Skip to content

The Central Bank of India, a Body Corporate Constituted Under the Provisions of Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 Represented HereIn by Its Manager, Sri S. Gopalakrishna Murthy Vs. Karnataka State Financial Corporation Represented by Its General Manager and One of Its Principal Officer, Shri S.R. Chandrashekhara Setty and Nelsa Enterprises Pvt. Ltd., a Company Incorporated Under the Companies Act, 1956 Represented HereIn by Its Managing Director, Sri Prakash V - Court Judgment

LegalCrystal Citation
CourtKarnataka High Court
Decided On
Case NumberRegular First Appeal No. 61/1997
Reported in2008(5)KCCRSN651
AppellantThe Central Bank of India, a Body Corporate Constituted Under the Provisions of Banking Companies (a
RespondentKarnataka State Financial Corporation Represented by Its General Manager and One of Its Principal of
Appellant AdvocateSriyuths Sriranga, Adv. for Sundaraswamy Ramdas & Anand
Respondent AdvocateS.V. Angadi, Adv. for R-1
DispositionAppeal dismissed
Cases ReferredIn Barclays Bank Ltd. v. Quistclose Investments Ltd.
election - counting - section 20 (a) karnataka agricultural produce marketing (regulation) act, 1966(act) - petitionercontested election -total vote cast 3530 and petitioner got 1285 vote and respondent no.3 secured 1282 vote - respondent no.1 declared respondent no.3 as winner - petitioner filed suit for cancellation of election - dismissed - writ petition - dismissed on ground that appellant did not exhaust alternative remedy of appeal - hence, present petition - whether petitioner has made out a sufficient ground for cancellation of election of respondent no. 3 as per section 20(a) of act? - held, respondent no.1 took out four ballot papers wherein votes were cast in favour of petitioner and then falsely prepared another form showing therein shortage of four votes so as to reduce.....b.v. nagarathna, j.1. this appeal filed by the first defendant is directed against the judgment and decree dated 24.08.1996 passed by the iv additional city civil judge at mayo hall, bangalore in o.s. no. 10280/1987 whereby the plaintiff's trait for recovery of a sum of rs. 7,69,280.73 is decreed with costs and current and future interest at 15% per annum.2. for the sake of convenience, the parties shall be referred to in terms of their statue before the trial court as plaintiff 'corporation', 1st defendant - 'bank' and 2nd defendant - 'company'.3. the plaintiff, karnataka state financial corporation had filed a suit against the defendant s se eking a judgement and decree of a sum of rs. 7,69,280.73 and future interest @ 15% p.a. from 27.1.1987 till the date of realisation with costs.....

B.V. Nagarathna, J.

1. This appeal filed by the first defendant is directed against the Judgment and Decree dated 24.08.1996 passed by the IV Additional City Civil Judge at Mayo Hall, Bangalore in O.S. No. 10280/1987 whereby the plaintiff's trait for recovery of a sum of Rs. 7,69,280.73 is decreed with costs and current and future interest at 15% per annum.

2. For the sake of convenience, the parties shall be referred to in terms of their statue before the Trial Court as plaintiff 'Corporation', 1st defendant - 'Bank' and 2nd defendant - 'Company'.

3. The plaintiff, Karnataka State Financial Corporation had filed a suit against the defendant s se eking a Judgement and Decree of a sum of Rs. 7,69,280.73 and future interest @ 15% p.a. from 27.1.1987 till the date of realisation with costs jointly and severally against the defendants.

4. According to the plaintiff, the second defendant which is a Private Limited Company had applied for two terra loans with the plaintiff for setting up of a Small Scale Industry at Plot No. 125/B, Boramasandra Industrial Area, Anekal Taluk, Bangalore District, for manufacture of non-metallic zip fasteners by letter dated 2.8.1982 (Ex.P.1). The plaintiff, by letter dated 4.8.1982 (Ex.P.4), wrote that the said request was under consideration. Subsequently, the plaintiff - Corporation auctioned two term-loans of Rs. 20.40 Lakh and Rs. 5.60 Lakh under communication of sanction dated 15.11.1982 (Ex.P.2) and 22.12.1983 (Ex.P.12) which were accepted by the second defendant company. Since the Company had to import Zip making machinery from Japan, for which foreign exchange to an extent of US $ 132234 was required it sought for an import licence from Government of India and opened a Letter of Credit with defendant No. 1 bank, bearing No. BLR.44/23? dated 14.11.1982. The Company requested the Corporation to issue a letter indicating its willingness and also to commit for release of the amount directly to the bank. Accordingly, the Corporation by letter dated 1.12.1982 informed that it would release Rs. 12.48 Lakh on the receipt of relevant dispatch documents, subject to certain terms and conditions, Subsequently the bank by Certificate dt.15.12.1982 (Ex.P.5) certified about the opening of the Letter of Credit by the company in favour of Murao & Co. Ltd., Osaka, Japan, for import of machinery for manufacture of 2ippers. Based on this assurance, the Corporation issued a cheque for Rs. 16,57,648/- bearing No. 640417, dt.27.9.1982, drawn in favour of the Bank, Cantonment Branch on Canara Bank, South circle, Bangalore 560001, which was utilised for retiring documents of imported machinery belonging to the Company and the Bank acknowledged the receipt of the said cheque by its letter dated 30.09.1983 (Ex.P.10).

