The United Commercial Bank Limited and Others vs Reliable Hire Purchase Co., Private Ltd. and Others

K. Veeraswami, C.J.—These appeals, one by the first defendant and the other by the second defendant Banks arise out of the suit instituted

by the first respondent for a declaration that moneys paid out on the basis of a cheque issued by it should not be debited to its account and in the

alternative for recovery of the amount covered by the cheque and also damages with interest on the former amount from the date of the plaint from

the first defendant or the second defendant, or both. The first respondent, Reliable Hire Purchase Co. Private, Ltd., drew up a cheque on the

Indian Overseas Bank Limited, as it then was, on 10th November, 1960, for a sum of Rs. 56,000 in favour of Sundaram Motors Private Ltd. One

Raman, the Managing Director of Manasuba and Co. Private Ltd., received the cheque with a covering letter addressed to Sundaram Motors

Private Ltd., on the understanding that he would purchase a motor vehicle on a hire purchase basis with that money. But, admittedly, Ramon

forged an endorsement as if by Sundaram Motors Private Ltd., acting through the Sales Manager and made it payable to Manasuba and Co.,

Private Ltd. He made a further endorsement as Director for Manasuba and Co., Private Ltd., and forwarded the cheque to the United

Commercial Bank, Ltd., as it then was, for collection, which was done the very next day, that is, on 11th November, 1960. Quite some time

thereafter, on the failure of Manasuba and Co., Private Ltd., the true facts came to light. The first defendant, the Indian Overseas Bank, having

refused to comply with the request of the first respondent to cancel the debit against it in relation to the cheque amount, it filed the suit asking for

the reliefs we have mentioned. We may mention that, before sending the cheque to the clearing house, the endorsements on the reverse of the

cheque were guaranteed by the United Commercial Bank Ltd., the second defendant. The plaintiff''s case was that the first defendant did not act in

good faith, but acted negligently in making payment relying upon the guarantee and that, in any case, as the first defendant could enforce the

guarantee given by the second defendant, but failed to do it, the first defendant must be directed to pay the amount covered by the cheque to the

first respondent. Alternatively the plaintiff also claimed that the second defendant had converted the cheque in collecting the same with its

endorsement and was liable to the first respondent as the true owner for damages for such conversion. The total claim made by it was for Rs.

60,200 against both the defendants, or either of them. Kunhamed Kutty, J., who tried the suit, found that the first defendant did not make the

payment in due course and was, therefore, liable for the suit claim. On the basis of a third party petition taken out by the first defendant under

Order 8-A, Civil Procedure Code, the learned Judge also found that the second defendant acted negligently, and, therefore, would be liable to the

first defendant for the amount of decree granted against the first defendants.

Mr. Narasimhachari, who appears for the second defendant-appellant made several submissions to get rid of his client''s liability. The first of

them was that the learned Judge was not right in his-view that the first defendant''s payment for the cheque was not in due course and that the first

defend ant was entitled to rely on the guarantee by the second defendant, endorsed on the cheque. Kunhamed Kutty, J., thought that the payment

made by the first defendant was not in due course, because any endorsement on a. crossed cheque in favour of one other than the original payee

should serve as a red light Warning so that there was an obligation on its part to make an enquiry, more especially when the cheque covered such a

large sum as Rs. 56,000. We are unable to concur in this view. Section 85(1) of the Negotiable Instruments Act provides that, where a cheque

payable to order purports to be endorsed by or on behalf Of the payee, the drawee is discharged by payment in due course. The expression

payment in due course"" is defined by Section 10 to mean payment in accordance with the apparent tenor of the instrument in good faith and

without negligence to any person in possession; thereof under circumstances which do not afford a reasonable ground for believing that he is not

entitled to receive payment of the amount therein mentioned. The question whether the first defendant complied with these requirements wilt

depend on the circumstances in the instant case, the most important one of which is that another well known Bank on behalf of its customer had

guaranteed the endorsement. There is no reason why the first defendant should suspect the guarantee which implied that the second defendant had

exercised the necessary care and caution and acted in good faith in making the guarantee. If it were otherwise, banking practice would become

unrealistic and burdensome and would not tend towards facilitating normal-banking business. We do not mean to say that there was no obligation

on the first defendant at all irrespective of circumstances to act as expected by Section 10 of the Negotiable Instruments Act. But, in the instant

case we are satisfied that, in view of the guarantee given by the second defendant which appeared on the reverse of the cheque as to the reliability

of the endorsement, the first defendant would be justified ex facie in accepting it and acting on that basis. We are unable to find out that there was

any failure on the part of the first defendant to make; enquiry which the circumstances called for. On that ground, we do not sustain the decree

against the first defendant.

