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This case is in regard to the borrowing power of a company and whether the company is liable for the loan taken by its managing director if the managing director was not authorized to do so by the company. The case also discusses the liability of the legal heirs of a guarantor for the loan in case there is a death of guarantor before paying off his liability.
- Anandi Lall Poddar i.e. the appellant took a loan of 5 lakhs from the SBI Bank for his business. The Bank advanced the said loan and a promissory note of five lakh rupees was executed by the company in favour of the Bank.
- The promissory note was periodically renewed, and the defendant-company made payments toward the amount advanced to it. The repayment of said loan was guaranteed by Shri Binay Krishna Rohatgi executing guarantees in favour of the bank. In 1953 a promissory note was again reissued by the Company for which Shri Binay Krishna Rohatgi executed a guarantee.
- Finally, the company renewed the last pronote in 1959 for a sum of Rs. 1, 62,000 promising to pay interest at a rate of 7 1/2 percent per year. Shri Binay Krishna Rohatgi signed another guarantee in favour of the bank for the same amount.
- The company, however, did not pay this amount, and the bank eventually filed the money suit on May 12, 1962 against the company for the entire debt of Rs. 1, 82,728-99, which was the amount due including interest till that time. Since Shri Binay Krishna Rohatgi who was the guarantor for all these sums was dead on that date therefore his heirs were made the defendants in the suit and the liability to pay as a guarantor was fixed upon them.
- In the money suit the subordinate judge after reviewing the materials on the record, concluded that the company is liable to repay the loan in question. It was also held that since liability of Krishna Rohatgi was coextensive with the liability of the principal debtor therefore his heirs cannot be absolved from that liability. And therefore, a decree was passed against the company as well as against the heirs of Shri Binay Krishna Rohatgi. The findings of the subordinate judge and the findings of the court was challenged and hence an appeal was filed in Patna High Court regarding the same.
- Whether the company is liable to repay the loan taken by the Managing director of the Company if the Managing director was not authorized to do so by the company.
- Whether the legal heirs of the guarantor are liable to repay the loan in event of death of the guarantor.
Arguments of Appellant on Issue 1
- Advocate General on behalf of Company contended that the company is not obligated to pay the sum in issue since the aforementioned pronote was executed by the chairman of the company without a resolution of the board of directors authorising him to do so. Attention was drawn to the to Section 292(1)(c) of the Companies Act, 1956 and it was submitted that for the managing director to borrow money on behalf of the company there must be a resolution of the board of directors authorizing the managing director to borrow any amount from the bank or any other company. Further, Sections 291 and 292 of the Companies Act specify the role of the board of directors in managing a company and impose certain limitations on the managing director’s power.
- It was further submitted by the advocate general that Shri Anandi Lalj Poddar did not execute the pronote in question, in the capacity of the managing director of the company but as the chairman of the same and the chairman of the company had no such authority.
Arguments by Appellant on Issue 2
- On the second Issue, the counsel for appellants contended that the said guarantee offered by by Shri Binay Krishna Rohatgi was without consideration and therefore the agreement between bank and the guarantor was void in itself only according to Section 25 of Indian Contract Act, 1872 (ICA) and even the pronote itself was executed without there being any consideration for the same, and, as such, it cannot be enforced in law.
- Second argument given by the counsel from side of appellant was that the bank has just annexed a copy of the accounts from 1947 to 1962, along with the plaint and none of the entries in the bank’s ledger have been proven in line with Section 34 of the Evidence Act, which requires that every entry in the books of account routinely held in the course of business be proven before a claim may be made on those entries. Therefore, according to the appellants no liability can be put upon the company or the guarantor just on the basis of these entries as according to section 34 such entries are not sufficient to put a charge on any person.
- On the point of Liability of repaying the loan by Shri Binay Krishna Rohatgi’s heirs the counsel cited Article 290 of Mulla’s Principles of Hindu Law and stated that since there is no evidence to show that in the instant case, Shri Binay Krishna Rohatgi had incurred the liability of the debt for family purposes or for his own personal benefit with the intention of passing that liability to his heirs even after his death, therefore his heirs will not be liable to repay the loan.
