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Woodbriar Estate Ltd. v. Catholic Bank Of India Ltd. .

Kerala High Court

Jul 2, 1957

Judgment

Subsequent
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Structured Summary of the Opinion

Factual and Procedural Background

This opinion arises from two appeals from the judgment of the Temporary Additional District Judge, Kottayam, in O.S. No. 146 of 1124. The suit (O.S. No. 146 of 1124) was brought by Woodbriar Estate Ltd. against the Catholic Bank of India Ltd. for recovery of two sums of Rs. 10,000 and Rs. 5,000 (with interest). The plaintiff's case was that purchasers (Mody and Company) had sent two demand drafts payable at Kottayam; the drafts were endorsed by V.N. Veloo (Managing Director of the plaintiff's managing agents) and delivered to the defendant bank for collection. The defendant bank credited the proceeds to Veloo's personal account in the name of Wilson and Company, after which Veloo withdrew and misappropriated the amounts. The plaintiff alleged conversion and wrongful detention and sought recovery.

The defendant bank denied liability, asserting that it paid Veloo under his instructions, acted in good faith, and had no liability for refund. The District Judge, after considering Sections 85 and 131 of the Negotiable Instruments Act and the evidence, held that the bank had not acted in good faith and without negligence, found the payment to Veloo wrongful, passed a decree in favour of the plaintiff, and directed parties to bear their own costs. Two appeals followed: A.S. No. 437 of 1954 by the defendant against the main decree, and A.S. No. 367 of 1954 by the plaintiff against the disallowance of costs.

Legal Issues Presented

Whether the defendant bank acted in good faith and without negligence in paying the proceeds of the drafts to V.N. Veloo (and thereby whether it is liable to the plaintiff for conversion/wrongful detention).
Whether the defendant bank should be treated as a collecting banker (subject to duties of a collecting bank) or as a paying banker (which would require different legal principles, including whether the bank had paid value).
Whether the learned District Judge erred in disallowing costs to the plaintiff (i.e., whether the costs order should be disturbed on appeal).

Arguments of the Parties

Plaintiff's Arguments

The plaintiff alleged that the drafts (for Rs. 10,000 and Rs. 5,000) were payable to Woodbriar Estate Ltd., were endorsed in a manner indicating payment was to be for Woodbriar Estate Ltd., and that the bank's payment to Veloo (to Wilson and Company) was unauthorised.
The plaintiff contended that the bank's payment to Veloo amounted to conversion and wrongful detention, entitling the plaintiff to recover the amounts covered by the drafts.
On costs, the plaintiff challenged the District Judge's decision to disallow costs and sought costs on appeal (A.S. No. 367 of 1954).

Defendant's (Catholic Bank of India Ltd.) Arguments

At trial the bank's defence was that it paid over the amounts to Mr. Veloo under his instructions, acted in good faith and in the ordinary course of business, and therefore had no legal liability to refund the amounts.
On appeal the bank (through Mr. P. Govindan Nair) argued that the District Judge's finding that the bank did not act in good faith or acted negligently was incorrect, and that the judge failed to apply the correct legal principles governing collecting banks.
In the alternative on appeal the bank contended it should have been treated as a paying bank that paid value for the drafts and thus would not be liable to refund. The court noted this plea had not been raised in the written statement or before the learned District Judge.
Regarding costs, the bank relied on the correctness of the District Judge's exercise of discretion (and referenced the Travancore Act) to support the costs order denying costs to the plaintiff.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bapulal Premchand v. Nath Bank, AIR 1946 Bom 482	Illustration of duties and standards applicable to a collecting banker; relevance of factual circumstances to negligence.	Used as authority that whether a bank is negligent depends on facts; supports the need to scrutinise the bank's conduct in the present case.
Sanyasilingam v. Exchange Bank of India, AIR 1948 Bom 1	Principles regarding collecting banker duties, good faith and absence of negligence; onus on banker to prove good faith.	Referred to for the proposition that the banker claiming protection under the Negotiable Instruments Act must prove good faith and freedom from negligence; relied upon in affirming the District Judge's conclusion.
Brahma Shum Shere Jung Bahadur v. Chartered Bank, AIR 1956 Cal 399	Further authority on the duties and liability of a collecting bank and assessment of negligence on facts.	Relied on as part of the body of decisions establishing that negligence is fact-specific and that surrounding circumstances must be considered.
Madras Provincial Co-operative Bank Ltd. v. South Indian Match Factory Ltd., AIR 1945 Mad 30	Authority touching on the responsibilities of banks in collection operations and relevant considerations in assessing negligence.	Adopted as part of the line of authorities confirming the factual inquiry required to determine a collecting bank's negligence.
Baker v. Barclays Bank Ltd., 1955-2 All ER 571	Principles applicable to a paying banker (i.e., when a bank is said to have paid value and the related consequences).	Cited in relation to the bank's alternate contention that it acted as a paying bank; the court noted the authority but found it unnecessary to apply because the factual record showed the bank acted as a collecting bank.