Mr. Narasimbachari then contends that, if the first defendant is not liable and the decree against it is set aside inasmuch as the decree as against

the second defendant resulted from a third party application, that decree also should be set aside. We are afraid that this result does not necessarily

follow. We have already referred to the frame of the suit. The first respondent had prayed far a decree against both the defendants, or one or the

other of them, as the Court might deem fit. If we find that the second defendant is independently liable, the technical argument addressed on behalf

of the second defendant-appellant loses its force. We may at once state, at this stage for the reasons which will appear hereafter, that although the

decree against the second defendant may not be rested on the basis of the third party petition, it is justifiable on the merits of the first respondent''s

claim itself and in that view we may well invoke our equitable jurisdiction under Order 41, Rule 33 of the Civil Procedure Code, and sustain the

decree.

What is strenuously pressed on us by Mr. Narasimhachari is that the endorsement made by the second defendant was done in good faith and

without negligence. He says that Manasuba & Co., Private Ltd., was known to be a flourishing company of respectability and there was no reason

why the second defendant''s suspicion should be aroused as to the genuineness of the endorsements. The question, therefore, becomes one of fact

as to whether, in the instant case, the second defendant acted in good faith and without negligence.

In our opinion, there are circumstances in which if the second defendant had applied its mind it would certainly have aroused suspicion calling for

an enquiry as to the genuineness of the endorsement purported to have been made by Sundaram Motors Private Ltd., through its Sales Manager.

Normally, when a cheque is drawn in favour of a company and the same is crossed, the payee remits it to its own Bank for collection and then

draws on its account for making payment to others. It is not a, very usual feature for incorporated companies to endorse cheques drawn in their

favour for payment to another company as a mode of payment. Secondly, the cheque covered a large amount, namely, Rs. 55,000. Thirdly,

though the cheque was drawn on 10th November, 1960 it was presented for collection probably on the same day or the next day and actually the

collection through the clearing house was made on 11th November. The endorsement by Sundaram Motors Private Ltd. as forged appears thus:

Pay Manasuba & Co., Private Ltd.

FOR SUNDARAM MOTORS PRIVATE LTD.

(Sd.)

SALES MANAGER

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

For Manasuba & Co. Private Limited.

(Sd.)

Raman Director.

In contrast, the first endorsement was by the Sales Manager on behalf of Sundaram Motors Private Limited, but the second by the Director on

behalf of the company. Whether the Saks Manager of Sundaram Motors Private Ltd., had the authority to act for the company in making

endorsements could possibly have raised a query before the second defendant satisfied itself and guaranteed the endorsements. The endorsements

also were not dated. There is a further feature and that is this. Manasuba and Co., Private Ltd., was among other things, carrying on business as

transport owner. One might ask what was the necessity for Sundaram Motors Private Ltd., to endorse the cheque in favour of Manasuba and Co.,

Private Ltd., which would not be the usual feature. One other thing is that, as disclosed by the record of evidence, the officers of the United

Commercial Bank possibly knew every one including Raman in Manasuba & Co., Private Ltd. One other circumstance is that even before the first

defendant Bank honoured the cheque, the second defendant had credited Manasuba & Co., Ltd., with the amount covered by the cheque. It

seems to us that the cumulative effect of all these circumstances is that the second defendant Bank did not take the least precaution to Verify the

endorsements.

It is vehemently contended before us that to lay such a burden on a busy Bank like the second defendant is to impose an impossible obligation in

view of the numerous transactions that pass through the Bank every day, and that when the second defendant was satisfied about the respectability

of Manasuba & Co., Private Ltd., it was justified in assuming that the endorsement purported to have been made by Sundaram Motors Private

Ltd., was a genuine one. Lord Atkinin United Australia Ltd. v. Barclave Bank Ltd. (1941) A.C. 1 , put it thus:

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

company''s.

This red light not only applies to cases of companies or persons standing in a fiduciary position, but also to a cheque drawn in favour of an

incorporated company, which has purportedly endorsed the cheque in favour of another incorporated company; The reason is that every credit

arid debit by cheques for or against are normally expected to find a place in the accounts and the usual way by which a company acts is that, when

it receives cheques, it also makes payment by cheques and not through endorsements as in this case. Our attention was invited to a few of the

decided cases in the United Kingdom, as Lloyds Bank Ltd. v. E.R. Savory and Co. (1933) A.C. 20, and Motor Traders Corporation v. Midland

Bank (1937) 4 All. E.R. 90. The second of these cases related to the bad history of the customer of the collecting Bank. The first was a case of a

stolen cheque which was received by the London office and sent to the clearing house. The paying-in-slips were sent to the country branch, no

mention being made of the names of the drawers. The amounts of the cheque were without question credited as directed by the paying in-slips.