5. Subsequently, the Company requested the Corporation for additional loan of Rs. 5.60 Lakhs. Subject to certain terms and conditions, the same was sanctioned by the Corporation by its letter dt.5.1.1984, which was accepted by the Company. This additional loan was fox the purpose of payment towards CUB ton Duties for importing the machinery from Japan and by letter dt. 19.01.1984, the bank requested the Corporation to release the additional amount, which was released by cheque bearing No. 648955 dt.30.04.1984, for Rs. 4,13,000/- and the same was credited by the bank in the account of the Company. It is the specific case of the Corporation that the said cheque was forwarded by it to the bank by its letter bearing No. KSFC/lND/AMD/(a)/ 4516R/5870, dt.30.1.1984, this amount was remitted under the said cheque for the purpose of releasing the machineries by paying the necessary Custom Duty. However, the Corporation learnt that the Bank had not got the imported machinery released from the Kochi Port. According to the Corporation, the Bank had permitted the Company to withdraw the said amount for other purposes ignoring the Corporation's specific advice and on account of disregarding of the specific advice of the Corporation by the Bank neither the Custom duty was paid, nor the said amount remained intact with the Bank, and instead several withdrawals were made by the Company through self drawn, cheques or for payment to private concerns or towards sundry expenses. According to the Corporation, due to nonpayment of Custom duty by the defendants, the Corporation had to get released the machinery of the Company after paying Custom Duty of Rs. 8,41,580.00 and demurrage of Rs. 1,23,553,73. Further it had to incur an expenditure of Rs. 3,750/- for renewing bank guarantee, a sum of Rs. 6,950/- towards insurance coverage and sum of Rs. 2,300/- for transport charges.

6. Thereafter the Corporation demanded the Bank to pay back the said amount of Rs. 4,13,000/- by its letter dt.20.7.1984 and 16.8.1984. Since the Bank did not respond to the said letter, a legal notice dated 2.7.1985 (Ex.P.15) was got issued by the Corporation to the Bank to pay a sum of Rs. 5,48,254/-, within a period of ten days from the date of receipt of notice, failing which it would initiate action against the Bank. The Bank by its reply dt.25.9.1995 (Ex.P.16), stated that it had repudiated the claim and that it was not liable to pay the said amount. On account of the said negative response of the Bank, the Corporation filed a suit seeking recovery of a sum of Rs.7,69,280.73 and future interest @ 15% p.a. from 27.1.1987 till realisation against the Bank and the Company jointly and severally.

7. The first defendant - Bank appeared in response to the suit summons and filed its written statement, contending that there was no relationship of creditor or debtor between the Corporation and the Bank and there was no privity of contract between the two parties and the suit was bad for misjoinder of parties. Further, the Bank as collecting banker had merely collected the proceeds of the cheque for crediting into its customers account and that it had no obligation towards the Corporation or the Company. It was specifically contended that the Bank could not have dishonoured any cheques drawn by the Company, so long as the funds were available in the credit of the company's account and that it had not received any covering letter when the cheque dated 30.1.1984 was sent to it by the Corporation. Therefore, there was no disobedience of any specific advise issued by the Corporation.

8. The second defendant - Company was placed ex-part by order dated 30.11.1988.

On the above pleading, the trial Court framed the following issues:

1. Whether the plaintiff proves the first Defendant colluded in violating the advise by plaintiff made to pay customs duty of Rs. 8,41,5B0/- Demurrage Rs. 1,23,553-73. Expenditure of Rs. 2,750/- and Rs. 6,950/-towaxds insurance and Rs. 2,300/- transport charges, in all Rs. 7,69,280-73 as detailed in para 8 of the plaint and there by both Defendant jointly and severally liable?

