Union Bank Of India v. Swastika Motors

Union Bank of India, plaintiff, the payee sues Swastika Motors, defendant No. 1, the drawee and Prestolite of India Ltd., defendant No. 2, the drawer of hundis to recover Rs. 4.21,103.68 p., besides costs, interest pendente lite and future interest on the allegations that the bank had provided commercial credit to Prestolite of India Ltd., the manufacturer, on the discounting of the bills by means of purchase of hundis, drawn by it on Swastika Motors one of its dealers and that the bank had delivered the documents of title to the goods intended for delivery to Swastika Motors on the acceptance of the hundis by Swastika Motor. The hundis are said to have been drawn between the period September, 1973 to Nov. 1973 and between January to Mar. 1974. It is alleged that the drawee duly accepted the hundis and the documents were delivered to the drawee but the drawee has failed to honour the hundis after acceptance thereby rendering the drawer and the drawee jointly and severally liable to the bank for the amount. The bank claims that the hundis had been presented for acceptance by Swastika through the latter's bank and the Swastika had duly accepted the hundis and that the notice of dishonour was duly given to Prestolite.

2. Suit is resisted by Swastika, inter alia, on the ground that as a distributor Swastika had made deposit of Rs. 2.50,000/- with Prestolite and Swastika was also entitled to interest on the amount as also to overriding commission, bonus, etc. in terms of the dealership agreement and that the goods represented by the documents of title delivered to Swastika through its bank were supplied against the aforesaid entitlement and that the Swastika at no stage signified its acceptance of the hundis and, therefore, never accepted any liability either to Prestolite or to the bank and that, therefore, the suit against Swastika was misconceived. A plea was also raised that the suit had not been instituted by a competent person, it was further alleged that the hundis had been transferred or endorsed to the collecting banker and as such, the bank had no locus standi to maintain the suit. The suit was resisted on behalf of Prestolite, inter alia, on the grounds that on the acceptance of the hundis by Swastika, the liability of Prestolite to the bank was extinguished and Swastika Motors alone were liable to the bank. The claim of Swastika that the goods had been supplied to it against the deposits and other entitlement of Swastika from Prestolite was denied. In the replication, the bank has, by and large, reiterated the averments made in the plaint. It is pointed out that the bank had “endorsed” the hundis in favour of the collecting banker “for realisation” and that did not prevent the bank from maintaining the suit.

3. On the pleadings of the Parties, following issues were framed on Sept. 29, 1976 :—

1. Whether the suit has been instituted by a duly authorised person?

2. Whether the suit is not maintainable against defendant No. 2?

3. Whether defendant No. 1 executed the hundis in suit only in taken of the receipt of the lorry receipts?

4. Whether there is no privity of contract between the plaintiff and defendant No. 1? and to what effect?

5. Whether the plaintiff is not the holder in due course in respect of the hundis drawn by defendant No. 2 on defendant No. 1?

6. Whether the documents i.e lorry receipts were delivered on behalf of defendant No. 2 to defendant No. 1 against the amount held in deposit with interest, commission and bonus? If so, what is its effect on the claim of on the basis of hundis in suit?

7. To what amount including interest is the plaintiff entitled and against whom?

4. Subsequently, following further issues were framed on the amended pleadings of the parties.

8. Whether defendant No. 1 did not accept the hundis for payment ? If so, what is its effect?

9. Whether the plaintiff bank has no locus standi to file the present suit?

10. If issue No. 8 is found against the defendant No. 1, whether the acceptance of the hundis by him was subject to the condition that defendant No. 1 was not to pay the amount of the hundis? If so, what is its effect?

11. Whether the plaintiff had notice of the dealings between defendants Nos. 1 and 2 with regard to issuance of hundis? If so, what is its effect?

12. Relief.

5. In support of rival contentions, parties led both oral and documentary evidence. I have also heard learned counsel for the parties. Plaintiff was allowed leave to produce additional evidence with regard to the competence of the person who acted in relation to the suit.

