Madras Provincial Co-operative Bank Ltd. Vs. South Indian Match Factory Ltd. (In Liquidation) - Court Judgment

Leach, C.J.

1. On 16th February 1939, an order for the compulsory winding up of the South Indian Match Factory, Ltd., was passed in proceedings on the Original Side of this Court and one M. Ramachandra Rao, who was then an advocate of this Court, was appointed the Official Liquidator. The main assets consisted of the factory building and machinery. The Court directed the sale of these properties by private treaty and the Official Liquidator entered into negotiations with one Shamsuddin Rowther. In the month of January 1940, an agreement was entered into between the Official Liquidator and Shamsuddin Rowther for the sale of the properties, subject to the confirmation of the Court, for a sum of Rs. 5750 and Rs. 200 was paid as earnest money. This payment was made by a crossed cheque in favour of the Official Liquidator. Under Section 244A, Companies Act, the Official Liquidator was required to open an account with a bank and pay therein moneys received by him in the course of the liquidation. Rule 66 of the rules framed then by this Court under the Companies Act required that all bills and other securities payable to the company or to the Official Liquidator should, unless the Judge otherwise directed as soon as they came into the hands of the Official Liquidator be deposited by him in the bank for the purpose of being presented for acceptance and payment or payment only as the case might be. The Official Liquidator here failed to open an account with a bank. The cheque for Rs. 200 was drawn by the purchaser of the factory and plant on the Madras Provincial Co-operative Bank, Ltd. It was a crossed cheque but the liquidator induced the bank to cash the cheque. The Court sanctioned the sale to Shamsuddin Rowther and on 9th May a cheque for Rs. 5550 was handed over to the Official Liquidator by the purchaser in discharge of the balance of purchase consideration. This cheque was drawn on the Madras Provincial Co-operative Bank, Ltd., by the advocate who was acting for the purchaser. It was an open cheque. The same day the Official Liquidator presented it to the Madras Provincial Co-operative Bank, Ltd., for payment, and payment was made. The Official Liquidator misappropriated the proceeds, for which he was prosecuted, convicted and sentenced. This resulted in his name being struck off the roll of advocates. On 8th February 1943, Bell J., passed an order removing M. Ramachandra Rao from the office of the Official Liquidator and appointed the Official Receiver of Madras to act in that capacity. The new Official Liquidator on 12th February 1943, instituted a suit on the Original Side of this Court against the Madras Provincial Cooperative Bank, Ltd., for the recovery of Rs. 5550. He alleged that the bank had acted negligently in paying the cheque, and that it was also liable for conversion. The suit was tried by Bell J. who held that the claim was well founded and passed a decree for Rs. 5550 with interest. This appeal is from the judgment of the learned Judge.

2. The drawer of the cheque had an account with the bank and there was sufficient money in the account to meet the cheque. It is the duty of a bank, in such circumstances to obey the order of its customer. Section 31, Negotiable Instruments Act, says that the drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default. If the payee had been a private individual the action of the bank in paying the amount of the cheque could not have been called in question. It is said that inasmuch as the cheque was drawn in favour of an Official Liquidator the bank was put on inquiry and was negligent in paying over to him personally the amount for which the cheque was drawn. Before paying M. Ramachandra Rao the Rupees 5550 the bank called for his order of appointment which was, it is said, sufficient in itself to put it on inquiry. It is also said that its officers must be deemed to know the law and that M. Ramachandra Rao had no right to ask for payment to him personally.

3. The order of appointment has been exhibited. Clause (6)(f) prohibited the Official Liquidator without the sanction of the Court, from indorsing a bill of exchange, hundi or promissory note in the name and on behalf of the company. Clause (7) stated that, subject to the retention in his hands of such moneys as might be required for current and necessary expenses, the Official Liquidator should deposit all moneys collected by him into the Imperial Bank of India within seven days after the receipt thereof to the credit of the liquidation account. The cheque in question was made out to 'M. Ramachandra Rao, Official Liquidator in Original Petition No. 5 of 1939, or order.' From the cheque itself the bank had notice that it was made out to him as Official Liquidator and that it realized this in full is shown by the fact that it called for the order of appointment. The contention of the plaintiff that the bank acting through its officers must be deemed to know the law cannot be contradicted, and this case must proceed on the basis that the bank knew that the Official Liquidator ought to have a bank account and that he could collect the amount of this cheque only through his bank. Section 244A, Companies Act, and Rule 66 of the rules framed by this High Court under the Companies Act make this perfectly clear.

4. We will now turn to Section 85, Negotiable Instruments Act. Section 85 says 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.' Section 10 defines what is payment 'in due course' and it says it means 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 ampunt therein mentioned. Therefore Section 85 only protected the bank if it made payment in accordance with the tenor of the instrument, in good faith and without negligence. Was this payment made to M. Ramachandra Rao by the bank on 9th May 1940 a payment made in good faith and without negligence? We have no doubt that the officers of the bank did not realise, as they should have done, that the bank was doing something improper, but in the circumstances there was negligence. They new or must be deemed to have known that his money could only be collected by the payee through his own bank and therefore it was most improper on his part to ask for payment over the drawee's counter. In our judgment there was here a clear breach of a statutory duty placed upon the bank and the Learned Judge was right in holding the bank liable. The payment of the cash to M. Ramachandra Rao facilitated his misappropriation of the money. As payment was not made in due course Section 85 does not help the bank and it must take the consequence of its negligence. The appeal is dismissed with costs.