2. Whether the plaintiff proves that the corporation is entitled for 15% interest?

3. Whether the Defendant No. 1 proves that they are not liable and no relationship of debtor or creditor not concerned with default of Defendant No. 2?

4. Whether this Court has no jurisdiction to try the suit?

5. Whether the Court, fee paid sufficient?

6. What decree or order?

9. In support of plaintiff - Corporation's case, P.W.1 was examined and Ex.P.1 to Ex.P.33 were marked, while D.W.1 was examined on behalf of first defendant - Bank and no documents were marked. The trial Court on considering the pleadings and evidence on record, decreed the suit of the plaintiff against defendant No. 1 - Bank and defendant No. 2 - Company jointly and severally with costs and current and future interest at 15% p.a. Being aggrieved by the said Judgement and Decree, the first defendant - Bank has filed this appeal. The 2nd defendant - Company which was placed exparte by the Court below has not filed an appeal.

10. We have heard the learned Counsel for the appellant Sri. Sriranga for M/S. Sundaraswamy Ranadas and Anand and the learned Counsel for the first respondent Sri. S.V. Angadi and second respondent is served and unrepresented.

11. Recording to Sri. Sriranga, learned Counsel for the appellant, the trial Court had erred in decreeing the suit of the plaintiff -Corporation in as much as there was no contract between the Corporation and the Bank and that the Bank was in no way concerned with the manner of utilisation of the loan amount sanctioned by the Corporation to the Company. That the Bank was a collecting banker and had merely collected the proceeds of the cheque and credited the same in the company's account and that no specific advise was issued by the Corporation to the Bank. It is further contended that the cheque dated 30.1.1984 sent for the purpose of paying the customs duty in order to release the goods imported by the Company did not have a covering letter with specific instruction to release the same towards payment of customs duty, and that the trial Court had erroneously concluded that the chaque was accompanied by a covering letter and that there was disobedience of the instruction given by the Corporation to the Bank. It is contended that in the absence of any privity of contract the Judgement and decree passed against the Bank is wholly erroneous and therefore the appeal ought to be allowed.

12. Per contra, it is submitted by Sri. S.V. Angadi, learned Counsel appearing for the first respondent that right from the inception of the transaction, namely sanction of loan by Corporation to the Company for import of machinery, the bank was always in the picture and the terms and conditions of the loan sanctioned included that the Bank should make available adequate working capital facilities and that the Company could not change its banker during the currency of the loan sanctioned by the Corporation without its prior approval. The copy of the sanction letter was forwarded by the Corporation to the bank for considering working capital requirements for the project and since the Company was having Letter of Credit facility in the bank and the entire transaction was routed through the bank, the Corporation issued cheque in the name of the Company for the purpose of customs duty and specifically sent it to the bank and not to the Company so that the bank would ensure that the amount would be utilised fox payment of customs duty and get the imported goods released on time. The bank had totally disobeyed the specific advise of the Corporation and instead it had permitted the Company to disburse the amount of loan sanctioned by the corporation towards customs duty for other purposes and thereby is liable to be proceeded against and the trial Court rightly passed Judgement and decree jointly and severally against both the defendants.

13. After hearing the learned Counsel for the appellant and respondent the following Points arise for our consideration:

1. Whether the transaction between the 2nd respondent - Company and the 1st Respondent - Corporation with regard to the loan sanctioned to the second respondent - Company for its entity was such that it constituted the Appellant - bank a trustee so as to act in a fiduciary capacity in order to ensure that the loan sanctioned by the first respondent -Corporation would be utilised for the purpose for which it was sanctioned?

2. In the event of answering point No. 1 in the affirmative whether the appellant bank and the second respondent - Company had notice of the circumstance under which the appellant - Bank had received a sum of Rs. 4,13,000/- by cheque bearing No. 649055 dated 30.1.1984 drawn on Canara Bank to be utilised for the purpose of clearing the custom duty so as to get the imported goods lying at Kochi port released in favour of the second respondent - Company?

