KESHARICHAND JAISUKHAL VS THE SHILLONG BANKING CORPORATION (1965)

INTRODUCTION 

This case brief addresses the appellant’s (Kesharichand Jaisukhal) claim against the respondent bank (The Shillong Banking Corporation) which is in liquidation now on non-payment of Rs 8,800/- (Rs. Eight thousand eight hundred only) which was not credited to the appellant’s account despite deposit of two cheques for collection.  The issues here are (i) the respondent acted negligently and the in breach of bank’s duty to credit the appellant’s account for the sum of Rs. 8,800/- (Rs. Eight thousand eight hundred only) (ii)the claim was bar of limitation.

FACTS

On December 9, 1946, the appellant had deposited two cheques, amounting to Rs. 8,800/- (Rs. Eight thousand eight hundred only), with the respondent bank for collection. The bank did not credit the amount to the appellant’s deposit account and combined overdraft. The respondent instead of receiving cash from the Bharati Central Bank (the drawee), received a cheque for Rs. 8,800/- (Rs. Eight thousand eight hundred only) drawn on the Nath Bank. The respondent then deposited this cheque to the Nath Bank on December 10, 1946, but it was returned due to insufficient cover.

The respondent accepted a demand draft for the sum from the Bharati Central Bank after further unsuccessful attempts to collect payment, which was subsequently not paid due to the bank’s liquidation. On January 2, 1947, the Bharati Central Bank closed its operations, and on January 28, 1947, the appellant raised the issue of the respondent’s failure to credit the amount to his account.

Thereafter, the respondent bank admitted the appellant as a preferential creditor in the liquidation proceedings for the draft amount subsequent to liquidation of the respondent bank. The appellant however disagreed and contented that the respondent bank should credit the full amount of Rs. 8,800/- (Rs. Eight thousand eight hundred only) to his account. However, the respondent bank rejected the claim and asserted that the appellant had consented to the handling of the demand draft and it had acted in the best interest of the appellant by filing a claim in the liquidation.   

ISSUE

1. Is the respondent bank bound to credit the appellant for Rs. 8,800/- (Rs. Eight thousand eight hundred only)?

The main issue here is whether the respondent bank has the obligation to credit the appellant’s account with Rs. 8,800/- (Rs. Eight thousand eight hundred only) for non-payment of the demand draft. The appellant independently accepted the demand draft from Bharti Central Bank and was not aware of the risks involved. Nath Bank’s failure to obtain payment from Bharti Central Bank does not absolve it of the responsibility to credit the appellant’s account.

1. Is the suit barred by limitation? 

The respondent bank argues that the appellant’s claim is barred by limitation. However, the fact that the appellant’s account remained open until December 1950 and the continued communication between the parties suggest that the appellant did not waive its right to challenge the non-crediting of Rs. 8,800/- (Rs. Eight thousand eight hundred only).

PETITIONER’S ARGUMENT

1. Entrustment of Cheques for Collection
   The appellant had entrusted the respondent for collection cheques in question. This entrustment had established an agency relationship, wherein the banker (respondent) acted as an agent of the customer (appellant) for the specific purpose of collecting the amounts from the respective drawee banks.
2. Crediting of Amounts Before Clearance
   On December 9, 1946, the respondent credited the appellant’s account with the amounts of the cheques before they were cleared. However, the subsequent dishonour of one of the cheques led the respondent to reverse this credit by debiting the appellant’s account on December 11, 1946. Importantly, it was neither shown that the credit entry was communicated to the appellant nor proven that there was an arrangement allowing the appellant to draw against the credited amount before clearance. This lack of communication and specific arrangement supports the view that the respondent remained the agent for collection and did not acquire ownership of the cheques.
3. Banker-Customer Relationship and Fiduciary Duty
   Once a customer deposits money with a banker, the banker becomes a debtor, not an agent or fiduciary. This principle, however, applies to general deposits of money, not specifically to situations involving cheques entrusted for collection. When a cheque is handed over for collection, the banker acts as an agent until the cheque is cleared, after which the relationship transitions into that of debtor and creditor.
4. Legal Position in the Absence of Endorsement or Arrangement
   In the absence of an endorsement indicating that the cheques were handed over for collection or an explicit arrangement permitting the appellant to draw on the credited amount before clearance, the legal presumption is that the respondent acted as an agent for collection. The unilateral action of crediting the appellant’s account does not negate the agency relationship unless the bank explicitly assumes ownership of the cheque, which is not evident in this case.
5. Respondent’s Preferential Creditor Status
   The appellant’s contention that the respondent’s actions (accepting the demand draft and seeking preferential creditor status) prevent it from claiming dishonour of the cheques is unfounded. The bank’s preferential status in relation to the Bharan Central Bank does not alter its agency role in this transaction. The respondent’s actions align with banking norms and do not constitute a waiver of its right to reverse the credit upon dishonour of the cheque.

RESPONDENT’S ARGUMENT

1. Presentation of Cheques and Acceptance of Alternative Payment Instruments

The respondent duly presented the cheques on the Bharati Central Bank for payment. When the Bharati Central Bank, instead of paying cash, issued a cheque on the Nath Bank, the respondent, acting in good faith and in the interests of the appellant, accepted it. This action aligns with the banking practices at Shillong, where collecting cash for cheques was not always customary.

Importantly, this acceptance was within the respondent’s scope of agency. The appellant, upon being informed of the dishonour of the cheque on the Nath Bank, ratified the respondent’s decision to accept the cheque and even instructed the respondent to represent the cheque and later accept a demand draft in lieu of the dishonoured cheque. Such actions by the appellant confirm their acknowledgment and approval of the respondent’s conduct.