Written rules formulated by the bankers for the direction of their manager provided, among other things, that no new current account should be

opened without knowledge of, or full enquiry into the circumstances and character of the customers. There was also a rule, not written, but

generally recognised}, that banks do not take payments in, without enquiry, of cheques-drawn by a firm in favour of a third party and paid in by a

person other than the payee, who is or ought to be known to be an employee of the drawing firm. In the circumstances, it was held by the House

of Lords that the practice of bankers was defective in that the branch which received the cheques in the first instance never informed the crediting

branch of the names of the drawers of the cheque, that the managers of the crediting branches had omitted to make sufficient enquiries when

accepting P and Mrs. S as customers and that, in those circumstances the bankers had failed to prove that they had acted without negligence and

consequently they were liable. An examination of these and other cases like Bapulal Premchand Vs. The Nath Bank, Ltd., , shows that the

question of good faith and negligence is a question of fact in the light of the material in each case. In the instant case, we are of opinion, in the light

of the circumstances mentioned, that the obligation on the part of the second defendant to clarify itself was not fulfilled. In the circumstances,

therefore, we are unable to hold that the second defendant has shown that it acted in good faith and without negligence in making the collection on

the basis of the guarantee of the forged endorsements.

It is next contended that, even so, the first respondent could not succeed as the company itself had acted negligently inasmuch as, for a period of

about six months, it kept quiet without enquiring as to what happened to the cheque which it had issued and without verifying whether Manasuba &

Co., Pvt. Ltd., has purchased a vehicle, and if so, asking for the certificate in respect of it. But, we are unable to accept this contention, because

the first respondent was a financier who would normally have expected Manasuba & Co., Private Limited to have utilised the amount, more

especially when the cheque itself was drawn not in favour of Manasuba & Co. Private Limited, but in favour directly of Sundaram Motors Private

Limited. Further, Manasuba & Co., Private Ltd., was also fulfilling the terms of the hire-purchase agreement inasmuch as it was remitting to the

first respondent the instalments due under that agreement.

Another contention of Mr. Narasimhachari is that the first respondent, at any rate, was not the true owner of the cheque within the meaning of

Section 131 of the Negotiable Instruments Act. In support of this contention our attention was invited to certain observations found at page 665 of

the Negotiable Instruments Act by Bhashyam and Adiga, 13th Edition. But, it seems to us that until the cheque was cashed, control in respect

thereof continued to remain with the drawer. He could, for instance, instruct his banker before the cashing of the cheque, not to honour it. That can

only be on the basis that he still continued to be the owner. The position will not in our opinion be altered by mere endorsement so long as the

cheque was not cashed. In that sense therefore, we consider that the first respondent continued to be the true owner of the cheque.

The last contention for the second defendant-appellant relates to a sum of Rs. 19,320 paid by Manasuba & Co., Private Ltd., to the first

respondent towards the purported hire-purchase transaction. That this sum was paid and credited by the first respondent towards this transaction

is admitted. The question is whether this amount can go in reduction of the second defendant''s liability. In our opinion, it can, and it should.

Strenuously this is objected to by the first respondent, and for this purpose reliance is placed on certain observations in Lloyds Bank v. The

Chartered Bank of India Australia and China (1929) 1 K.B. 40. But, we are not persuaded that we should decide this case strictly on a formal

basis. In England a great deal of importance is attached to forms, and anything that did not conform to the form would be treated as being outside

the scope of the claim. But as we have already indicated, the first respondent has based its claim in the suit not merely on conversion of the cheque,

but on other facts as well. Apart from it, when the first respondent has received payment towards the debt covered by the cheque, it would be a

case of unjustified enrichment to allow the first respondent to have the benefit of these instalmental payments amounting to Rs. 19,320 and at the

same time recover the full amount by the cheque. It may be that there were other transactions between Manasubha & Co., Private Ltd., and the

first respondent. But, we are not concerned with the over-all position as between them. Once it is admitted that the sum of Rs. 19,320 was paid in

respect of the transaction of hire-purchase, though it never came into existence, to that extent, the second defendant should be relieved of the

liability to make good the loss suffered by the first respondent.

On that view, we direct that there be a decree against the second defendant and in favour of the first respondent for a sum of Rs. 56,680 with

interest at six per cent from the d ate of the trial Court''s decree. As regards costs, taking all the circumstances into account especially the conduct

of the first respondent in handing the cheque to the Director of Manasuba & Company Private Ltd., we think that it would be fair and proper to

direct that each party should bear its costs at the trial Court, but the second defendant should bear the costs of the first respondent in the related

appeal.

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

Mr. Ramakrishna for the first defendant-appellant presses for costs. But, having regard to the fact that both the first and the second defendants

arc nationalised Banks and also the fact that at least Kunhammed Kutty, J., thought that the first defendant also should be made liable, though we

have token a different view, we do not feel justified in allowing the first defendant''s costs.