14. From the documentary evidence on record, it is seen that by Ex.P.1 dated 2.8.1982, the Company made an application to the Corporation for a term loan including loan against the subsidy to set up a project for manufacture of non Snetalic zip fasteners and the entire unit of machinery was to be imported from Japan. By letter dated 3.B.1982, the Company had sought for working capital finance from the Bank and in response to the same by Ex.P.4, being letter dated 4.8.1982, the bank informed the Company that it would consider the financial assistance to it. Thereafter, by an agreement dated 15.11.1982 (Ex.P.2) the Corporation informed the Company that a term loan of Rs. 20,40,000/- lakhs including Rs. 2,40,000/- against state subsidy had been sanctioned to it for its project. The agreement contained several terms and conditions with regard to repayment to the loan and condition 21 stated as follows:

21. You should obtain adequate working capital facilities from M/s. Central Bank of India, Commercial street Branch, Bangalore-1, and should not change this banker during the currency of the loan without the prior approval of the Corporation. A copy of our sanction letter is forwarded to the bank for considering the working capital requirement of your project.

In fact, a copy of the said agreement was sent by the Corporation to the Bank with a request to sanction required working capital facilities to the Company. By letter dated 18.11.1982 at Ex.P.3, the Company thanked the Corporation for sanction of the said loan.

15. Thereafter, the Bank issued a certificate, Ex.P.5 dated 15.12.1982, certifying that it had established foreign letter of credit BLR : 44 : 237 dated 15.12.1982 on account of the Bank for US dollars 1,32,234 amounting to Indian Rs. 12,48,000/- and cash margin of 10% in favour of Murao And Co., Ltd., Osaka for import of machinery for making zippers. Thereafter, by letter dated 10.8.1983 produced as Ex.P.6, the Bank informed the Corporation that it had opened the letter of credit, as early as in May 1983 and that the goods had arrived in Kochi port and were incurring demurrage and since it had not received any payment either from the Corporation or from the Company towards retirement of the bill drawn under the letter of credit, cheque could be sent, so that the bills could be retired. The letter concluded in the following terms:

Please let us have your cheque as already requested or alternatively let us know the exact position to facilitate doing what is necessary in the matter.

Ex.P.7 is a letter written by the Corporation to the Company, a copy of which was marked to the Bank. By Ex.P.8, being letter dated 8.9.1983, the Bank wrote to the Corporation once again requesting for a cheque for requesting of the bills of the Company and that the short fall of Rs. 1,50,000/- to retire the bills would ha made by making available overdraft on temporary basis. Subsequently by a covering letter (Ex.P.9) dated 29.9.1983, Corporation sent the cheque No. 640417 dated 27.9.19B3 for Rs.16,57,648/- drawn in favour of the first defendant - bank on Canara Bank S.C. branch, Bangalore, so that the documents could be delivered to the Company. The said letter was acknowledged by the bank by its letter dated 30.9.1983 (Ex.P.10) to state that it had received the above mentioned cheque. The bank also wrote to the company to obtain the cheque from the corporation to facilitate retirement of the documents by Ex.P.11 dated 31.8.1983.

16. As requested by the company, additional terra loan of Rs. 5,60,000/- including Rs. 1,20,000/- against state subsidy was sanctioned to it by the Corporation by agreement marked as Ex.P.12. A copy of this agreement was also forwarded to the bank with a request to sanction the required working capital to the Company. Thereafter, the Corporation by its covering letter dated 30.1.1984 which is marked as Ex.P.13 sent a cheque for Rs. 4,13,000/- to the bank for the purpose of utilising the said fund towards payment of custom duty and by Ex.P.14 bank acknowledged the receipt of the cheque. It is necessary to extract Ex.P.13 and Ex.P.14 as the entire case of the corporation is on the misutilisation of the funds given by way of Ex.P.13 and acknowledged under cover of Ex.P.14 by the company and the bank permitting the company to do so.


No. KSFC/I&D;/and 4516 R 5870 30/1/84Central Bank of India

75-76, Commercial Street,

Bangalore - 560001.

Dear Sir,

Ref: M/s. Nelsa Enterprises Pvt. Ltd., Bangalore

Please find herein enclosed our Cheque No. 649955 dated 30-1-B4 for Rs. 4,13,000/- Rupees (Four lakhs thirteen thousand) only drawn in your favour on the Canara Bank, S.C. Branch, Bangalore, towards release of machinery from customs in respect of the captioned unit.

Please furnish the latest balance sheet.

The receipt of the cheque may please sent for our records. The machinery/relative documents may please be delivered to the captioned party under intimation to us.

CC: M/S/ Nelsa Enterprises

75/1, Dispensary Road


Encl: Cheque

Yours faithfully,


Assistant Manager (I & D)



Central Bank of India,

75-76, Commercial Street,


Karnataka State Financial Corporation,

Shankaranarayana Building

M.G. Road, Bangalore-563017

Dear Sir,

We have to inform you that the proceeds of cheque No. 648953 dt. 30-1-84 on Canara Bank for Rs. 4,13,000/- towards C.D. has been credited to the account M/s. Nelsa Enterprises (P) Ltd.

