Suraj Bahu and Ors. vs Jaitley and Co. and Ors. Case

Introduction

This case is to determine if an agent of a company has taken a loan not in the name of the company but the company has benefitted from the loan amount, whether or not it will be held liable to the creditor.

Facts of the case

• There was a joint Hindu family which had for many years done business under the name of P.L. Jaitly and Co. The family included three sons of Mr Murlidhar (who had started this family business but died in 1938) i.e.  Parshotam Lal, Narotam Lal and Kesari Narain. Despite the fact that Murlidhar was the family’s nominal leader, the firm was run by the eldest son, P.L. Jaitly, from 1929 to 1930.

• There was a company named Lower Ganges Jumna Electric Distributing Co., Ltd (L.G.J.E.D. Co. which was in liquidation.and P.L. Jaitly and Co. were Managing Agents of the same. An application for the winding up of the company was made by the Secretary of State for India on 12th April 1934. It was mainly based on the allegation that a large sum was due from the Company and that the Company was unable to pay its debts.

• P.L. Jaitly, the Managing Agent, refuted this, claiming that he was owed a considerable sum by the government and proposed that before June 9,1934 he will pay Rs. 75,000 and the monthly bills on a regular basis in response to an application for the appointment of a provisional liquidator. The Company Judge accepted this and issued orders for the same both on May 8th and July 18th, 1934 but P.L. Jaitly even on the latter date failed to pay Rs. 25,000 out of the Rs. 75,000 which he promised to pay. It was claimed by him that the Banks refused to allow the Company’s accounts to be operated on because of the winding up application and his credit was harmed as a result of it.

• It was then offered by P.L. Jaitly said that if the Court gave directives to the Banks allowing him to run the Company’s accounts he promised to pay Rs. 25,000 and the amount outstanding on the bills by July 23rd. The court again agreed again on the condition that money was anyhow paid on the said date. And it was for the payment of this amount that the said loan was taken by P.L. Jaitly as it is shown by the order dated of July 23rd that an amount of Rs. 82,000 was paid into Court.

• A promissory note was signed in favour of Joshi Parshotamji for obtaining Rs. 10,000 in cash and Rs. 25,000 by cheque on 22nd July. P.L. Jaitly wrote or pretended to write two letters to Joshi Parshotamji on the same day as Exhibits(Ex.s)[1]  15 and 16.

• In the first letter (Exhibit 15)  i.e. in Hindi language it was mentioned that P.L. Jaitly had borrowed Rs. 85,000 from Joshi Parshotamji and had transferred in his name shares in the Gorakhpur Electric Supply Co., with a face value of Rs. 65,000 and that these shares are obliged to remain pledged as a collateral until the principal was paid with interest. Another letter that is mentioned as Exhibit 16 in the present case is the one which is said to have been written on the same date but in a different language i.e. in English and states that P.L. Jaitly had borrowed this Rs. 35,000 against his promissory note from Joshi Parshotamji for the demand in connection with the L.G.J.E.D. Co. Ltd.

• Now since the loan was not paid back a suit was filed against 9 defendants out of which the first is P.L. Jaitly and Co. and the second and third are P.L. Jaitly’s brothers. The next three are sons of P.L. Jaitly and the following two are sons of Kesri Narain. As P.L. Jaitly was an insolvent he was not sued personally and in his place we find as defendant 9 the Official Assignee of Calcutta.

• First it was thought that the claim for the loan amount against the company L.G.J.E.D. Co. had to be made before the liquidator but later on permission of the court the company was added as the defendant 10. But the Additional Civil Judge decided the suit only against P.L. Jaitly’s two brothers and the two sons of Kesri Narain, limiting their liability to the joint family property in their possession and directing that the shares which had been pledged as security should be sold first in satisfaction of the decree. He further ruled that the defendants (the defendants against whom the suit was determined) would be given credit for any sums that the plaintiff, as a creditor of P.L. Jaitly, would get from the Official Assignee and dismiss the suit against other defendants.