6. My conclusions on the various issues are as follows:

Issue No. 1

7. This issue is based on the plea of Swastika that the suit had not been instituted by a duly authorised person. This issue was, however, not pressed pursuant to the recording of additional evidence by which the bank successfully established the authority of the person who had acted for the bank in relation to the suit. Issue is accordingly answered in the affirmative.

Issue No. 2

8. This issue is based on the plea of Prestolite that on the acceptance of the hundis on presentation by Swastika, Prestolite was discharged of all obligations to the bank in terms of the credit allowed by the bank to Prestolite and that the suit was, therefore, not maintainable against Prestolite. There is no substance in this plea. The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof to compensate the holder, provided due notice of dishonour has been given to or received by the drawer. This is what Ss. 30 and 32 of the Negotiable Instruments Act provide. Prestolite was admittedly the drawer of the hundis and the bank the payee and Swastika, the drawee having dishonoured the hundis the drawer would be liable to the payee and the only requirement is of the due notice of dishonour and it was not disputed that such a notice had been duly received by the drawer. If the documents of title, accompanying the hundis, were delivered to the drawee without a valid acceptance, as is the claim made by the drawee, doubt would certainly arise if the drawer would still be liable to the bank on dishonour of the hundis by the drawee. But even then, suit would, nevertheless, be maintainable even though the claim may or may not be eventually sustained. There is a clear distinction between the maintainability of a suit and the sustainability of the claim, on which it is based. Even if one conceded that the documents of title were delivered to the drawee without a proper acceptance, suit against the drawer would still be maintainable. The issue is answered accordingly. The suit is, therefore, clearly maintainable.

Issue No. 9

9. This issue is based on the plea of Swastika that the bills had been endorsed in favour of Laxmi Commercial Bank by the Union Bank and the Union Bank therefore, had no locus standi to file the present suit. There is no substance in this plea. In para 10 of the plaint, the Union Bank stated that the bank presented the hundis to Swastika “through the Laxmi Commercial Bank Ltd.” and that Swastika accepted the same and the documents accompanying the bills were delivered to Swastika. P.W 1 who was, at the material time, working as Manager of the Union Bank, stated in the course of his cross-examination that “while forwarding the hundis, we used to first endorse them on the back side in favour of the Laxmi Commercial Bank, the drawee's bankers. These endorsements were in fact made.” This statement is sought to be construed by Swastika to mean that the hundis had been assigned to the Laxmi Commercial Bank by “endorsement” and that Laxmi Commercial Bank, therefore, ceased to be merely a collecting banker and that the Laxmi Commercial Bank was the assignee or the endorsee of the hundis and not merely the drawee's banker to whom the hundis had been sent for presentment for acceptance and payment. The original hundis bear on the top the words, “through Laxmi Commercial Bank Ltd., Kashmiri Gate Delhi” and bear on the back a stamp of the Union Bank to this effect : “Deliver to the order of the Laxmi Commercial Bank Ltd. for Union Bank of India, Chandni Chowk. Accountant, Chandni Chowk, Delhi.”