Yours faithfully,


Sranch Manager.

17. Since the Corporation became aware that the Bank had acted contrary to its communication and the sum of Rs. 4,13,000/-was not utilised for the payment of customs duty in respect of the imported machinery which was lying in Kochi port and instead the Corporation had to get the machinery released after paying customs duty of Rs. 8,41,580/-demurrage of Rs. 1,24,554/- and other expenses for renewing bank guarantee and insurance cover, transportation etc., on account of violation of Corporation's advise by the bank, demand was made by the Corporation by legal notice dated 2.7.1985 (Ex.P.15) to the Bank for a sum of Rs. 5,48,254/- together with interest drawn at the rate of 15% p.a. In response to this legal notice by reply dated 28.9.1985 (Ex.P. 16) it was stated that the bank bad no obligation towards corporation to had the utilisation of money for non payment of customs duty and that the claim of the bank against it was misconceived and that it had no obligation towards Corporation. Thereafter, by letter dated 22.7.1985 (Ex.P.17), the Bank informed the corporation that they were awaiting advise from their higher authorities on the matter.

18. The plaintiff - Corporation had also filed a complaint of cheating. A copy of the complaint of cheating registered by it against the company on 1.3.1985 before the Assistant Commissioner of Police, Frazer Town Division, Bangalore, is marked as Ex.P.18. Ex.P.19 is the bill dated 30.5.1985 issued by National Trades And Agencies towards release of the import machinery and Ex.P.20 is the receipt on payment of Rs. 1,23,553.73 from the corporation. Ex.P.21 and 22 are miscellaneous bills issued by the Kochi Port Trust on National Trades and Agencies. Ex.P.23 is a bill towards survey fee given to the Corporation with regard to the pre insurance survey of the consignment of imported machinery of the company. Ex.P.24 is a bill issued by Kochi Port Trust towards National Trades and Agencies. Ex.P.25 is an import application submitted by National Trades and Agencies by the Traffic Manager, Kochi port trust. Ex.P.26 is an entry bill, Ex.P.27 a bill issued by the Acting Division Manager of National Insurance Co. Ltd. to the Corporation. Ex.P.28 is a receipt issued by National Insurance Co. Ltd., for having received payment from the Corporation. Ex.P.29 is a consignment copy for the transport of the goods issued by Prakash Road Lines Pvt. Ltd. and Ex.P.30 is a receipt for having received the transportation charges. Ex.P.31 is the delivery book for having sent the letter from the Plaintiff - Corporation to the Bank, which is denied by the Bank. Ex.P.32 is a letter dated 21.12.1984 written by the Bank to the Company to clear the outstanding overdraft and copy of the said letter has been sent to the plaintiff -Corporation. Ex.P.33 is a statement of account of the company showing utilisation of the funds in its current account.

19. The 1st defendant bank has not exhibited any document.

20. PW.1, Deputy General Manager of the plaintiff - Corporation while adverting to the documentary evidence has deposed in his examination-in-chief as follows:

On the request of second Defendant we released further amount of Rs. 4.13 lakhs and the cheque was sent to the first Defendant under our covering letter dt. 30-1-84 and said covering letter is at Ex.p-13. In Ex.p-13 we have specifically noted that amount so released must be utilised for the payment of custom duty on the imported Machinery. The said cheque sent under Ex.P-13 was acknowledged by the first Defendant by their letter dt.29.3.84 and it is at Ex.P-14. We came to know that the amount released was allowed to be utilised for second Defendant for other purpose by the first Defendant. Thus, the Banker namely first deft. could not follow our condition and as such the plaintiff Corporation suffered loss. It was open for the first Defendant to return the cheque or to seek, further instructions if it was not possible for them to follow our instructions.

He has deposed in his cross examination as follows:

In his further cross-examination he has stated as follows:

It is true that the 1st Defendant had issued a letter of credit fox importing of goods by 2nd Defendant. It is true that the letter of credit was issued by the 1st defendant on the basis of the letter from the plaintiff agreeing to reimburse the amount after 1st Defendant makes payment. This commitment to pay the Is6 Defendant was limited to the amount indicated by in its commitment letter. It is true that the K.S.F.C. (Plaintiff) know that the 1st Defendant had issued a letter of credit on the basis of plaintiffs commitment letter. I cannot say whether the copy of the letter of credit issued by 1st Defendant was sent to the Plaintiff.