• The present appeal is for contesting this dismissal of the suit against two of P.L. Jaitly’s sons and against the L.G.J.E.D. Co. The main part of the appeal is in regard to dismissal against the company only.

• It states that he, P.L. Jaitly, had that day borrowed Rs. 35,000 from Joshi Parshotamji against his pronote “for the requirement in connection with the Lower Ganges Jumna Electricity Distributing Co., Ltd.”

Issue

Whether the money was borrowed by Mr. P.L. Jaitly in his personal capacity or on behalf of Messrs. P. L. Jaitly and Co. as Managing Agents of the L.G.J.E.D. Co. Ltd. only, and if the latter is the case, is defendant only liable for the payment of the debt.

Arguments in the case-

Appellants

• ●       A contention was made on the side of appellants that the company must be made liable since it benefited by the deposit of the money in Court as the money was used for the purpose of securing the postponement of the appointment of a provisional liquidator. And it is a settled law even if the managing agent was not authorized to borrow the money but the counsel of appellants took reference of various cases to prove its point like that of Dehra Dun-Mussoorie Electric Tramway Co., Ltd. v. Jagmandar Das where it was held that persons contracting with a Company and dealing in good faith may assume that acts within the powers of the Company have been properly and duly performed and it is not their responsibility to inquire whether all the acts of internal management were performed and therefore , in the present case there can be no doubt that P.L. Jaitly was empowered by the Articles of Association to borrow money for the Company and if he did obtain this loan for the Company in the sense that credit was given by Joshi Parshotam to the Company and not to P.L. Jaitly himself there would be nothing more to be said.

• The second case that the appellant took help of is Secy. of State v. G.T. Sarin & Co. (’30) 17 A.I.R. 1930 Lah. 364. In that case the plaintiff was a contractor who had supplied food for the horses of a cavalry regiment. Under the terms of Section 30(2) of the Government of India Act, the official who granted him the contract was not authorised to do so. The plaintiff was entitled to compensation under Section 70 of the Contract Act since he had legitimately supplied the food and had not done so gratuitously, and the defendant had benefited from it.

• Also on the point of how the plaintiff thought the company could be alone held liable on the promissory note when P.L. Jaitly had personally assumed sole the learned Counsel of appellants made a reply that both P.L. Jaitly and the lender may have thought that the company would be bound by P.L. Jaitly’s signature since he was the agent of the company and the principles are bound by the acts of the agent.

• The plaintiff further presented the statement of a witness Hari Krishna Bhatt, son-in-law of Joshi Parshotamji, to contend that the letter, Ex. 16, was written at the same time as the promissory note was written as it was alleged by the defendants that Ex 16 letter to be written on a later date. ,

Defendants

• The company cannot be made liable as even though the company benefited from the loan amount the loan was not taken in the name of the company as the object of the loan was not specified anywhere. The first letter i.e. exhibit 15 had no reference in regard to the object of the loan and it was alleged by the defendants that exhibit 16 letter was in truth written some time later and not on the same date collusively with the object mentioned as it was seen that the Exhibit 16 letter mentions nothing but the object of the loan only and is found somewhat unnecessary. It is said that the immediate object of the loan for P.L. Jaitly was to save him and his family from losing their lucrative job as Managing Agents of the Company and therefore to keep the liquidator from taking possession of the company, P.L. Jaitly borrowed the money and deposited it at the High Court. And later to shift the liability to the company he wrote this letter altering the date of writing it.

Summary of Court’s Decision and Reasoning in the case

First, the court held that the creditor had no separate cause of action against P.L. Jaitly’s sons since his property had vested in the Official Assignee and included the sons’ share in the joint family property. In order to get this property, the plaintiff must contact the Official Assignee. The court held that P.L. Jaitly had acted as manager of the joint Hindu family in the transaction, and that the entire family was responsible, including his brothers and their sons.

