent borrows money for a principal without the authority of the principal, but if the principal takes benefit of the money so borrowed or when the money so borrowed has gone into the coffers of the principal, the law implies a promise to repay. In that connection it was further observed that there appears to be nothing in law which makes this principle inapplicable to the case of a joint stock company and even in cases where the directors or the managing agent had borrowed money without there being authorisation from the company, if it has been used for the benefit of the company, the company cannot repudiate its liability to repay. The aforesaid view of Kania, J. of the Bombay High Court expressed in connection with a liquidation proceeding was also affirmed by a Bench of that Court, on appeal, and it was pointed out by Beaumont, C.J. that distinction has to be drawn between the cases where the borrowing is ultra vires the directors and not ultra vires the company and in such cases the money could be recovered in an action for money had and received. The aforesaid judgment was also affirmed by the Privy Council in the case of T.R. Pratt (Bombay) Ltd. v. M.T. Ltd. (1938) 8 Comp. Cas. 137.

18. In Kumar Krishna Rohatgi v. State Bank of India (1980)50 Company Cases 722, a Bench of the Patna High Court countenanced,

Under the general principle of law, when an agent borrows money for a principal without the authority of the principal, but the principal takes the benefit of the money so borrowed or when the money so borrowed has gone into the coffers of the principal, the law implies a promise to pay by the principal. There is nothing in law which makes this principle inapplicable to the case of a joint stock company. In cases where the directors or the managing agents borrow money without there being authorisation from the company, if the money has been used for the benefit of the company, the company cannot repudiate its liability to repay.

The Bench of the Patna High Court placed reliance on the pronouncement in T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon and Co. Ltd. (1936) 6 Comp. Cas. 90.

19. In the present case, we are not dealing with absolute lack of power to borrow on the part of the defendant company. I have dispelled the first contention put forth by the learned Counsel for the defendant company that such a power was lacking on the part of the defendant company and the suit transaction is ultra vires the powers of the defendant company. It is true that the said methodology or procedure has found expression in statute law, namely, Section 292(1)(c) of the Act when it contemplates that the power to borrow moneys otherwise than on debentures shall be done only by means of a resolution passed at the meeting of the Board of Directors. But, if it is found that the benefit of the suit transaction, did reach the defendant company and the defendant company was benefited by it and further made payments in acknowledgement of its liability, then it cannot absolve itself from its obligations to honour its liability under the suit transaction by projecting this technical plea that the suit transaction lacked the authorisation in the form of a resolution, as contemplated under Section 292(1)(c) of the Act.

This is very sound principle which has found countenance in the general field of contract and I find no acceptable reason to take it out of the field, merely because the party who stood benefited by the transaction happens to be a company within the meaning of the Act. I am of the view that this principle must govern wherever a company received and enjoyed the benefit of a transaction, even though it suffered certain infirmities in the eye of law, as contended in the present case.

20. The facts of the present case do disclose that the defendant company received the benefit of the suit transaction, enjoyed the same and repaid portions of the dues. There was an exchange of notices prior to the institution of the suit. The demand was put forth by the plaintiff as per the original of Ex.A-5, acknowledged by the defendant company on 1.4.1978. The defendant company sent the reply as per Ex.A-7 dated 8.4.1978. In paragraph 1 of this reply, it has been stated as follows:. It is also true that my client subscribed for one ticket therein and at the auction held on 17.1.1974, the date of the sixth instalment, my client took the chit in auction and received the prize amount. It is also true that my client paid up to and inclusive of 8th call.

It was never claimed in this reply notice that the benefits of the suit transaction did not reach the defendant company. Even in the pleadings, the defendant has not put forth any stand to this effect. In the written statement it is not claimed that the benefits of the suit transaction never reached the defendant company. The defendant company did repay part of the dues on five occasions as hereunder:

17.5.1975 Rs. 2,000/-30.5.1975 Rs. 1,000/-27.6.1975 Rs. 9,375/-9.8.1975 Rs. 600/-21.10.1975 Rs. 1,200/-Rs. 14,175/-

There was a change in the management of the defendant company, and even thereafter on 9.8.1975, a sum of Rs. 600 was paid and this was accompanied by the letter dated 8.8.1975, Ex. A-4 signed by the present Managing Director, examined as D.W.I. This payment was by cheque and the request was to credit the amount and to send the receipt. There was no expression of any grievance that the benefit of the suit transaction did not reach the defendant company. If in fact this was the true position, the conduct and the reaction of the defendant company would be otherwise. D.W.I. the present Managing Director of the defendant company, offers his explanation that both in the reply notice and in the written statement, the defendant company admitted the receipt of the money and the payment of portions of the dues on confidence. This explanation is too puerile to be accepted and it is not clear as to who or what circumstances persuaded him to have such a confidence and how that confidence was shaken and when the truth was discovered that the defendant company was not at all benefited by the suit transaction. The defendant company did and does have accounts. D.W.I would state that he did not obtain the previous accounts from the erstwhile management, because they were not handed over to him. This is too naive an answer and it does not bring conviction to the mind of this Court with regard to the non-production of the accounts. D.W.I admits that the payments towards the dues are reflected in the accounts and they are in his custody. Even these accounts have not been produced. The only inference which the court could draw, in these circumstances, is that they would certainly reflect that the benefits of the suit transaction did reach the defendant company and it was fully exploited by the defendant company. If the principle countenanced above is applied to the facts of the present case, whatever may be the infirmity with regard to the non-obtaining of the requisite resolution, that cannot be put against the claims of the plaintiff.