10. With a view to take advantage of the unfortunate impression created by the statement of Radhey Sham, Swastika sought leave to amend the written statement to contend that by virtue of this “endorsement.” the property in the hundis was transferred to the Laxmi Commercial Bank thereby divesting the Union Bank of all rights under it and that, therefore, Union Bank lost standing to sue the drawee on the basis of the dishonoured hundis. Leave was granted and this plea was inserted by the defendant in the amended written statement. In para 17(A) of the replication, Union Bank, however, challenged this assertion and pointed out that “merely because the plaintiff endorsed the hundis in favour of the Laxmi Commercial Bank for realisation does not prevent the plaintiff from maintaining the present suit.” There is a clear distinction between forwarding bills for realisation to an intermediate banker, whether the banker of the drawee or otherwise, and endorsement of a negotiable instrument in favour of an intermediate banker. It is no doubt true that Radhey Sham, as also the Union Bank were strictly speaking under a misapprehension when they used the expression “endorsed in favour of Laxmi Commercial Bank” and the use of the loose expression is capable of creating some confusion in the precise relationship that was thus created between the Union Bank and the Laxmi Commercial Bank but a look at the hundis resolves the doubt because the hundis leave no manner of doubt that these were being presented through the Laxmi Commercial Bank and the stamp on the back of the hundis merely authorised the Laxmi Commercial Bank to make the realisation and the averment of the Union Bank in the replication that the hundis were sent to Laxmi Commercial Bank for “realisation” sufficiently clarifies the position so as to disentitle the Swastika to contend that there was any assignment of property in the hundis or an endorsement of the hundis in favour of the Laxmi Commercial Bank so as to transfer any property in its favour. Union Bank, therefore, retained the necessary locus standi to sue. The issue is answered accordingly.

Issues Nos. 3, 4, 5, 6, 7, 8, 10, 11 and 12

11. These issues could be conveniently considered together either because they overlap or are based on alternative pleas and pleas which represent different ramification of the question if the drawee signified his acceptance of the hundis or not.

12. The question, if Swastika signified its acceptance of the hundis, on which the claim is based is crucial to the case of the bank not only against Swastika, an aspect of which the parties have been fully aware, but also as against Prestolite as well, and this is an aspect to which parties have, by and large, been indifferent and this indifference is reflected not only in the plaint and the written statement of Prestolite but also in the conduct of the trial and at the stage of arguments.

13. It is well-settled that the drawee of a bill of exchange, and a hundi is a bill of exchange, is liable to the drawer, as indeed, the payee or holder, whether a bank or otherwise, on its basis, only on acceptance. Sec. 32 of the Negotiable Instruments Act provides that in the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively and the acceptor of a bill of exchange, on or after maturity is bound to pay the, amount thereof to the holder on demand. Under this Section, the liability of the drawee arises only when he accepts the bill. There is no provision in the Act that the drawee is as such liable on the instrument, the only exception being under Sec. 31 in the case of a drawee of a cheque having sufficient funds of the customer in his hands and even then the liability is only towards the drawer and not the payee. Where there is no acceptance no cause of action can have arisen to the payee against the drawee. (See Jagjivan Mavji v. Ranchhoddas Meghji, AIR 1954 SC 554). In the absence of such an acceptance, the drawee may be liable to the drawer on the original transaction but there is no liability of the drawee to the discounting bank in such a case, ordinarily, the drawer, however, continues to be liable to the discounting banker of a bill of exchange both before or after acceptance by the drawee until due payment by the drawee to the bank and if the drawee dishonours the bill after acceptance, the drawer continues to be liable to the bank. A bill of exchange may be a bill simpliciter or what is described as “accommodation bill” without any security. It may also be a “documentary bill of exchange” i.e where the bill is accompanied by documents of title. In the latter case, the discounting banker has the virtual custody of the goods, which provide him the security, on the basis of which he gives the commercial credit by the process of discounting. Such a banker holds these documents of title until acceptance by the drawee or until the payment by the drawee, as the case, may be.

The discounting banker is not supposed to deliver documents of title to the drawee, where it is a documentary bill of exchange, until valid and clear acceptance by the drawee. But if the banker delivers the documents to the drawee without any acceptance or payment or by acceptance which may prove to be illusory or invalid or ineffective, it is doubtful if the discounting banker is entitled to be compensated by the drawer because by its negligence, the discounting banker has parted with the documents of title without the acceptance of the bill by the drawee. In such a case, the drawer no doubt does not lose his remedies against the drawee on the original transaction of sale of goods. The liability of the drawer to compensate the discounting bank would be highly doubtful I am advisedly not expressing any opinion on this aspect of the matter because in their perception of the case, the bank as also the drawer had ignored this aspect with the result that Prestolite denied liability solely on the ground that the bill had been accepted but failed to plead that even if there was no acceptance in the eye of law, Prestolite was nevertheless not liable because the bank delivered the documents of title to the drawee without either acceptance or payment with the result that in case I find that there was no acceptance, the suit must fail against the drawee but not against the drawer, as the beneficiary of the commercial credit received on discounting. The drawer could perhaps have escaped liability if a plea had been raised that in case there was no acceptance, the bank was not entitled to the relief against the drawer because of its failure to exercise due care and caution in delivering valuable documents of title to the drawee without acceptance or payment. The result is, therefore that on the existing pleas of the parties, suit must succeed against both the defendants if there was acceptance of the bills by the drawees but the suit against Prestolite must be decreed even if there was no acceptance by the drawer of the bills notwithstanding that the documents of title were passed on to the drawee without a valid acceptance.

14. What is it then that constitutes a valid acceptance of a bill of exchange by the drawee and what are the legal requirements of it. Sec. 7 of the Negotiable Instruments Act, inter alia, defines the expression “acceptor.” as a person who “has signed his assent upon the bill” and “delivered the same or given notice of such a signing to the holder or to some person on his behalf.” Section 7, following the English Law in that behalf, provides that the drawee becomes an acceptor when he has signed his assent upon the bill. What constitutes acceptance is the signing of assent and such assent appearing on the face of the bill. In view of this provision, there cannot be, apart from any mercantile usage, an oral acceptance of the bill, much less an acceptance by conduct, where at least no question of estoppel arises. Mere acknowledgment of liability by the drawee is, however, not sufficient to constitute acceptance. As the law, however, does not prescribe particular form for acceptance, there is no difficulty in construing an acknowledgment as an acceptance but such acknowledgment must satisfy the requirements of Sec. 7 and must appear on the bill and be signed by the drawee. Mere implication arising from the discharge of the instrument is not sufficient to fix liability on the drawee under Sec. 32 of the Act. See Jagjivan Mavji (supra). To become an acceptor, the drawee must sign his assent upon the bill and in order to signify acceptance, the drawee very often adds express words of acceptance such as “accepted” in addition to affixing his signature on the bill but there is no legal requirement of the addition of those words in order to bind the drawee as an acceptor. All that the Section requires is that he must sign his assent upon the bill. Unqualified signature upon the bill signifies that he assents to the order of the drawer. The bill is essentially an order by the drawer on the drawee to pay the payee a specified amount of money on demand or within a specified period of time. Such a bill may be presented for acceptance and payment or first for acceptance and then for payment by the drawer to the drawee or by anyone holding it in due course and until its acceptance, it is a purely unilateral act of the drawer even though its dealings by the payee or the holder in the due course may create another relationship. The drawee is not accountable to anyone on the bill nor liable to them in its terms, until he signifies his assent by the acceptance of the order. Since no form is required and the only requirement is of the signing of the assent on the face of the bill what is necessary is the true intent of the drawee when he affixes his signature on the document.

15. At common law, even an oral acceptance was sufficient. In 1821, it was replaced by a statutory requirement of acceptance in writing on the bill. This, however, did not require the signature of the drawee and it was laid down by high authority that under this statute a mere signature on the face of the bill without any words of acceptance may constitute acceptance in writing within the statute. In 1856, Sec. 6 of the Mercantile Law Amendment Act enacted that no acceptance of any bill would be sufficient unless the same be in writing on the bill and signed by the acceptor or on his behalf. In 1878, it was held that in view of the change in the statute, simply writing the name of the drawee across the face of a bill would not constitute a valid acceptance and that there must also be upon the face of the bill some word or words indicating an intention on the part of the drawee to be bound by it as acceptor. This case was obviously not correctly decided and by the Bills of Exchange Act, 1878 an express provision was made by which mere signature of the drawee without anything more would be deemed sufficient acceptance. This provision was held to be declaratory of the then existing law, (see; Steele v. Mikinlay (1880) 5 AC 754). The Provisions of this Act were re-enacted in Sec. 17 of the Act of 1882. That Section provides that the acceptance of the bill is the signification by the drawee of his assent to the order of the drawer, that an acceptance was invalid unless it was written on the bill and signed by the drawee and that mere signature of the drawee without additional words as sufficient. The Negotiable Instruments Act was enacted in 1881 and, as observed by the Supreme Court in the case of Jagjivan Mavji, AIR 1954 SC 554 (supra) the Indian Act follows the English law. There is no express provision in the Indian Act corresponding to Sec. 17(2)(a) of the English Act of 1882, but inasmuch as the Provisions of Sec. 17(2)(a) of the English law of 1882 were held to be merely declaratory of the pre-existing law of England, it would be reasonable to hold that there is no further requirement of Sec. 7 that any express words of acceptance in addition to the signature of the drawee are necessary and an unqualified signature by the drawee on the bill without additional words is sufficient signification of his assent on the bill, (see Manick Chand v. Chartered Bank. AIR 1961 Cal 653).

16. Applying these principles to the facts and circumstances of the present case, it follows that the bills were duly accepted by the drawee. 47 hundis, P.W.2/2 to PW2/49 drawn by Prestolite on Swastika requiring Swastika to pay to the order of the bank, the payee, on account of value received as per invoice described in the bill were Presented by the bank to Swastika through the Swastika's bankers Laxmi Commercial Bank. At the back of each of the bills is a stamped endorsement of the payee to the effect: “Please pay/deliver to the order of Laxmi Commercial Bank.” The goods covered by the invoices mentioned in each of the bills were despatched to the payee and the documents of title were enclosed with each of the bills. Each of these bills were signed on the back of the bills on behalf of Swastika simultaneously with the delivery of the documents of title to Swastika. Swastika, therefore, took delivery of the goods but on presentation of the hundis for payment declined to pay. By singing at the back of each of the bills. Swastika would be deemed to have signified its acceptance of the bills in that the signature on the back of the bills are unqualified in terms. That when Swastika affixed its signature on the back of the bills, it signified its acceptance of the same is further reinforced by two additional circumstances. One is that the bill was a documentary bill in that the documents of title were enclosed with them obvious intention being that the documents of title entitling the drawee to take delivery of the goods would be delivered to the drawee only where the drawee accepts the bill, the documents of titles and the goods covered thereby, being a security held by the payee bank. The acceptance of the documents and the taking of the delivery of the goods, therefore, reinforces the acceptance signified by the signature at the back of the bills, what is more, by D2/4. Swastika wrote on June 19. 1974, to Frestolite with reference to “the above mentioned overdue hundis,” that “due to certain unfavourable circumstances such as railway strikes, postal strikes, etc. we could not honour our commitment in time. Now, we have been given to, understand by our bankers M/s. Laxmi Commercial Bank Ltd. that they have been advised by the negotiating bank Union Bank of India, Chandni Chowk and Faridabad to return the overdue hundis lying with them as unpaid. Under the circumstances explained above, we would request you to please approach your bankers Union Bank of India with a request to instruct our bankers M/s. Laxmi Commercial Bank Ltd., Kashmiri Gate Delhi-6 to detain the hundis tin 30th June, 1974. We hope and assure you that by that time we would retire the old hundis.” This document is not mere acknowledgement of liability but a reaffirmation that there had been unqualified acceptance of the bill quite distinct from the liability on the transaction.