Court's Reasoning and Analysis

The court reviewed the evidence and the applicable provisions of the Negotiable Instruments Act (notably Sections 85 and 131) and a body of case law concerning the duties of collecting banks. The court set out and applied the following key steps in its analysis:

Statutory and precedential framework: The court observed the settled authorities that (a) whether a bank has been negligent depends on the facts of each case, (b) a banker who seeks protection under the Negotiable Instruments Act bears the onus of proving good faith and absence of negligence, and (c) in assessing a collecting bank's conduct one must consider the customer, the account, and surrounding circumstances.
Examination of endorsements and documentary evidence: The court focused on the endorsements on the two drafts, which read “For Woodbriar Estate Ltd.” and “For Krishnankutty and Veloo (India) Ltd. / Sd/- V.N. Veloo, Managing Director, Managing Agents.” The court held that these endorsements put the defendant bank on clear notice that payment was to be for Woodbriar Estate Ltd., not to Veloo in his individual capacity.
Evaluation of the bank's conduct and witness evidence: The court relied on the evidence of the bank's agent (Mr. John, D.W.1) as extracted by the learned District Judge to conclude that the bank did not act in good faith or without negligence. The bank failed to inquire into the relationship between the plaintiff company and Wilson and Company when Veloo requested collection to Wilson and Company.
Consideration of the paying-versus-collecting bank argument: The court noted that the bank's plea at trial did not assert that it acted as a paying bank or that it paid value for the drafts; that argument was raised on appeal only. The court examined the bank's own account entries (Ex. II) showing the drafts were collected on specific dates and then credited to Wilson and Company, after which Veloo withdrew the funds. These entries showed the bank collected the drafts and then paid out, rather than having paid value earlier. Hence the bank occupied the position of a collecting bank and not a paying bank.
Conclusion on liability: Given the endorsements, the lack of inquiry, the account entries showing collection before payment out, and the failure to plead or provide evidence supporting a paying-bank defence, the court accepted the District Judge's finding that the bank failed to act in good faith and without negligence and that the payment to Veloo (Wilson and Company) was wrongful.
Costs: The court reviewed the District Judge's discretionary decision to disallow costs to the plaintiff. Although the bank pointed to a local statute (Travancore Act) in support, the appellate court found it unnecessary to examine that statute; it was satisfied that the District Judge had properly exercised his discretion and that the order disallowing costs should stand.

Holding and Implications

Core Ruling: Appeals dismissed.

Consequences and immediate effects:

The decree and judgment of the learned District Judge in favour of the plaintiff (Woodbriar Estate Ltd.) are confirmed.
A.S. No. 437 of 1954 (defendant's appeal against the main decree) is dismissed with costs.
A.S. No. 367 of 1954 (plaintiff's appeal against the disallowance of costs) is also dismissed; the appellate court found no reason to interfere with the District Judge's exercise of discretion and ordered that, in the circumstances, the parties will bear their own costs in this appeal.
The bank was held not to have acted in good faith or without negligence in paying the proceeds of the drafts to Veloo/Wilson and Company; the payment was wrongful in law and the plaintiff is entitled to recover the amounts. This is the direct effect on the parties in this litigation.

The opinion does not purport to lay down a new precedent; it applies established principles about collecting bankers' duties to the facts and confirms the lower court's decision.

K.S.B

Show all summary ...

Vaidialingam, J.:— These two appeals arise out of the judgment of the learned Temporary Additional District Judge Kottayam, in O.S No. 146 of 1124. A.S No. 367 of 1954 is by the plaintiff against the disallowance of costs by the learned District Judge. A.S No. 437 of 1954 is by the defendant, the Catholic Bank of India Ltd., against the main decree passed by the District Judge.