The court then answered particularly according to each reference given by both the sides. On the case reference of DehraDun-Mussoorie Electric Tramway Co., Ltd. v. Jagmandar Das, given by side appellants, the court said that even though there was an empowerment by the company to P.L jaitley for borrowing of the money what really had to be considered in the present situation is whether this was not a loan to the Company but a loan to P.L. Jaitly himself and in answering this question 3 things need to be taken into consideration :

(1) the circumstances of the Company and the admitted fact that its credit had been impaired by the winding up application; (2) the fact that the promissory note was executed in the name of P.L. Jaitly alone, without any addition suggesting that he might be acting on behalf of the Company, not even the addition of the words “Managing Agent, L.G.J.E.D.Co” (3) the fact that the additional security taken in the form of shares was P.L. Jaitly’s personal property.

Since these considerations do not involve the fact whether P.L. Jaitley was empowered by the company to take a loan or not therefore the case cited can have no bearing on the present case.

On the contention made with reference to the second case i.e. Secy. of State v. G.T. Sarin & Co. it was said that the court’s decision in this case appears to be solely focused on the fact that the plaintiff provided the food to the person sued. Before the L.G.J.E.D. Co. can be held liable, it must be established that not only did the money come into their hands, but that it was effectively put into their hands by the plaintiff through the managing agents, with both parties understanding that the company would be liable for repayment when the promissory note was signed which is not really seen in the present case.

On the contention of the counsel for appellants that both P.L. Jaitly and the lender must have believed that the firm would be bound by P.L. Jaitly’s signature, the court found this hard to accept this because there is no indication or evidence on the promissory note that Jaitly was acting for anybody other than himself. Therefore apparently the fact that the company benefitted is insufficient to bind the company. The court for explaining the same drawed an example i.e. if  B borrows money from A in order for his own purposes to lend it to C, C cannot be held liable to A, even if A knew with what object the money was being borrowed. Before he can be held so liable it must be found that the loan was actually a loan to A. All the indications in the present case are that the loan was made to Jaitly personally and on his personal security, there being very strong reasons why Joshi Parshotamji should not lend the money to the company.

The court further said in reference to the example taken of the case of  Krishnanand Nath v. Raja Ram to explain that the managing member of a joint Hindu family can execute in his sole name a promissory note which shall be binding on the family as a whole. This supports the Court’s conclusion that P.L. Jaitly executed the promissory note as joint family manager, but there is no rationale for applying the same approach to a company, which is covered by the provision of Section 89 of Companies Act executed the promissory note as joint family manager.

The Court first said that it cannot accept the evidence of Hari Krishna’s testimony regarding the letter of ex 16 being written at the same time as the promissory note, but even if it is considered true the specific statement therein that the money was borrowed “for the requirement in connection with the L.G.J.E.D. Co.” wasn’t enough to prove that the money was lent to the Company. P.L. Jaitly had referenced in the said letter as  “my pronote” and indicated that he is the one who had implemented it and not the company both in this and the other letter of Ex. 15.

The learned Judges finally held that the suit against the company was rightly dismissed as from the present facts it is clear that there was no intention to bind the company at the time of execution of the loan. Even if Joshi Purshotamji was informed at the time of execution that the loan was being taken for the company the company could have been made liable but since there was no concrete proof in regard to whether the second letter mentioning the object was written at the time of execution of pronote therefore this contention cannot stand.

Analysis

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 taken into consideration a lot of previous judgement like that of where a similar situation took place and has given its judgement in consonance of the principles laid down by these previous judgements. It has first looked into the concern of why there is no separate cause of action for the creditor against sons of P.L. Jaitley. Then it has looked into the concern of whether the company would be held liable in the present case if it has benefitted from the loan amount.

The court analyzed every evidence and statement and determined that since there was no concrete proof in regard to the time of writing of the second letter mentioning object of the loan and at the time of taking of the loan the creditor was not informed that the loan was being taken for the company therefore it implies that there was no intention to bind the company for the repayment of the loan.

Conclusion

This case had a great impact in determining that the mere fact that a company benefited from a loan is not sufficient to bind a company for paying back the loan. What actually matters is whether the loan was initiated in the name of the company or on the personal liability of the agent. If the loan was not initiated in the name of the company and there was no intention to bind the company at the time of giving loan then even if company benefited from the loan it will be not held liable to the creditor