Jamshedji Naoroji Gamadia v. Maganlal Bankeylal & Co.

Macleod, C.J:— The plaintiffs filed this suit seeking to recover the sum of Rs. 26,671-9-0 from the first defendant, and praying for a declaration that the pledge of the shares mentioned in Ex. E to the plaint was binding on the second defendant, and that the second defendant had no right to prohibit the transfer of the said shares to the name of the plaintiffs. They also prayed that they might be authorised to sell the shares mentioned in Ex. D and appropriate the net proceeds towards part satisfaction of the decree to be passed in their favour.

2. Plaintiffs alleged that the first defendant had borrowed certain amounts from them on security of certain shares. On April 12, 1921, it was found that Rs. 38,000 were due by the first defendant and the first defendant passed a writing to the plaintiffs whereby he promised to pay the plaintiffs the said sum of Rs. 38,000 on demand with interest, and gave details of the shares which were to remain as security. Thereafter the plaintiffs had received a certain amount of interest on certain shares and also sold certain shares under the instructions of the first defendant. On making up the account the amount of Rs. 26,671-9-0 was found due to the plaintiffs, against which the plaintiffs had in their possession the shares mentioned in Ex. D to the plaint, out of which fourteen shares of the Emperor Edward Mills and one share of the Nagpur Mills stood in the name of the second defendant. The plaintiffs had in their possession the share certificates and transfer forms signed by the second defendant, who had given notice to the companies concerned not to transfer the share to any other person. The first defendant had failed to pay the sum of Rs. 26,671-9-0, and hence the suit was filed claiming the relief above mentioned. The first defendant filed a written statement asking for an account but at the hearing he admitted the claim.

3. The second defendant in his written statement alleged that in April 1920 the first defendant had induced him to join the first defendant in cotton business as financing partner, representing that he only owed Rs. 16,000 on the transaction of the firm of Framroze Boga & Co. of which he had been a partner and which had been dissolved. Relying on the representation the second defendant agreed to become a partner with the first defendant upon the terms of two writings dated April 24, 1920, and as the second defendant had not sufficient cash it was arranged that he should hand over to the first defendant certain shares with blank transfers signed by him on which the first defendant should be at liberty to borrow money for the purposes of the said business. The aggregate value of the shares was Rs. 2,03,889 and amongst them were fourteen shares of the Emperor Edward Mills and one share of the Nagpur Mills. Thereafter the second defendant discovered that the first defendant's liabilities in the firm of Framroze Boga and Co. far exceeded Rs. 16,000 and that he had employed the money raised on the security of the said shares of the second defendant in paying off these liabilities. When the second defendant threatened the first defendant with proceedings he executed a writing in favour of the second defendant on May 20, 1920, and on January 28, 1921, executed a mortgage of his property known as the “Bharda Building” to secure repayment of one lakh.

4. Accordingly the second defendant contended that the first defendant had obtained possession of the said shares by means of an offence and fraud, be that the pledge of the shares in favour of the plaintiffs by the first defendant was not valid and binding on the second defendant.

5. By way of counter-claim he prayed that the plaintiffs might be ordered to return the shares to him.

6. The following issues were raised at the trial:—

(1) Whether the suit shares were handed over to the first defendant under the circumstances mentioned in para 3 of the written statement?

(2) Whether the first defendant obtained possession of the shares by means of an offence and fraud?

(3) Whether the pledge alleged by the plaintiffs was valid and binding on the second defendant?

(4) Whether second defendant was en-titled to his counter-claim?

7. The trial Judge believed the story of the second defendant that the first defendant told him that the liabilities of the old firm amounted to Rs. 16,000 only, but was of the opinion that the second defendant was willing that the money to be raised on pledge of the shares was to be utilised in paying off that liability besides helping to start the new business.

8. On the second issue he decided that the first defendant obtained the shares by a material misrepresentation of fact, but that as the interests of a bona fide pledgee under Section 178 of the Indian Contract Act had intervened, the second defendant could not be placed in the status quo ante. Consequently he held that the pledge was valid and binding on the second defendant who was entitled to redeem the shares on payment of the amount for which they were pledged.

9. A fifth issue had been raised whether the second defendant had not ratified all the acts of the first defendant whereby he was estopped from disputing his liability to the plaintiffs.

10. The Judge held that the mere fact that he took further security from the first defendant did not amount to a ratification.

11. The second defendant has appealed.

12. His main ground of appeal was that the learned Judge should have held that the first defendant had obtained possession of the shares from the appellant by means of an offence or fraud.

13. He contends that first defendant falsely represented that his old debt was only Rs. 16,000 and that if he had known that the debt amounted to a very much greater sum he would not have given the first defendant the shares to pledge.