2. O.S No. 146 of 1124 was filed by Woodbriar Estate Ltd., against the Catholic Bank of India Ltd., for recovery of two sums of Rs. 10,000 and Rs. 5,000 together with interest thereon. Plaintiff's case was that in pursuance of contracts entered into with Mody and Company, Bombay, the latter company, as purchasers, had sent two demand drafts on 16-3-1946 and 20-3-1945 payable on certain banks at Kottayam. Krishnankutty and Veloo (India) Ltd., were the managing; agents for the plaintiff company and one Mr. Veloo was the Managing Director of the Managing Agents Co. The two drafts for Rs. 10,000 and Rs. 5,000 were endorsed by the Managing Director, Mr. Veloo, and delivered for collection to the defendant Bank. The defendant Bank instead of collecting the amounts and paying the same to the plaintiff company, credited the same to the personal account of Mr. Veloo in the name of Wilson and Company. Veloo appears to have drawn the amounts and misappropriated the same. The plaintiff's case was that the said payment by the defendant Bank to Veloo was unauthorised and that the plaintiff is in law entitled to recover the said two amounts covered by the two drafts on the ground of conversion and wrongful detention.

3. The defendant Bank contested the claim on the ground that they paid over the amount to Mr. Veloo under his instructions and that they had acted in good faith and in due course of business and as such there was no liability in law for refunding the amounts to the plaintiff, especially as the amounts had already been paid over to the Managing Director of the Managing Agents, Mr. Veloo.

4. The learned District Judge on a consideration of the relevant sections of the Negotiable Instruments Act and also on the evidence placed before him came to the conclusion that the defendant Bank cannot be said to have acted in good faith and without negligence. In particular, the learned Judge has also referred to the actual endorsement on the two drafts and held that endorsement clearly puts the defendant Bank on notice that the amount has to be paid only for the plaintiff company and not to Veloo in his individual capacity. In this view, the learned Judge held that the payment of the amounts covered by the two drafts to Mr. Veloo was wrongful in law and as such he passed a decree against the defendant Bank for the amount claimed. The learned Judge directed the parties to bear their own costs and this aspect of the matter is considered by him in paragraph 20 of the judgment.

5. As stated earlier, the defendant Bank has filed A.S No. 437 of 1954 and A.S No. 367 of 1954 is filed by the plaintiff.

6. Mr. P. Govindan Nair the learned counsel for the defendant-appellant has raised two main contentions before us. They are (i) that the learned Judge's finding that the defendant has not acted in good faith and without negligence is wrong and that the learned Judge has not properly applied the correct legal principles regarding the duties of a collecting Bank; and (ii) that in any event, the learned Judge erred in treating the defendant Bank as a collecting Bank and that he should have treated the said Bank as a Bank which has paid value for the drafts, and as such he should have applied different legal principles applicable to such paying Banks.

7. Regarding the first contention, we are to state that we are unable to agree with the learned counsel, Mr. Govindan Nair. In our view, the learned judge has come to a correct finding on the evidence adduced in the case. The duties of a collecting banker have been considered in the decisions in Bapulal Premchand v. Nath Bank, AIR 1946 Bom 482 (A); Sanyasilingam v. Exchange Bank of India, AIR 1948 Bom 1 (B); Brahma Shum Shere Jung Bahadur v. Chartered Bank, (S) AIR 1956 Cal 399 (C) and Madras Provincial Co-operative Bank Ltd. v. South Indian Match Factory, Ltd., AIR 1945 Mad 30 (D).

8. In construing Sections 85 and 131 of the Negotiable Instruments Act these decisions have laid down that whether a Bank is guilty of negligence depends on the particular facts of each case. The onus of proving “good faith” and “absence of negligence” is on the banker claiming protection under the Act. It is also laid down that in finding out whether a collecting banker has or has not been negligent in a particular case it becomes necessary to take into consideration any factors such as the customer, the account and the surrounding circumstances.

9. In this case there is no dispute that the two demand drafts, Ex. F and Ext. A, were in the name of Woodbriar Estate Ltd. Ex. F dated 10-3-1946 for Rs. 10,000 was a draft in favour of Woodbriar Estate Ltd., by the Indo Mercantile Bank Ltd., Bombay, on its branch at Kottayam. The next draft for Rs. 5,000 dated 20-3-1946 marked Ex. A in the case was by the Central Bunk of India Ltd., in favour of the plaintiff company payable on the Bank's branch at Kottayam. Both these drafts were endorsed as follows:

“For Woodbriar Estate Ltd.,”,

“For Krishnankutty and Veloo (India) Ltd.