21. The third contention put forth by the learned Counsel for the defendant company is that the promissory note relied on by the plaintiff, Ex.A-3 was not executed in the name of or on behalf of, or on account of the defendant compnay and hence, the plaintiff cannot rest its claim on this document and the plaintiff must be non suited on this basis, accepting this contention. Learned Counsel for the defendant company would submit that the promissory note, Ex. A-3 has been signed only by Mr. Ramasubramaniam, who was then the Managing Director of the defendant company and another Director of the defendant company by name M. Lakshmanan and their signatures are not under the seal of the defendant company. Learned Counsel would further state that in Ex. A-3 M. Ramasubramaniam is being described as the person who is running the defendant company as well as doing business in vessels; and M. Lakshmanan is being described as the person who is doing business in partnership with M. Ramasubramaniam. That the above features are found in Ex. A-3 promissory note cannot be disputed. However, Mr.T.R. Mani, learned Counsel for the plaintiff, would place reliance on a pronouncement of V.Ramaswami, J. in P. Rangaswami v. R. Krishnaswami : AIR1973Mad251 to state that the description found in Ex.A-3 would suffice the purpose and it need not be put to a stringent test to find out as to whether the persons who signed the same have not purported to act in the name of or on account of, or on behalf of the defendant company. In my view, there is no need to go into this aspect, because as further contended by the learned Counsel for the plaintiff, the suit is not based on the promissory note, Ex.A-3 but it is based on the chit transaction as such which culminated in the defendant company successfully bidding at the sixth instalment on 17.1.1974, and the promissory note Ex.A-3 was only taken as a collateral security and nothing more. A cogent reading of the plaint leaves no room for ambiguity in the mind of the Court that the suit is not solely based on the promissory note Ex.A-3. Even the claims in the plaint are not based on and are not referable to the promissory note, Ex.A-3 as such. The claims have been made for the amounts due from the ninth instalment to the fortieth instalment, of course, giving credit to the amounts paid subsequently. Hence, on the simple ground-assuming that it is factually tenable -that Ex. A-3 promissory note does not purport to have been executed in the name or on behalf of, or on account of the defendant company, it is not possible to non-suit the plaintiff, whose cause of action does not solely rest on the promissory note, Ex.A-3. The basis for the suit claim is the chit transaction itself.

22. The fourth contention put forth by the learned Counsel for the defendant company is that his client ought to have been given credit of the dividends for the instalments which fell due after the eighth instalment and in fact credit has not been given to the defendant company in this behalf. It is true that Clause 5(2) of the agreement contemplates disbursement of dividends after deduction of the commission due to the foreman at every bid. But a defaulting subscriber, who has defaulted in the payment of subscriptions due according to the terms of the chit agreement, cannot expect and insist for the payment of dividends. The rights and obligations under the chit transaction have a mutuality. The chit agreement sets out the rights and obligations of parties thereto, under which the chit is to be run and is agreed to be run by every one of the subscribers. Only if the subscriber, be he so a prized subscriber or non-prized subscriber, continues to pay the subscriptions due, which payment is an essential term of the chit agreement according to the chit agreement and which would be performance of his part of the essential obligations under the chit agreement, he could insist upon the disbursement of dividends as per the chit agreement. When there is a failure or breach on the part of the subscriber to fulfil his part of the obligations in this behalf, which are essential indeed, under the terms of the chit agreement, he cannot insist for the performance and discharge of the counter-obligations of the payment of dividends. This is the well accepted general principle traceable to the law of contracts and performance thereof and I feel obliged to apply the same to the present case. This is not a case where forfeiture of the earned dividends is being asked for. Such a forfeiture has been discountenanced by the Bench in Sri Visalam Chit Funds Ltd. v. P.Srinivasa Mudaliar (1975) 88 L.W. 415 and by V.Ramaswami, J. in S.F.Chit Fund v. Abdul Rahman : AIR1978Mad160 . But, that proposition has no application to the facts of the present case. As stated above, when the obligations are mutual and when there is a default on the part of one party in discharging his obligations, which are essential in nature, he cannot insist for the performance of the obligations of the other party under the agreement. Hence, the claim of the defendant company for dividends even after it committed default after eighth instalment, is not tenable and has got to be rejected.

23. The above discussion practically disposes of the points raised by the learned Counsel for the defendant company and as such, the appeal deserves dismissal and accordingly, the same is dismissed.

24. However, I find that there is a memorandum of cross-objections preferred by the plaintiff with regard to the disallowance of interest as claimed by it. The plaintiff has claimed interest from 15.4.1974, giving credit to the amounts paid. But, with regard to the period before the filing of the suit, the contract between the parties must govern and as per Clause 11 of the Rules, which are part and parcel of the chit agreement, Ex.A-1 for the instalments in respect of which default is committed, the plaintiff is entitled to interest at 12 per cent per annum. In my view, this must govern from the date of the first default, namely, the date of the ninth instalment being 15.4.1974. The plaintiff would be entitled to interest from the ninth instalment upto the fortieth instalment from the respective dates when they became due, at the rate of 12 per cent per annum, till the date of suit. Due credit should be given to the various amounts paid. The plaintiff would be entitled to interest on the principal at 6 per cent per annum from the date of the suit till date of realisation. The memorandum of cross-objections filed by the plaintiff is allowed in the above terms and the decree of the Court below will stand modified to the above effect and extent.

25. The plaintiff, respondent in the appeal, is entitled to costs. However, I disallow costs in the Memorandum of Cross Objections.


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