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TMI Blog2002 (10) TMI 710X X X X Extracts X X X X X X X X Extracts X X X X ..... sues. On behalf of the plaintiff PWs. 1 and 2 were examined and Exs. A-1 to A-8 were marked. Likewise on behalf of the defendants D.W.1 was examined and Exs. B1 to B3 were marked. 4. The trial Court on appreciation of the oral and documentary evidence ultimately decreed the suit as prayed for personally against the 1st defendant and also against the assets of the 2nd and 3rd defendants. Aggrieved by the said judgment and decree, defendants 2 and 3 preferred the present appeal. 5. The respective pleadings of the parties are as hereunder. 6. It is pleaded in the plaint that the 1st defendant during the time when he was acting as Chief Executive of M/s. Kirlampudi Sugar Mills Limited, Pithapuram borrowed a sum of Rs. 40,000 from the plaintiff for the purpose of paying huge amounts due to the A.P. Electricity Board and executed the demand promissory note dated 30-3-1982 undertaking to repay the same with interest at 2 per cent per month to the plaintiff or to his order on demand. It was also pleaded that the 1st defendant executed the promissory note in the capacity of Chief Executive of M/s. Kirlampudi Sugar Mills Limited and bound himself personally also. Since the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cane-growers. The management also paid 15 lakhs of rupees towards the electricity and fee of other statutory liabilities. The management had spent 20 lakhs for acquiring new machinery and the management paid 16 lakhs of rupees towards salaries, bonus etc. Thus the management had spent 84 lakhs of rupees to bring the factory into a running condition. It was also further pleaded that the cane was also crushed in 1983-84 season. The allegations that the factory is heavily indebted and secreting the properties and the plaintiff is asking attachment of properties before judgment had been specifically denied. It was also pleaded that the account books of the defendant factory do not show any liability of the defendants 2 and 3 to the plaintiff and hence they are not liable to pay the suit amount. It was also stated that the registered notice said to have been issued was received by one of the employees of the defendant-factory who had not brought it to the notice of the management and hence reply could not be given. It was further pleaded that the plaintiff has no cause of action to file the suit as against the defendants 2 and 3. The 1st defendant had not contested the litigation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y note and had contended that neither the body nor the recitals of the promissory note go to show that the 1st defendant executed the promissory note representing the Company and at the best it can be said that the promissory note was executed by the 1st defendant in his individual capacity and hence in such case on the strength of such document, the company cannot be fastened with the liability. The learned Counsel further elaborating his submissions had drawn my attention to sections 4, 7, 26, 27, 28 and 118 of the Negotiable Instruments Act, 1881 and also to sections 47 and 147(1)( c ) of Companies Act, 1956. The learned Counsel further submitted that a reading of the promissory note Ex.A-1 would show that D-2 and D-3 are not the makers of the promissory note and hence the essential requirement of a promissory note as contemplated under section 4 of Negotiable Instruments Act is violated. The unconditional promise to pay is not there as far as 2nd defendant and Ex.B-3 are concerned and hence the company is liable to pay the amount. The learned Counsel also submitted that the identity of the maker also must be certain and Ex-A-1 simply shows the 1st defendant as the maker of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sake of the company and 2nd and 3rd defendants intend to escape the liability by taking such a defence. The learned Counsel also further contended that when it was specifically pleaded in plaint that the 1st defendant as the Chief Executive had executed Ex.A-1 promissory note and had borrowed the amount representing the subject company only, there should have been a specific denial in the written statement and in the absence of such a denial, it should be taken that the case of the plaintiff in this regard had not been disputed by the contesting defendants. The learned Counsel also further submitted that the recitals of the particular promissory note are very clear and the learned Counsel also had pointed out that the amount was borrowed for the purpose of paying electricity charges of the M/s. Kirlampudi Sugar Mills Limited, Pithapuram and as the Chief Executive of the Company he had undertaken to pay the amount. The learned Counsel also had drawn my attention to the signature portion and also the seal which had been affixed in Ex. A-1. Payment endorsement also had been pointed out by the learned Counsel for the respondent/plaintiff while further making elaborate submissions. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssory notes on behalf of the Company, the provisions of the Companies Act, 1956 have to be looked into for the purpose of deciding the binding nature of such a document. The learned Counsel had drawn my attention to the language of section 47 of Indian Companies Act, 1956 while taking me in detail through the evidence of D.W.1. The learned Counsel commented that the admissions made by D.W.1 are sufficient to establish the claim put forth by the respondent/plaintiff. The learned Counsel placed strong reliance on Oriol Industries Ltd. v. Bombay Mercantile Bank Ltd. AIR 1961 SC 993, and P. Rangaswami Reddiar v. R. Krishnaswami Reddiar AIR 1973 Mad. 251. The learned Counsel also had placed reliance on Lohia Properties (P.) Ltd. v. Atmaram Kumar 1993 (2) APLJ 58 (SC), and also Bharat Barrel Drum Mfg. Co. v. Amin Chand Pyarelal AIR 1999 SC 1008. 13. Heard both the learned Counsel at length and also perused both the oral and documentary evidence available on record from the respective contentions which had been advanced by both the Counsels elaborately. The following points for consideration will arise in this appeal. ( a )Whether the appellants/defendants 2 and 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mill. P.W. 1 further deposed that the attestors of the Ex.A-1 were present when the consideration of Rs. 40,000 was passed and the plaintiff was not present when Ex.A-1 was executed. P.W.1 also further deposed that the 1st defendant on behalf of the 2nd defendant paid Rs. 10,000 towards the part payment of debt covered by Ex.A-1 and the said endorsement was marked as Ex.A-2 and it also contains the stamp of the mill and subsequently, thereto no other payment had been made. P.W.1 further deposed about the issuance of notice and the acknowledgement in the cross-examination at length for the purpose of establishing that D2 and D3 are not liable and the suggestion that Ex.A-1 is the collusive document to defraud D-2 and D-3 had been specifically denied by P.W.1 16. P.W. 2 Narasimha Rao, one of the attestors of Ex. A-1 was examined and P.W. 2 deposed that he worked as Cane Superintendent in Sugar Mill from 1952 to September, 1982. P.W.2 also deposed that the 1st defendant was the Chief Executive of the 2nd defendant and he had attested Ex.A-1 and in his presence P.W.1 paid Rs. 40,000 to the 1st defendant and he attested the pronote and he was present at the time of payment of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also made several other admissions which may not be necessary to be dealt with in detail. No doubt, in cross-examination relating to the entries several questions were put and answers had been elicited in detail. D.W.1 also was cross-examined relating to the maintenance of several loose sheets relating to the company in relation to the maintenance of accounts. As can be seen from the evidence available on record, P.Ws. 1 and 2 had specifically deposed that the plaintiff was not present at the time of Ex.A-1 transaction and the payment was made by P.W.1 the cousin brother of the plaintiff and hence P.W.1 was examined and to further prove the execution of the promissory note though it was not specifically denied by the 1st defendant, P.W.2 one of the attestors also had been examined. Thus the execution of the promissory note had been duly proved that the Executant of the promissory note the 1st defendant had not chosen to deny Ex.A-1. It is also pertinent to note that in the plaint at para 4 it was specifically pleaded that the 1st defendant had executed the pronote as the Chief Executive of the company and this aspect was not specifically denied though a vacate plea was taken in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission to plead these aspects can be taken to be fatal to the case of the respondent/plaintiff so as to non-suit him. In Ganesh Trading Co. v. Moji Ram AIR 1978 SC 484, the Apex Court while dealing with object of provisions relating to pleadings had explained as follows : "2. Procedural law is intended to facilitate and not to obstruct the course of substantive justice. Provisions relating to pleadings in civil cases are meant to give to each side intimation of the case of the other so that it may be met, to enable Courts to determine what is really at issue between parties, and to prevent deviations from the course which litigation on particular causes of action must take." (p. 485) 20. In Manjushri Raha v. B.L. Gupta AIR 1977 SC 1158, it was held that the pleadings have to be interpreted not with formalistic rigour but with latitude or awareness of low legal literacy of poor people. 21. Hence in the light of the evidence of P.Ws.1 and 2 it cannot be said that the non-examination of the plaintiff is fatal to the case of the plaintiff especially in the light of the fact that plaintiff was not present and it is P.W.1 who had advanced the amount and P.W.2 the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... body of the document. The 3rd defendant is only a successor-in-interest in the present management of the affairs of the company. The main stand taken by the contesting defendants is that inasmuch as this amount was not shown in the accounts, defendants 2 and 3 cannot be fastened with the liability on the strength of the promissory note alleged to have been executed by the 1st defendant. Sections 26, 27 and 28 of the Negotiable Instruments Act read as hereunder : " Section 26. Capacity to make, etc. promissory notes, etc. Every person capable to contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque. Minor - A minor may draw, indorse, deliver and negotiate such instruments so as to bind all parties except himself. Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered." Note Whether company has power to issue cheques - The power is to be found in the relevant provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t one of the essential conditions is that the instrument on its face must show that it has been drawn, made accepted or endorsed by the company. This may be done either by showing the name of the company itself on the instrument, or by the statement of the person making the instrument that he is doing so on behalf of the company. In other words, unless the plain tenor of the negotiable instrument on its face satisfies the relevant requirement the instrument cannot be validly treated as an instrument drawn by the company. The inevitable consequence of this requirement is that whenever a negotiable instrument is issued without complying with the said requirement it would not bind the company and cannot be enforced against it. The principle enunciated by section 89 cannot be extended to a claim made by a company against its bank on the ground that the cheque which the bank accepted and honoured was defective in that it did not comply with the requirements of section 89 and could not have been enforced against it." (p. 993) It may also be relevant to note another passage in the same judgment in Oriol Industries Ltd. s case ( supra ). The Apex Court had observed as follows : "That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of P. J also pledged certain fully paid up share held by the family in his name and transferred in blank the share of P. The money borrowed by J was deposited in the High Court on behalf of the company in order to secure the postponement of the appointment of a provisional liquidator. There was no indication in the promissory note that J was acting on behalf of the company. All the indications in the case were that the loan was made to J personally and on his personal security, there being very good reasons why P should not lend the money to the company. The question was whether the company could be made liable for the payment of the loan : (1)that the mere fact that the company benefited was not by itself sufficient to bind the company; (2)that before the company could be held liable, it must be found not only that money came into their hands but that it was in effect put into their hands by P through the managing agents, it being understood by both parties when the promissory note was executed that the company would be liable for repayment; (3)that though J signed as manager of the family and though the managing member of a joint Hindu family could execute in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irector. Resolution 6 vested in him full powers for the management of the company s affairs and also authorised him to sign all papers of the company. The transaction is, therefore, one which could be entered into on behalf of the company by the first defendant. In such a circumstance, the creditor is entitled to presume that all formalities required in connection therewith have been complied with. A bona fide creditor in the absence of any suspicious circumstance is also entitled to presume its existence. The creditor being an outsider or a third party so far as the company is concerned is entitled to proceed on the assumption of the existence of such a power. In fact the money was utilised for the purpose of the company is not in dispute and the 2nd defendant himself has made a part payment towards this promissory note. In this connection it is also useful to refer to the decision of the Allahabad High Court in L.R. Cotton Mills Co. v. J.K. Jute Mills Co. AIR 1957 All. 311. It was held in that case that even where there was no actual resolution authorising a director to enter into a transaction on behalf of the company either by the Board of Directors or by the Board of Man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defendant company who is in the present management of the affairs of the company. The material on record also shows that several other liabilities of the company also had been discharged by the present management but, however, the appellants defendants 2 and 3 in the present suit had taken a stand that inasmuch as Ex. A1 transaction does not find a place in the accounts of the company, the company cannot be made liable. As already observed by me, the Chief Executive of the company at the relevant point of time executed Ex.A1 and borrowed the amount for the purpose of payment of the electricity bills of the company only. Hence the said borrower pays for the sake of the company and at any stretch of imagination, it cannot be said that the amount was borrowed by the 1st defendant in his personal capacity. 31. It is pertinent to note that the making of entries or maintenance of account books by the company predominantly relate to the Indoor Management or the Internal Management of the affairs of the company with which a creditor is not concerned with and the creditor will not have any control over the maintenance of the accounts and hence on that ground a creditor of the company ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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