1961 (1) TMI 35 - SC - Companies Law

Scope and effect of the provisions contained in section 89 of the Indian Companies Act, 1913, in relation to the law of banking questioned Held that - The High Court was right in coming to the conclusion that section 89 cannot be invoked by the company against the bank in making the present claim. The decisions on which the company relied are all decisions in cases where a negotiable instrument was sought to be enforced against the company and had thus given rise to a cause of action. No case has been cited before us in which section 89 has been extended to a claim like the present. Appeal dismissed.

Summary

Issues Involved:
1. Scope and effect of Section 89 of the Indian Companies Act, 1913, in relation to the law of banking.
2. Validity of cheques issued by company directors without proper indication of authority.
3. Applicability of Section 89 to claims made by a company against its bank.
4. Bona fide actions of the bank in honoring cheques.
5. Relevance of precedents and legal principles from analogous cases.

Issue-wise Detailed Analysis:

1. Scope and Effect of Section 89 of the Indian Companies Act, 1913:
The principal question in this case revolves around the interpretation of Section 89 of the Indian Companies Act, 1913. The section stipulates that a bill of exchange, hundi, or promissory note must be made, drawn, accepted, or endorsed in the name of or on behalf of the company by a person acting under its authority, either express or implied. The court emphasized that for a company to be bound by a negotiable instrument, the instrument must clearly indicate on its face that it has been issued on behalf of the company. This requirement ensures that the responsibility and liability of the company are apparent and can be instantly recognized.

2. Validity of Cheques Issued by Company Directors Without Proper Indication of Authority:
The appellant argued that the cheques issued by K. Poddar and M.J. Chacko were invalid as they did not specify that they were drawn on behalf of the company, contrary to the resolution passed by the company. The court, however, found this argument unsound. It held that the resolution did not mandate the drawers to specify on each cheque that they were made on behalf of the company. The court noted that the subsequent resolution passed by the company, which explicitly required cheques to be signed in a specific manner, contrasted with the earlier resolution and highlighted that the initial resolution did not impose such a requirement.

3. Applicability of Section 89 to Claims Made by a Company Against Its Bank:
The court determined that Section 89's principles, which protect companies from claims on defectively drawn negotiable instruments, do not extend to disputes between a company and its bank. The section applies when a negotiable instrument is enforced against a company, not when a company claims against its bank for honoring cheques. The court cited the House of Lords' decision in Mahony v. East Holyford Mining Co., which supported the view that a bank acting in good faith and honoring cheques drawn by authorized persons cannot be held liable for unauthorized payments.

4. Bona Fide Actions of the Bank in Honoring Cheques:
The court noted that both lower courts found the bank acted bona fide and that the company had expressly given up the charge of negligence against the bank. The bank had provided the company with a cheque book and had no reason to doubt the cheques' validity, as the drawers had no other joint account with the bank. The court concluded that the bank was justified in honoring the cheques, believing they were issued under the authority conferred by the company's resolution.

5. Relevance of Precedents and Legal Principles from Analogous Cases:
The court referred to several precedents, including decisions by the Privy Council and the House of Lords, which reinforced the principle that a company is not liable on a negotiable instrument unless it is clear on the face of the instrument that it was issued on behalf of the company. The court also cited authoritative texts, such as Chalmers on "Bills of Exchange" and Halsbury's Laws of England, which supported the view that banks are justified in paying cheques out of company funds even if the cheques do not comply with formal requirements, provided the payments are made to persons known to represent the company.

Conclusion:
The appeal was dismissed with costs, affirming the High Court's decision that Section 89 of the Indian Companies Act cannot be invoked by the company against the bank in the present claim. The court held that the bank acted in good faith and was justified in honoring the cheques, and the company's claim was unsustainable.