1. Principle of Ratification

Ratification occurs when a principal approves or adopts an act performed by their agent, even if it was not expressly authorized initially. By instructing the respondent to accept the demand draft and approving subsequent steps, the appellant unequivocally ratified the respondent’s actions regarding the collection process. This ratification binds the appellant to the acts of the respondent, preventing the appellant from later disowning those actions or disputing the respondent’s role as their agent.

1. Banker’s Duties and Performance

A banker entrusted with the collection of cheques is obligated to:

1. Follow the customer’s instructions, if provided.
2. Adhere to the customary banking practices prevailing in the region where the banker operates.
3. Use reasonable skill and diligence in presenting and securing payment for cheques.
4. Take appropriate steps to safeguard the customer’s interests.

In this case, the respondent’s actions, including presenting the cheque, accepting the cheque on the Nath Bank, and subsequently accepting the demand draft on instructions from the appellant, were in accordance with the customary practices at Shillong and the appellant’s instructions. There is no evidence to suggest negligence, breach of duty, or deviation from lawful banking usages.

1. Appellant’s Estoppel

By ratifying the respondent’s acts, the appellant is estopped (barred) from now claiming that the respondent acted in its own capacity or outside the scope of the agency. The appellant’s consistent approval of the respondent’s actions, including the steps taken in securing the demand draft, affirms the continuation of the agency relationship.

1. Respondent’s Fulfilment of Duties

The respondent

1. Acted in good faith and in the interests of the appellant.
2. Adhered to customary banking practices.
3. Followed instructions from the appellant upon dishonour of the Nath Bank cheque.
4. Used reasonable skill and diligence throughout the collection process.

Since there is no evidence of negligence or misconduct on the part of the respondent, they cannot be held liable for the loss arising from the dishonour of the cheque or the draft.

ANALYSIS

In this case, the central issue revolves around whether the respondent, a banking company now in liquidation, was liable to credit the appellant with the sum of Rs. 8,800/- (Rs. Eight thousand eight hundred only) in connection with two cheques presented for collection. The appellant contends that the respondent acted negligently and is responsible for ensuring the payment of the cheques or crediting the account accordingly.

The facts establish that on December 9, 1946, the appellant handed over two cheques for Rs. 8,200/- (Rs. Eight thousand two hundred only) and Rs. 600/- (Rs. Six hundred only) to the respondent for collection. The respondent credited the appellant’s account with Rs. 8,800/- (Rs. Eight thousand eight hundred only), but instead of securing cash payment, the respondent accepted a cheque from the Bharati Central Bank drawn on the Nath Bank. The cheque was returned unpaid due to insufficient cover. Despite attempts to collect payment through a demand draft, the funds were never received. Eventually, the Bharati Central Bank closed its business, and the respondent’s claim was admitted as a preferential creditor in its liquidation proceedings.

The appellant’s argument hinges on the assertion that the respondent acted beyond the scope of a mere collecting agent and instead took on the risk of receiving the funds directly, thus being responsible for the failure to credit the appellant’s account. The appellant further claims that, by accepting the demand draft and seeking payment through its own means, the respondent acted as a principal and not as an agent.

The court must determine whether the respondent, by accepting the cheque on its own responsibility and by failing to provide timely information about the dishonoured cheque, can be deemed to have assumed the risk of non-payment. The appellant also contends that the respondent, by initiating claims in the liquidation of the Bharati Central Bank, acknowledged the sums as owed to itself and not to the appellant.

The majority opinion holds that, in light of the respondent’s actions, it cannot now hold the appellant liable for the Rs. 8,800/- (Rs. Eight thousand eight hundred only). The respondent’s acceptance of the cheques, without clear communication or reliance on the appellant’s instructions, placed the responsibility on them to secure payment, not the appellant. The respondent’s subsequent actions, including the filing as a preferential creditor, further support the conclusion that their claims should lie against the Bharati Central Bank, not the appellant.

CONCLUSION  

The appeal in this matter concerns the claim of the Shillong Banking Corporation, represented by its liquidator, for the inclusion of the appellant’s name in the list of debtors, with a debt of Rs. 6000/- (Rs. Six thousand only). The dispute arises from the appellant’s objection to the bank’s claim, particularly challenging the validity of the claim on the grounds of limitation and the circumstances surrounding the demand draft for Rs. 8,800/- (Rs. Eight thousand eight hundred only) issued by Bharati Central Bank Ltd., Shillong.

The appellant contends that the cheque for Rs. 8,800/- (Rs. Eight thousand eight hundred only), which was initially issued for realisation, was not processed in the usual manner. Instead of being converted into cash, the bank opted for a demand draft from Bharati Central Bank Ltd. to its Calcutta branch, without the appellant’s knowledge or consent. The appellant further asserts that they were unaware of the transaction involving the demand draft and that the bank’s failure to inform them about the suspension of business by Bharati Central Bank Ltd. should absolve them of any liability. Additionally, the appellant challenges the bank’s claim, arguing that if the cheque had not been cashed or properly realised, the bank should have notified them promptly.

After careful examination of the facts, the legal objections raised, and the principles of equity and fairness in financial transactions, it appears that the appellant’s arguments regarding the bank’s failure to notify them and the subsequent action taken are not entirely without merit. The appellant’s failure to inform the bank of their withdrawal of funds or provide sufficient evidence to counter the liquidator’s claim may influence the final outcome.

Thus, the courts below correctly concluded that the suit was not barred by limitation. Issue No. 1, therefore, was answered appropriately in the negative, as the account remained mutual and the claims fell within the permissible time frame for litigation. The mutual nature of the account and the continuation of transactions until the last recorded entry supported the legal position that the suit was timely and the claim not barred by limitation.