- Lastly it was urged by the counsel that the subordinate judge cannot impose a decree for the amount claimed in the plaint i.e. Rs. 1,82,728.99 as it has been clearly mentioned in the letter of guarantee that Shri Rohatgi had just undertaken to pay the amount not exceeding the sum of Rs. 1,62,000 with interest at the rate of 7 1/2 per cent, per annum from the date on which demand for payment shall have been made, but in the present case. However, the amount imposed by the subordinate judge includes Rs. 1,62,000 plus interest from the date of execution of the pronote to the filing of the complaint, which is wrong, Shri Binay Krishna Rohatgi or his heirs cannot be made liable to pay interest prior to the demand having been made on them for repayment of the amount, only the company will be liable to the amount for this period.
Summary of Court’s Decision and Reasoning
On Issue 1
- Regarding the Counsel for appellants’ first argument regarding the Issue 1 the court said that it is an undisputed fact that the initial loan of 5 lakhs taken by Anandi Lall Poddar was after a resolution by the board of directors regarding the same. Therefore, even if there was no resolution of board of directors in the later stage the bank’s entitlement to recover the debt it has loaned to the company cannot be challenged on this basis. Also, it is not that Anandi Lall Poddar has executed the pronote in favour of the bank in his personal capacity but on behalf of the company as even the receipt from the bank regarding the further loan of Rs. 1, 62,000, was executed in favour of the bank therefore the company doesn’t have the authority to say that the managing director was not authorized by the board of directors to execute the pronote in question. The court also took the reference of judgement of T.R. Pratt (Bombay) Ltd. v. E. D. Sassoon & Co. Ltd. to prove this point, in the said judgement it was held by the court that according to general rule of law when an agent borrows money for a principal without the principal’s permission or authority, the law suggests a commitment to repay if the principal benefits from the money borrowed or the money borrowed has gone into the principal’s coffers.
Therefore this principle will also be applicable in cases where the directors or the managing agent of the company has borrowed money without there being authorisation from the company, but the money has been used for the benefit of the company, the company cannot absolve itself from its obligation to repay the money back. The court also took the reference of the case of Shri Kishan Rathi v. Mondal Brothers and Co. where a similar situation took place and it was held by the court in such circumstances, since the dispute is in regard to an internal management of the company, the onus to prove that there was no such power of borrowing with the director, will be on the company only and any such violation would not negate the creditor’s bona fide claim against the company, as it is very normal for the creditor to assume that all the internal requirements of the management has been fulfilled. And hence, it was held by the court that the company is liable to pay the entire amount of the loan.
- Regarding the second argument given by the appellants that the said pronote was not executed by Shri Poddar as the managing director of the company but in the capacity of chairman of the company, the court said that even though Shri Poddar was originally the chairman of the company but was also holding the post of the managing director of the company on the said date. The court came to this conclusion by examining the statement of witness no. 3 who stated that since the managing director of the company i.e. Binay Babu was ill in the year 1959, Anandi Lall Poddar who was then the chairman of the company began to look after the business of the company. The court also stated that Shri Poddar has took the loan in capacity of the chairman of the company will be contradicting pleading of the company itself since in para 7 of the written statement the company itself has stated that the Managing director of the company had no authority to execute the pronote in the absence of a resolution duly adopted by the board of directors for the same, which proves that company had accepted that Shri Poddar has executed the pronote in capacity of the Managing Director of the Company only. Looking upon all these things the court held that since the pronote was executed by Shri Poddar as the Managing Director therefore the company cannot repudiate from its liability in respect of the transaction in question.