PW.1 in his further exercitation-in-chief has stated as follows:

The cheque was sent under a covering letter under Ex.P.13 to the Defendant No. 1. The acknowledgment given to us in the our delivery book at Ex.P-31. Seal and signature of the Defendant No. 1 official who received the said cheque is mentioned is seen there. It is false to say that the cheque mentioned under Ex.P-13 did not came to the Defendant No. 1.

In his cross examination ha has admitted as follows:

I am not familiar with the rubber seal of Defendant No. 1, but on ageing the stamp (rubber seal) put at Ex.P-31 I say that it is of Defendant No. 1.

In further examination-in-chief with permission PW.1 has stated as follows:

In routine course the attender meant for delivery of letters will take the tappal book and deliver it to the addressee. I do not know who was the attender who delivered it.

21. DW.1 in his examination in chief has stated as follows:

22. TM.2 in his cross examination has admitted as follows:

He has further deposed that:

In further cross examination while admitting the contents at Ex.P.5, EX.P.10, Ex.P.9, Ex.P.11, Ex.p.18, Ex.P.12, Ex.P.14, Ex.P.16 has stated that

It is true that we have mentioned in our written statement that the cheque was received by us without any covering letter.

23. On an appreciation of the documentary and oral evidence of the parties, it is seen that the Corporation, Bank and the Company were jointly involved in financing the project of the Company in as much as while the term-loan was sanctioned by Corporation, the working capital was made available by the Banc and right from the very inception of this project of the Company the bank was aware of the fact that the funds from the Corporation to the company would be routed through the bank. In fact Clause 21 of Ex.P.2, and contents of P.5, P.6, P.7, P.8, P.9, P.10, P.12 amply make it apparent that the bank had a duty and responsibility towards the Corporation in insuring that the finance for the company's project routed through the bank were to be properly utilised. It is in this background that Ex.5.13 - letter dated 30.1.1984 was written enclosing cheque for Rs. 4,34,000/- dixectly to the bank just as in the first instance when the term loan was sanctioned, with a. specific advise that the said amount be utilised for the purpose of payment of customs duty in order to release the imported machinery by the company. Merely because Ex.P.14 does not refer to the letter dated 30.1.1984, it cannot be said that the Corporation had sent only a cheque for Rs. 4,13,000/- without a covering letter. In fact such an act i.e., sending only the cheque without a covering letter is not done in the usual course of business. In order to support its contention, the Corporation has infact produced Ex.P.31 which is an entry in the delivery book for handing over the cheque alongwith the covering letter by the Corporation to the bank through Muddam. Ex.P.33 has been maintained in the usual course of business and it has to he presumed to be true in the absence of any rebuttal evidence produced by the Bank, challenging the veracity of the entry in the delivery book. Which aspect shall he dealt with in detail while discussing point No. 2 Hence, the inevitable conclusion is that the bank had a duty and an obligation towards the Corporation to ensure that the funds received by it directly from the Corporation and credited in the account of the company in the bank would ha utilised for the purpose for which it was sent.

24. In this context it is relevant to state that when a banker has knowledge that an account with it is for a specific purpose then the banker must be held to ha aware of the fiduciary nature of that account. A banker can be a constructive trusty of money in his customer's account and in breach of the trust if he pays the money away even with the customer's mandate, in such circumstances he can be made liable. When once the banker is fixed with the fiduciary responsibility of the account, he has to bear in mind two some what conflicting influences: he has to consider the interest of the persons beneficially entitled and he has to recognise the extent of right of his customer to draw cheques on the account and have them honoured. The bank obviously must not be a party or privy to any fraud or any mis- application of the fund. He cannot on a mere instruction of the customer transfer such monies to private accounts: or wipe out or reduce the over draft. In the case of Rowlandson v. National West minister Bank Ltd. reported in 1978 (3) All E.R 370, it was held that in the same manner when monies are paid to the banker to be applied for the special purpose, then the bank has to strictly apply for that purpose and cannot permit the customer in whose account the credit is made. The monies are credited to utilise it for his own purpose or for payments to other purposes.