Sd/- V.N Veloo,

Managing Director, Managing Agents”.

10. These endorsements are enough to put the defendant Bank clearly on notice that the amount is payable only to Woodbriar Estate Ltd., and not to anybody else. The learned Judge has set out the evidence of Mr. John, D.W 1 who was the Agent of the defendant Bank at Kottayam. The evidence extracted, by the learned Judge clearly shows that it could not be said that the Bank has acted in good faith and without negligence.

11. When Mr. Veloo asked the defendant Bank to collect the proceeds of the drafts to his company, Wilson and Company, the bank officials have never cared to find out what exactly is the connection between the plaintiff company and Wilson and Company and whether the plaintiff company had authorised the payment of the amount to Wilson and Company. The evidence adduced in the case clearly justifies the finding of the learned District Judge that the Bank cannot be said to have acted in good faith and without negligence in paying over the amount to Wilson and Company. Therefore, we accept the finding of the learned District Judge on this point.

12. Then Mr. Govindan Nair contended that the defendant bank should be considered to be not a collecting Bank but a paying bank in the sense that they had paid for the drafts and as such they have no liability in law for refunding the amounts. It must be stated at the outset that such a defence has not been raised in the written statement of the Bank. The main contention was that they had no liability to pay the amounts to anybody other than the person who presented the draft endorsed by the payee and that as it was Mr. Veloo who presented the drafts to them they were entitled to pay the amounts to Mr. Veloo and they were so paid to the account of Wilson and Company under directions from Mr. Veloo.

13. Based on this reasoning they contended that they had paid the amounts in good faith and in due course of business. That they have paid value for the drafts and that they acted as a paying Bank has not been mentioned at all in the written statement. In fact such a plea, if it had been raised, would require evidence as to the exact time when the drafts were given to them, when they paid cash for the same and when they collected the proceeds of the drafts. That such a contention was not raised even before the learned District Judge is clear from what is stated in paragraph 6 of the judgment. The learned Judge observes as follows:

“That defendant was acting only in the capacity of a collecting bank is not disputed.”

Further, lower down, the learned Judge again observed in the same paragraph,

“No argument was made for the defendant on the basis that Veloo was a holder and/or that defendant paid value.”

14. The principles applicable to a paying banker have been summarised in “Banking Law and Practice in India” by Mr. M.L Tannan, 1954, 8th Edition, at page 215. In this connection reference also can be made to the decision reported in Baker v. Barclays Bank Ltd., 1955-2 All ER 571 (E), where the principles applicable to such a case have been laid down. But we feel that it is unnecessary to embark on this branch of the argument because it is clearly seen from Ex. II, copy of the current account of Wilson and Company with the defendant bank that Ex. F, the draft for Rs. 10,000 dated 18-3-1946 was collected by the defendant bank on 21-3-1946 and credited to the account of Wilson and Company on that date.

15. On the same day and on subsequent days Mr. Veloo has drawn practically the whole amount. The said Ex. II also shows that the second draft, Ex. A, dated 20-3-1946 for Rs. 5,000 was collected by the defendant bank on 29-3-1946 and credited on the same day to the account of Wilson and Company. The said amount along with other amounts is drawn by Mr. Veloo on 30-3-1946.

16. The dates given above will clearly show that the defendant bank cannot be considered to be a paying Bank. The entries in their own accounts extracted above prove that it was only after the drafts were collected that they paid the amount to Mr. Veloo. It cannot be considered that the defendant bank occupies the position of a paying bank who has paid value for the drafts even before realising the same from third party bankers. In this view, even the second contention raised by Mr. Govindan Nair fails.

17. In the result, the decree and judgment of the learned District Judge are confirmed and A.S No. 437 of 1954 is dismissed with costs. A.S No. 367 of 1954 is filed by the plaintiff against the disallowance of costs by the learned District Judge. Mr. Rama Iyer, the learned counsel for the appellant contends, that the learned Judge erred in not awarding costs to his clients. Mr. Govindan Nair, the learned counsel for the defendant, has contended that the order of the lower Court regarding costs can be supported in view of the Travancore Act 12 of 1.1.24 It is unnecessary for us to go into the provisions of the said Act as we are satisfied that the order passed by the learned District Judge cannot be said to De wrong. The learned Judge has exercised his discretion properly and disallowed costs to the plaintiff. We see no reason to interfere with the said order and accordingly A.S No. 367 of 1954 will also stand dismissed, but in the circumstances, the parties will bear their costs in this appeal.