On Issue 2
- In relation to the first argument made by the counsel the court said that from the copy of the ledger it is clear that on the basis of the pronote an amount of Rs. 1, 62,000 was deposited by the bank in the account of the company which was a fresh deposition which happened between the two and was withdrawn by them on the same date, therefore this will be considered as a sufficient consideration for the purpose of Section 2(d) of the Indian Contract Act. And a fresh promise made in any old debt is always considered as a valid consideration, the court referred to the judgement of Ibrahim Mallick v. Lalit Mohan Roy and the same will also be a valid consideration for the guarantor as according to Section 127 of Indian Contract Act, any promise made for the benefit of principal debtor will be sufficient consideration to the surety too for giving in the guarantee. Therefore, this 1, 62,000 advanced by bank to the company for the benefit of the company will act as a sufficient consideration for the guarantee.
- In regard to the second argument made by the counsel i.e. the entries of the bank are not sufficient under Section 34 of Indian Evidence Act to put a charge on any person and therefore no liability can be put upon that, the court said that the charge has not been just put by the bank just on the basis of the entries, apart from those the reliance has been also placed on the pronote executed on behalf of the company, as well as on the receipt of payment and the examination of the witnesses on behalf of bank who have confirmed about the amount advance to the company.
- Coming to the answer of court regarding the last argument given by the counsel of appellants (i.e. since Shri Binay Krishna Rohatgi had not incurred the liability of the debt for family purposes or for his own personal benefit with the intention of passing that liability to his heirs therefore, his heirs will not be liable to repay the loan), the court said that in the para 2 of the letter of guarantee it has been clearly written that in case Shri Rohatagi dies or becomes disabled then his executors, administrators or legal personal representatives of his estate will be liable until the expiration of three calendar months’ notice in writing given to you by such legal personal representatives to determine the guarantee.
In the light of the same the court held that the bank cannot enforce the said guarantee against the personal properties of the heirs or their shares in the joint family properties but the bank has full authority to enforce the said guarantee against the properties which has been passed upon the death of Shri Rohatgi to his heirs. The court modified the judgment of the subordinate judge in light of the same. This decision was taken due to the unambiguous terms of the letter of guarantee.
- Lastly, the last argument made by the counsel (i.e. Shri Binay Krishna Rohatgi or his heirs cannot be made liable to pay interest prior to the demand having been made on them for repayment of the amount and only the company will be liable to the amount for this period), the court considered this argument of the counsel and held that the heirs of Shri Binay Krishna Rohatgi shall be liable to pay solely in line with the terms and conditions of guarantee an amount of Rs. 1,62,000 along with interest with effect from the date of the filing of the suit and in light of the same modified the decree passed by the subordinate judge.
The judgement passed by the court is right and totally justified. The judge has looked into every small aspect of the situation and has rightly interpreted it in the light of the current laws, annexed evidences and previous judgements. The court has took into consideration a lot of previous judgement where a similar situation took place and has given its judgement in consonance of the principles laid down by these previous judgements. It has upheld the previous decision and rightly looked into the concerns and rights of the and has protected its bona fide claim of the amount against the company but has also looked into the problems and rights of the present liability of guarantors i.e. the heirs of Shri Rohatgi and therefore the court has upheld the judgement of the subordinate judge.
But the court has amended it on two points i.e. the said guarantee cannot be enforced against the personal properties of the heirs or their shares in the joint family properties and that the heirs of the guarantor shall be liable to pay only an amount of Rs. 1,62,000 along with interest with effect from the date of the filing of the suit and not the interest from the date of execution of the pronote to the filing of the complaint This shows how the court has maintained a balance in its judgement so that it doesn’t just favor one party only but looks into concern of both the parties.
This case had a great impact with relation to the laws governing the borrowing power of the companies. It helped in answering the questions like whether the company can be made liable when the loan taken or borrowing done is within the company’s powers but is beyond the powers of those managing the company. This judgement made it clear that the money that has been borrowed for the benefit of the company then the company cannot run away from its liability to pay back the loan only on the point that the person or agent who borrowed the money was not authorized to do so.