25. In Barclays Bank Ltd. v. Quistclose Investments Ltd. 1968 (3) All E.R. 651 the question arose as to the rights of the payer in respect of ouch a transaction. The facts were that a company, Rolls Razor Ltd., which was in serious financial difficulties having an overdraft with Barclays Bank Ltd of some 484,000, needed to borrow a sum of 209,719 to meet an ordinary share dividend which it had declared. The company obtained a loan of that sum from Quistclose Ltd, who paid it on condition that it would be used to pay the dividend. A cheque drawn by Quistclose was paid into a separate account opened specially for the purpose with the bank, who knew of the purpose and conditions of the loan. Before the dividend had been paid, Rolls Razor went into voluntary liquidation. Quistclose claimed repayment of the 209,719, but this was refused by the bank/who applied the sum in reduction of the overdraft. It was submitted on behalf of the bank that the relationship between itself and Rolls Razor was one of loan, giving rise to a legal action in debt which necessarily excluded the implication of any trust enforceable in equity in favour of Quistclose.

26. The House of Lords rejected the submission by stating that in one transaction there can co exist legal and equitable rights and remedies i.e., when the money is advanced, the lender acquires the equitable right to see that it is applied for the primary designated purpose. When the purpose has been carried out, the lender has his remedy against borrower in debt. If the primary purpose cannot be carried out, the question arisen if a secondary purpose i.e., repayment to the lender has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of loan. Accordingly the appeal of the bank was dismissed. By applying the above ratio to the case at hand, it can be said that the Corporation advanced the money to the bank in order to enable the bank to pay the customs duty and for no other purpose.

27. Learned Counsel for the appellant has relied upon Paget's Law of Banking to contend that the paying banker owes his customer a contractual duty of care in carrying out payment instructions and so long as there are sufficient of funds to effect payment, the bank is under an obligation to his customer to honour its customer payment instructions. We are not in agreement with this proposition in its entirety as we are of the opinion that there has to be a balance between the bank's duty of care and the bank's duty to honour instructions given in accordance with the mandate. It has long been established that the bank must recognise the person from or for whom it received the money as the proper person to draw it, and the money as available for the purpose. Therefore, when money has been sent by the third party to a bank to use for a particular purpose, the same cannot be allowed to be diverted for another purpose by the bank. In our view, the duty of the bank towards its customer is subject to the duty of the bank to the third party, who has paid money to the bank on account of and for the purpose of the customer, particularly when the bank has knowledge of the object and purpose of the amount received by it for the benefit of its customer.

28. The mutual intention of the parties and the essence of the transaction in question was that the sum advanced could not become part of the assets of the company but should have been utilised exclusively for payment of the customs duty. A necessary consequence from this was that if the money could not be utilised for payment of customs duty, the same was to be returned to the Corporation. The House of lords in the above mentioned decision has opined that 'Arrangements of this character gives rise to relationship of fiduciary character of trust which has been recognised in the series of cases over 150 years.' The aforesaid ratio of the said decision squarely applies to the facts and circumstances of this case. Accordingly, we answer point No. 1 in the affirmative.

Point No. 2:

29. The contention of the Corporation is that the said cheque was sent with covering letter and the office copy of the same in Ex.P.13 DW-1 in his evidence has admitted the receipt of Ex.P.12 by which additional loan sanctioned to the Company. He has also admitted the first loan amount sanctioned to the Company under the cheque, along with its covering letter Ex.P.9. DW-1 in his cross-examination dated 6/3/96 has stated as:.Ex.P.5 is issued by our Bank. The contents of Ex.P.5 are correct. The contents of Ex.P.10 are also correct. Ex.P.10 is related to Ex.P.9. Contents of Ex.P.9 are true and correct. Ex.P.11 is written by Defendant No. 1 and its contents axe true. Ex.P.8 is also written by us and its contents are true. I do no remember whether I have sent the copy of Ex.P.12 or not. It is true that Ex.P.12 is issued by 1st Defendant Bank and the copy marked to the plaintiff.....It is true that in Ex.P-16 we have not mentioned that we have not received the covering letter to the said cheque, but the covering letter has not come. The said covering letter is Ex.P-13. It is true that we have not mentioned in our written statement that cheque was received by us without any covering letter....

The above evidence of DW-1 goes to show that he admits the receipt of the said cheque but denies that it was accompanied by covering letter Ex.P.13. DW-1 in his examination-in-chief, has stated that he did not see the original of Bx.P.13, he does not know if the original of Ex.P.13 had come to the 1st Defendant Bank. The trial Court was right in inferring that in the above evidence, DW-1 has not totally denied the receipt of such covering letter Ex.P.13, but, he has only stated that he does not know if such letter was received by the Bank. DW-1 has further stated that Corporation in this transaction is a 3rd party and in the usual course of business if the Bank receives a cheque from a third party, such a cheque will be accompanied by a covering letter. This evidence of EW-1 virtually demolishes the case of the Bank, in the light of the admission made by DW-1, the then Manager of the Bank that in the present transaction, the Corporation is only a third party and if any cheques were to be received by the Bank from a third party it is always accompanied by a covering letter.