14. What the appellant's case against the first defendant was on January 25, 1921, is made clear from his solicitors' letter of date, Ex. No. 2. After referring to the writing of April 24, 1920, whereby first defendant agreed to execute a mortgage in respect of two of his properties in favour of the second defendant whenever called upon to do so for securing the moneys to be advanced and the fact that second defendant handed over certain shares with blank transfer forms signed by him to enable the first defendant to raise moneys thereon for financing the new business which was to be started, he complains that the moneys so raised were utilised for liquidating the private debts of the first defendant in abuse of the confidence reposed on him by the second defendant without his knowledge and consent so that the new business was never started. On second defendant discovering this he wanted to prosecute the first defendant but he promised to redeem the shares very shortly. As the first defendant had neither redeemed the shares nor executed the mortgage though he had given a fresh writing on August 10, 1920 (Exh. 2), he was called upon to redeem the shares within twenty-four hours or pay the value thereof and in default proceedings either civil or criminal would be taken against him. There is no suggestion in that letter that the original intention was that first defendant should pay off old debts to the extent of Rs. 16,000 out of the amount borrowed on the shares or that second defendant would be entitled to give notice to the different companies not to register any transfers.

15. In his evidence the second defendant said:—

“Framroze Boga was dissolved in April 1920. First defendant proposed I should finance his business after the dissolution. I said I had shares and he could raise money on them to continue a business with me as partner. He said the existing liabilities were Rs. 16,000. My shares were not to go towards that. I would not have given those shares to the first defendant if I had known the liabilities were Rs. 80,000… About August 1920 I came to know he had raised monies on my shares and used them for his own purposes. Then I gob the writing of August 10, 1920, executed by first defendant. I also got the first defendant to execute a promissory note for Rs. 1,30,000 on April 30, 1920. On January 28, 1921, I took a second mortgage of the first defendant's Bombay Building. I threatened first defendant with legal proceedings (that was by the letter of January 25, 1921), and he gave me the second mortgage.”

16. On April 24, 1920, the second defendant had given the first defendant a writing Exh. F. authorising him to borrow monies on the shares given to him either by making badlas or by over drawing monies by depositing the said shares with some bank or with shroffs.

17. Cross-examined about that document he said:—

“I did not understand when I signed it that I was giving first defendant unreserved liberty to pledge. The letter is plain enough. I say it did not authorise first defendant to pledge the share for any purpose he wanted. First defendant said he had to discharge liability of Rs. 16,000 and he wanted money for that also. The shares of value of those I deposited were to finance to this business also. First defendant got these shares from me by fraud, viz., obtaining them for partnership and thus misapplying them.”

18. It is difficult owing to these contradictory statements to arrive at any satisfactory conclusion whether first defendant was authorised or not to spend out of the monies borrowed on the shares, Rs. 16,000 or any other sum towards discharging his own liabilities. It is true that there is some foundation for the allegation to this effect of the second defendant in the writing Exh. 6 given by the first defendant to the second defendant on April 24, 1920, but against that there is the statement of the second defendant in his evidence that his shares were not to be used by the first defendant for raising money to pay off his own liabilities. The first defendant said he did not tell the second defendant his private liabilities were Rs. 16,000. Second defendant did not ask, what were the liabilities of the firm the first defendant was continuing. The shares were not given for the new business. They were given so that he could raise margin money. Second defendant had given him shares before by way of margin money. On his own confession the first defendant was guilty of misappropriation of the monies borrowed on the shares. The second defendant's case cannot stand higher than this: “I know the first defendant wished to wind up his old business. He told me the liabilities of that business ware Rs. 16,000 and I was willing that monies should be raised to pay off those liabilities and provided the capital for our partnership business. If I had known that first defendant's liabilities were Rs. 80,000 I would not have consented to stare a new business with him, and I would not have handed over the shares.”

19. But in my opinion the case set up in Exh. 2 is the right one and that the second defendant gave the shares to the first defendant to raise money thereon for the new business.

20. The question, therefore, is, as propounded by the Advocate General whether the person who advanced money to the first defendant on the shares standing in the name of the second defendant were bound to make inquiries as to the first defendant's title to deal with the shares, or whether the second defendant by putting into the hands of the first defendant his shares with blank transfers signed be him was estopped from disputing the title of a holder of the shares and transfers who received then in good faith from the first defendant and advanced money to the first defendant on security of the shares.