17. There is yet another reason which would justify an inference of unqualified acceptance. The system of discounting of documentary bills of exchange clearly implies that the payee bank or the bank who is the holder in due course provides the necessary credit to the drawer of the bills of exchange which are presented for acceptance along with the documents of title to the goods. The documents of titles, as indeed, the goods to which they relate, are held as security by the bank. The documents of title in such cases at the time of presentation of the bill of exchange for acceptance are delivered to the drawee only if the bill is accepted and it is purely for this reason that the payee bank would provide credit because if the bill is not accepted, the banker would not part with the documents and would have recourse to the goods to recover its outstanding against the credit. If the drawee accepts the documents and signs acceptance on the bill, as in the present case, the drawee clearly makes the representation of acceptance not only by signing the bill but also by his conduct in accepting the documents and taking delivery of the goods and would, therefore, be stopped from denying the acceptance after having taken advantage of the documents. In such a case, there would be acceptance by conduct by virtue of estoppel and this conduct is in addition to the signature on the face of the bill. That there may be acceptance by conduct, even without an acceptance on the face of the document, where a question of estoppel arises was clearly visualised by the Supreme Court in the decision in the case of Jagjivan Mavji (AIR 1954 SC 554) (supra).

18. Even so, counsel for the drawee sought to urge that there was no acceptance and sought support from the decision of the Supreme Court in the case of Jagjivan Mavji and pointed out that in that case. Supreme Court held that there was no acceptance of the bill even though the bill had been discharged and that clearly imported an acknowledgement of liability on the bill. The Supreme Court, however, drew a distinction between the acceptance of the instrument and an acknowledgement of liability and held that mere acknowledgment of liability by discharge or otherwise was not a substitute for acceptance. This is so because in that case, no acceptance was signified on the face of the bill, either by signature of the drawee or otherwise and that is by the Supreme Court pointed out that to be valid, an acceptance of such an instrument must satisfy the requirements of Section 7 and must appear on the bill. Counsel also tried to read into the decision of the Supreme Court a dictum that acceptance must be signed by the drawee, but ignored that the question before the Supreme Court was if the acknowledgment by discharge was acceptance or not and held that the acknowledgement could have been an acceptance but for the fact that it was “neither in writing nor is it signed by the defendants.” It is not possible to read into these observations the requirement that the acceptance must contain more than a mere signature. In that case, the bill had been discharged and there was neither an acknowledgement of liability on the bill nor was the bill signed by the drawee. The observations of the Supreme Court, therefore, have to be seen in this context. This decision was referred to by the Calcutta High Court in the case of Manick Chand (AIR 1961 Cal 653) (supra) and it was observed that there was an authority of the Supreme Court that the Indian Act “following the English law, provides that the drawee becomes an acceptor when he has signed his assent upon the bill and that an unqualified signature by the drawee on the bill without additional words is sufficient signature of his assent on the bill”. Counsel sought support from the fact that there was no express provision in the Indian Act corresponding to S. 17(2)(a) of the Bills of Exchange Act, 1882. But this is of no consequence as rightly pointed out by the Calcutta High Court because the provisions of S. 17(2)(a) of the 1882 Act were merely declaratory of the existing law as has been pointed out above. An attempt was made by counsel to explain away the bare signature on the back of the bill of exchange as a mere receipt for the documents of title. There is no substance in this contention. In the first instance, there was no occasion for a mere receipt of documents of title. The reason why the documents of titles were enclosed with the bill of exchange are so obvious. Secondly unqualified signature having no reference to the documents belies this contention. There is no material to support the contention that the drawee was not liable even if there was valid acceptance because of an agreement or arrangement with the drawer to the contrary. No such agreement or arrangement was placed on the record or otherwise proved. Bare word of Swastika to that effect is contrary to the common course of events and therefore to be rejected. Even if the Bank could legitimately be fixed with knowledge of the dealings between the parties there is nothing to show that the bank was aware of any agreement or arrangement of an usual character, which is contrary to the established practice.

19. For all these reasons, I hold that there was valid acceptance of the bills of exchange by the drawee rendering the drawee liable to the bank for the suit amount. It has already been held above that in view of the dishonour of the bills of exchange by the drawee notwithstanding acceptance, the drawer nevertheless continues to be liable to the bank. In the circumstances, suit of the Union Bank of India for Rs. 4,21,103.68 is decreed with costs against both the defendants. The bank would also be entitled to interest ad litem and future interest till the date of payment at the rate of 12% per annum.

Order accordingly.