30. The fact that the earlier cheque for sanction of loan of Rs. 16,00,000/- dated 27/9/83 was admittedly received by the Bank with a covering letter Ex.P.9, the Bank had replied as per Ex.P.10, after it received the< said cheque from the Corporation, under the covering letter makes it probable that in this transaction also, the Bank after receiving the said cheque along with a covering letter has replied to the Corporation. The said reply letter is Ex.P.14 dated 29/3/84. The contents of said letter axtracted above has to be read in the background of Ex.P.13. Wherein a specific advice was given as 'towards release of machinery from customs in respect of the captioned unit'

31. In the light of the above admission made by DW-1 that whenever the Bank receives cheque from the third party, it necessarily is accompanied by a covering letter and admittedly, the Corporation being a 3rd party in this transaction, it further goes to suggest that the cheque for a sum of Rs. 4,13,000/- bearing No. 648955 was accompanied by covering letter addressed to the Bank. The relevant entry is marked as Ex.P.13 dated 30/1/84 in the Thapal Book. The name and address of the letter sent under the said entry is to the Bank and cheque dated 30.4.84 bearing No. 648955 for a sum of Rs. 4,13,000/- is also mentioned which also bears the seal and signature of the receiving clerk of Bank. DW-1 has denied that the signature and seal at column No. 4 of Ex.P.31 is not of his office or any of the clerk this delivery book was for the period from 4th January 1984 and the last entry is dated 31.3.84.

32. During this period, the Corporation has sent letters and correspondence to many of the public institutions and other Banks and not only to the Bank. Each entry bears the seal and signature of the officer or the clerk who received the correspondence from the Corporation under the said delivery book from the Corporation. Hence the entry with regard to Ex.P.13 to the effect that such a letter dated 30/1/84 was addressed to the Bank and it was delivered to the Defendant No. 1 - Bank at its office cannot be rejected. The plaintiff being a Corporate office, the correspondence maintained by it and Ex.P.13 accompanied by Ex.P.31 delivery hook, sufficiently shows that original copy of Ex.P.13 was delivered to Defendant No. 1 along with the said cheque dated 30/1/04 for a sum of Rs. 4,13,000/-.

33. The interpretation of the word 'CD' referred in reply Ex.P.14 as deposed by DW-1 is wholly incorrect keeping in mind the circumstances of the case, because it cannot be towards the 'current deposit' and on the other hand, the interpretation of the word 'towards CD' mentioned in Ex.P.14 is towards the payment of the customs duty is more correct. This follows quite clearly from the terms of the letter dated 30.1.1984, a copy of which was also sent to the company in order that the cheque might be utilised for that purpose. Therefore, both the bank as well as the company were clearly aware of the purpose for which the fund had to be utilised. Ex.P.13 has to be seen in the background of Ex.P.12 and P. 14 and other documents which make it apparent that the bank was clearly aware of the fact that the release of the loan by the Corporation for the project of the company was exclusively through the hank. The above referred letter issued by the Bank goes to show that it had received the Cheque No. 649053 dated 30/1/84 for a sum of Rs. 4,13,000/- from the Corporation and same was credited to the account of the Company. In fact all the letters written by the Corporation to the Bank with relation to the transaction in question were also marked to the Company, which was also well aware of the object and purpose of the additional loan, as it was at the company's instance, the same was sanctioned by the Bank. Once the said cheque received by the Bank with the original letter of Ex.P.13, has been proved by the Corporation and the circumstances narrated above clearly goes to suggest that it was well within the knowledge of the Bank as well as the Company that the additional loan granted to the Company by the Corporation was for release of the machineries lying in the Kochi Port. Accordingly, we answer issue No. 2 in the affirmative.

34. Hence, in our opinion all the payments made under Ex.P.19 to P.30 were made only for securing or release of the machineries left at the Kochi port and for transportation. The Bank which has allowed the Company to draw the amounts sanctioned as additional loan amount of Rs. 4,13,000/- sanctioned as additional loan specifically for the payment of customs duty and demurrages etc., has allowed to draw for the purpose otherwise than it was sanctioned. Hence, the Bank, along with the company is liable to make good the said loss to the Corporation.

In view of the above reasons, we confirm the Judgement and decree of the trial Court and dismiss this appeal with costs.

Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //