1963 (2) TMI 56 - SC - Indian Laws

Summary

Issues Involved:
1. Whether the sum of Rs. 35,000/- was actually paid or advanced to the Firm by the Bank.
2. The liability of the Firm for the amount of Rs. 35,000/- under the cash credit agreement.
3. The applicability of Section 85 of the Negotiable Instruments Act, 1881.
4. The liability of the Bank for the alleged misappropriation by its Potdar.

Detailed Analysis:

1. Payment of Rs. 35,000/- to the Firm:
The Bank claimed that the Firm executed a promissory note and drew a cheque for Rs. 35,000/- on August 29, 1947, which was cashed by the Manager of the Bihar Sharif branch. The Firm contended that the amount was not actually paid to them but was to be sent to M/s. Manohardass Jainarain through the Bank's Potdar. The High Court noted that Mr. B.C. De, counsel for the Bank, conceded that the Potdar took the money to Patna, implying the second defendant did not receive the money directly. The Supreme Court held that the money was not actually received by the Firm or its agent, and thus, the Firm cannot be held liable for the amount.

2. Liability of the Firm under the Cash Credit Agreement:
The Supreme Court examined whether the Firm could be deemed to have received the money through the Potdar. The Court concluded that the Potdar, being an agent of the Bank, could not be considered an agent of the Firm for carrying the money to Patna. The arrangement between the Firm and the Bank's Manager was unusual and unauthorized as the Manager had no authority to disburse the loan before receiving the goods or documents of title. Therefore, the Firm was not liable for the amount as it did not pass into their custody or that of their agent.

3. Applicability of Section 85 of the Negotiable Instruments Act, 1881:
The Bank argued that under Section 85 of the Negotiable Instruments Act, it was not responsible for the money once the cheque was honored. The High Court and Supreme Court rejected this argument, stating that for Section 85 to apply, payment had to be made to the Firm or its authorized representative. Payment to the Potdar, who was an agent of the Bank, did not constitute payment to the Firm. The Court also dismissed the relevance of Section 118 of the Act in this case.

4. Liability of the Bank for Misappropriation by its Potdar:
The Bank contended that it could not be held responsible for the Potdar's criminal act of misappropriation. The Supreme Court clarified that the Bank could not transfer liability for the criminal act of its servant to the Firm. The principle of vicarious liability applies to a master for the acts of his servant within the scope of employment, but it does not extend to holding a third party liable for the servant's criminal acts. Therefore, the Bank, as the employer of the Potdar, must bear the loss resulting from the misappropriation.

Conclusion:
The Supreme Court affirmed the High Court's decree, holding that the Firm was not liable for the Rs. 35,000/- as the amount was not actually received by them or their agent. The appeal by the Bank was dismissed with costs.