Case: The Oriol Industries Ltd Vs. The Bombay Mercantile Bank Ltd

This question arises in this way. The appellant the Oriol Industries, Ltd., (hereafter called the company) was incorporated on May 15, 1945, and it appointed as its managing agents M/s. Poddar Chacko and Co. Soon after its incorporation the company passed a resolution on May 21, 1945, whereby it decided to open an account with the respondent, the Bombay Mercantile Bank. Ltd., (hereafter called the bank) and in accordance with the said resolution an account was opened with it on May 28, 1945. Twentyeight cheques were drawn on this account aggregating the total amount of Rs. 28,882-13-0 during the period between May 28, 1945 and July 31,1945 These cheques were drawn by K. Poddar and M. J. Chacko in pursuance of the authority conferred on them by the company. On September 28, 1948, by its liquidator the company brought the present suit claiming to recover from the bank the said amount of Rs. 28,882-13-0. The case for the company as set out in the plaint was that the payment of the said amount had been made by the bank wrongfully and negligently and the amount drawn under the said cheques had been wrongfully debited to the company in is account kept by the bank. It appears that the resolution for winding up of the company was held by the Court to be null and void, and so the plaint was subsequently amended whereby the name of the liquidator was struck out and the suit then purported to be one which was instituted by the company itself. The plea raised by the company that the cheques in question had been negligently and wrongfully honoured by the bank was seriously disputed by the bank in its statement. Mr. Justice Tendolkar, who tried the suit on the Original Side of the Bombay High Court, however, upheld the plea raised by the company and came to the conclusion that the cheques had been wrongfully honoured. Even so, Mr. Justice Tendolkar held that out of the total amount in dispute an amount of Rs. 8,882-13-0 had been actually received by the company and so on equitable grounds he rejected the companys claim in regard to the said amount. The companys claim was, however, decreed in respect of the balance of Rs. 20,0002. The decree thus passed by Tendolkar, J. was challenged by the bank in its appeal, whereas the rejection of the companys claim in respect of Rs. 8,882-13-0 by the trial judge gave rise to cross-objections by the company. The Court of Appeal has reversed the finding of Tendolkar, J., and has held that the bank was not liable to repay any amount to the company since it had accepted and honoured the cheques issued on it in good faith. It may be stated at this stage that the plea of negligence which had been originally urged by the company in its plaint was expressly given up at the trial. Since the Appeal Court accepted the banks case on the principal question of law it did not think it necessary to consider the question of limitation or the question about the applicability of the equitable doctrine on which the trial judge had relied. In the result the appeal filed by the bank was allowed, the cross-objections preferred by the company were rejected, and the suit filed by the company was dismissed with costs. The company then moved the High Court for a certificate, and on a certificate being granted it has come to this Court; and on its behalf Mr. Andley has urged that in coming to the conclusion that the companys claim was unsustainable the Appeal Court has misjudged the effect of the provisions of S. 89 of the Indian Companies Act in relation to the conduct of the bank in the present case.

Court's reasoning:
In our opinion, this argument is unsound. On a fair and reasonable construction of the resolution it is difficult to uphold the contention that the resolution required the drawers of the cheques to specify on each cheque that they were made or drawn on behalf of the company. The object of the resolution as well as its effect merely was to conform to the requirements of S. 89 of the Indian Companies Act to which we will presently refer. It cannot be said that the resolution required that the drawers of the cheques had to comply with the said condition apart from the requirements of S. 89; and so it would be unreasonable to treat the said requirement as a condition prescribed by the resolution independently of S. 89This communication affords an eloquent contrast to the communication made by the company to the bank in regard to the earlier resolution by which C/s. Poddar and Chacko were authorised to issue cheques on its behalf. Therefore, in our opinion, the argument that the impugned cheques accepted by the bank were inconsistent with the specific mandatory requirements authorised by the resolution cannot be acceptedIt is clear that in order that a company may be bound by a negotiable instrument purporting to have been issued on its behalf two conditions must be satisfied; the instrument must be drawn, made, accepted or endorsed in the name of or by or on behalf of or on account of the company, and the person who makes, draws, endorses or accepts the instrument must have the authority given to him by the company on that behalf. This authority may be either express or implied. There is thus no doubt that before a company can be bound by a negotiable instrument 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. This position is not disputedThus, there can be no doubt that the failure to comply with the essential requirements of S. 89 must necessarily mean that the negotiable instrument in question defectively issued cannot be enforced against the companyThe present dispute is between the bank and its constituent the company, and the claim made by the latter proceeds on the assumption that in honouring the cheques irregularly drawn the bank has acted improperly and exposed itself to the charge that it has honoured the cheques wrongfully and improperlyIt would be noticed that the principle underlying S. 89 which is a very healthy and salutary principle affords to the companies protection against claims made on negotiable instruments defectively or irregularly drawn; but, when we deal with a dispute between a company and the bank of which it is a constituent it is difficult to extend the said principle. The said principle in terms is applicable only when a claim is made against a company on a negotiable instrument; in other words, it is only in the matter of enforcement of negotiable instrument against a company that the principle comes into play. It is, therefore, difficult to see how the principle enunciated in S. 89 can be extended to a claim made by the company against the bank. In our opinion, therefore, the High Court was right in coming to the conclusion that S. 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 S. 89 has been extended to a claim like the presentIt would thus be clear that the authority of this decision of the House of Lords is in favour of the view taken by the High Court that the principle enunciated by S. 89 of the Indian Companies Act 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 S. 89 and could not have been enforced against it.We ought to add that S. 47 of the corresponding English Act of 1862 is exactly in the same terms as S. 89 of the Indian Act.