21. It is impossible to lay down any general rule. The answer to the question must depend on the facts of the case. The decision in France v. Clark(1) is not of much assistance. Prance, the registered holder of certain snares, deposited the certificates with Clark as security for £ 150 and gave him a blank transfer signed by himself. Clark deposited the shares and the transfer with a third party as security for £ 250. The third party filled in the transfer in his own name and sent it in for registration. If was held he had no title against Prance except to the extent of what was due from France to Clark. A person who without inquiry takes from another an instrument signed in blank by a third party and fills up the blanks cannot even in the case of a negotiable instrument claim the benefit of being a purchaser for value without notice, so as to acquire a greater right than the person from whom he himself received the instrument. Clark was regarded in the light of an equitable mortgagee of the shares. The documents themselves showed that Clark was not the owner and there was no evidence of a mercantile usage that the holders of such documents were treated as having the right to transfer. Blank transfers with share certificates were not negotiable instruments. In this case the first defendant was the agent of the second defendant to raise money on the shares. I cannot agree with the learned Judge when he says the first defendant was a principal. The letter of April 24, 1920, is clearly an authority to the first defendant to raise money on the shares, on behalf of the second defendant, the moneys to be utilised according to the terms of Exh. 2 in the business to be started by defendants Nos. 1 and 2, as partners. The first defendant being authorised to pledge the shares it cannot be said that he had obtained possession of them by means of an offence or fraud. At the most it may be said that he induced the second defendant to negotiate with him with regard to starting a new business by misrepresenting the amount of his liabilities in his old business. Such a misrepresentation would enable the second defendant to avoid the agreement to start the new business and to recover the shares entrusted to the first defendant for the purpose of raising money for that business. The question whether the pledge of the shares before the rescission of the contract would be invalid is considered by Messrs Pollock and Mulla in their notes to Section 178 of the Indian Contract Act, at p. 639. The authors think that the use of the term “fraud” in juxtaposition to offence would seem to indicate that it is confined to the substantive wrong of deceit. If possession of goads obtained under a contract voidable on the ground of fraud is possession obtained by fraud a pledge by the possessor could be invalid even before the rescission of the contract although an out and out sale would be valid under S. 108. I agree with their conclusion that it was not the intention of the legislature to depart from the common law, and that the obtaining of goods or documents by fraud of which, the proviso to S. 178 speaks must mean obtaining possession by such a trick or fraud as excludes real consent and therefore cannot be the foundation of any contract. The fraud if any committed by the first defendant was not committed in obtaining possession of the shares but in his disposition of the moneys obtained by pledging them.

22. Even assuming that the pledgee on being asked to lend money on the shares with blank transfers standing in the name of the second defendant was put on inquiry with regard to the title of the first defendant, he would have been shown the letter of authority signed by the second defendant.

23. I think therefore, the decision of the learned Judge was right and that the appeal should be dismissed with costs.

Coyajee, J.:— I agree in holding that the pledge of the share certificates created by the first defendant in favour of the plaintiffs is valid: Section 178 of the Indian Contract Act. The term “goods” used in that section is very wide (S. 76 of the said Act), sufficiently wide to include share certificates: Fazal v. Mangaldas(2). In my opinion the evidence in this case, which is fully discussed in the judgment of the learned Chief Justice, makes it clear that the first defendant had not obtained those certificates from the second defendant by means of “fraud” within the meaning of that expression as used in the proviso to S. 178. The proviso, it would seem, does not exclude from the operation of the section the case of goods obtained under a contract voidable on the ground of fraud. For it would be anomalous that although a person who has obtained possession of goods under a contract voidable at the option of the other party to it can transfer full ownership of these goods before the contract is rescinded (exception 3 to S. 108), he cannot make a valid pledge at all of the same goods. In this case the second defendant handed over the share certificates and transfer forms duly signed to the first defendant on April 24, 1920. On that day two documents (Exht. E and Ex. No. 6) were exchanged between them. The one passed by the second defendant gave the first defendant authority to raiser moneys on the pledge of those certificates in language both plain and wide. It says:—I authorise him and give my consent to borrow monies either by making Badlas or by overdrawing monies by depositing the said shares with some Bank or big shroffs.” The material statements in the other document are:— “With regard to the cotton brokerage business which I have been carrying on…in the name of Messrs Framroze Boga and Company and with regard to the current business of the said brokerage which I have taken upon myself in the said firm you have this day (given).to me certain shares…to enable me to borrow monies thereon…For the monetary assistance which you have given to me I bind myself to make an agreement with you as soon as the accounts of my old customers are settled.” The agreement here referred to was a contemplated partnership agreement between the parties. It seems to me that the effect of the evidence of the second defendant read with these documents and with his attorney's letter of January 25, 1921 (Exh. No. 2), is this: Not that the pledge of the share certificates was unauthorised, but that the monies so borrowed were wrongly applied by the first defendant to unauthorised uses. But with this the plaintiffs have no concern. They have acted in good faith in making the loan on the pledge of the share certificates.

24. In my opinion the decree of the learned Judge is right and this appeal must fail.

25. Appeal dismissed.