Steel Authority Of India Ltd. vs Punjab & Sind Bank & Ors.
2012 Latest Caselaw 7144 Del

          *IN THE HIGH COURT OF DELHI AT NEW DELHI
%                            Date of decision: 13th December, 2012
+                                LPA No.1115/2004

      STEEL AUTHORITY OF INDIA LTD.               ..... Appellant
                  Through: Mr. H.S. Phoolka, Sr. Adv. with Ms.
                             Gursimranjit Singh & Mohd. Aaquil,
                             Advs.
                          Versus
    PUNJAB & SIND BANK & ORS.                                 ..... Respondents

Through: None.

CORAM :-

HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW

RAJIV SAHAI ENDLAW, J

1. This intra-court appeal impugns the judgment dated 20.09.2004 of

a learned Single Judge of this Court of dismissal of W.P.(C)

No.5678/1998 preferred by the appellant for the reason of entailing

disputed questions of fact incapable of adjudication in writ jurisdiction

and relegating the appellant to the remedy of a suit and further holding

the appellant entitled to avail of the time spent in prosecuting the writ

petition, if the suit were to be filed within 30 days of the dismissal of the

writ petition.

2. Notice of the appeal was issued. Vide order dated 24.04.2006, the

respondents No.3 &4 were proceeded against ex-parte and the appeal

admitted for hearing. None has appeared for the respondents No.1&2

Punjab & Sind Bank today inspite of the matter having been held over for

some time. Considering that the appeal is of the year 2004, it is not

deemed expedient to await the respondents No.1&2 any further and we

have heard the senior counsel for the appellant.

3. It is the case of the appellant that the respondents No.3&4, in

consideration of purchase of steel from the appellant, had furnished Bank

Guarantees issued by the respondents No.1&2 Bank to the appellant; on

default by the respondents No.3&4, the said Bank Guarantees were

invoked; however the respondents No.1&2 Bank instead of honouring

and encashing the Bank Guarantees averred that the Bank Manager who

had issued the same had no authority and thus repudiated the Bank

Guarantees. Impugning the said repudiation, the writ petition from which

this appeal arises was filed, seeking a direction to the Bank to make

payment under the Bank Guarantees.

4. The respondents No.1&2 Bank contested the writ petition inter alia

pleading as under:

"3. That as the matter involves fraud and conspiracy, not only the manager of the Bank, but other people are also involved and the conduct of the employees of the petitioner and other respondents is full of suspicion and their involvement is subject to investigation. The question of fraud, cheating and forgery has been referred by the bank to the police authorities which is under investigation and this is not a proper forum to decide and adjudicate upon various allegations of fraud, cheating and conspiracy made by the Bank.

4. That since the matter is subject matter of police investigation, on the F.I.R. lodged by the Bank for investigation of fraud, cheating and forgery and various other serious offences under Indian Penal Code, in which the element of conspiracy is very material and as such, these aspects in question cannot be a extraordinary subject matter of Writ / jurisdiction of the High Court.

6. That there are disputed questions of fact which cannot be decided in Writ jurisdiction. More so, when the

matter is under police investigation of serious offences under I.P.C.

7. That the question of issue of Bank Guarantees, whether legally valid or not, is contractual obligation of the parties and as such cannot be adjudicated in the writ forum and as such, the writ is not maintainable.

8. That the writ is not maintainable even otherwise since there is an efficacious remedy available to the petitioner by way of Civil suit in which the various questions can be adjudicated on the basis of evidence. The question of connivance and involvement of Bank Manager, petitioner and respondent No.3&4 has to be adjudicated and if it is proved that it is a sheer question of fraud, forgery and cheating, then the entire claim of the petitioner stands vitiated.

9. That the respondent Bank came to know of fraud and forgery in issuing of alleged bank guarantees by Shri B.S. Kamra, the then Officer of Rajouri Garden Branch, New Delhi, of the Bank on 22.7.97, after his transfer from the said branch to the accounts branch of Head Office. The bank immediately reported the matter to the police on 24.7.97 and two F.I.Rs No.654 and 655 of 1997 were lodged. Copy of the F.I.Rs are enclosed

herewith marked "A" and "B". the investigation by the police is still continuing.

10. That prior to the filing of the writ petition, the petitioner lodged complaint bearing No.401/97/98 with sanding ombudsman to which the bank submitted its reply of dated 18.11.97, Copy of which is enclosed marked "C". The Bank, in its reply highlighted the controversial issues bringing out the fraud, forgery and cheating in detail.

After hearing both the parties, the learned Ombudsmen rejected the claim of the petitioner and refused to intervene in view of the serious allegations of fraud, cheating and forgery which is subject matter of investigation by the police.

11. That Shri B.S. Kamra, Scale-II officer of the bank, deserted his post and made an attempt to obtain anticipatory bail from the Court of District & Session Judge, Delhi which was rejected and the culprit is still avoiding arrest who had subsequently been dismissed from service.

12. That the Ministry of Economic Affairs (Banking Division) had issued a circular dated 19.6.84, directing all the Govt. Departments to get confirmation of Bank

Guarantees submitted by private parties from the banks. The object of the said circular has been to avoid issuing of bogus Bank guarantees by private parties by dubious means. In the present case, the Steel Authority of India did not get confirmation with respect to any of the bank Guarantees knowing it fully well that the respondents No.3&4 do not have financial capacity to obtain bank Guarantees of such enormous value. The whole system was subverted and a big fraud was played by various interested parties in order to cheat the Bank.

REPLY ON MERITS:

7. Contents of para 7 of the petition are denied and not admitted correct. It is further denied that the Bank had authorized any officer of the branch to issue any Bank Guarantee alleged to be of No.5/96 dated 13.5.96 as stated in the said para 7 of the petition. The Bank has no record with respect to the issue of the said Bank guarantee as claimed by the petitioner in para 7 of the petition. It is sheer forgery which seems to have been perpetuated by various persons intending to be benefited. This aspect is under the investigation of the police.

7. (2nd Time) contents of para 7 (2nd time) are denied and not admitted correct. The Bank did not issue any

confirmation with respect to the said alleged Bank Guarantee by letter dated 14.5.96, as claimed by the petitioner in para 7 (2nd time) of the petition. The confirmation letter is forged and seems to have been procured without the knowledge of the Bank and its other higher authorities.

The procedure adopted is totally irregular and it seems number of agencies and parties are involved in this scandalous transaction. These are all bogus Bank guarantees with bogus confirmations.

8. Contents of para 8 of the petition are wholly misconceived, fabricated and are denied. These are bogus / documents and cannot bind the bank in any right when apparently number of persons are involved who have conspired to play fraud on the bank.

9. Contents of para 9 of the petition are denied and not admitted correct. The respondent bank has issued no such bank guarantee alleged to be of No.14/96 dated 24.6.96 and No.21/96 dated 14.10.96. The Bank has no record of any such bank Guarantees as claimed by the petitioner.

It seems that the alleged confirmatory letters with respect to the alleged Bank Guarantees were procured

in a clandestine manner either from the Manager of the Bank or in connivance with the parties on whose behalf the alleged Bank Guarantee was issued. Accordingly, the contents of para 10 of the petition are wholly denied and it is also denied that any such letter purported to be of dated 25.6.96 or of any date was issued by the branch of the bank as claimed in this para alleged to be marked as Annexure P-6, though there is no such letter in the record of the petition."

5. In the aforesaid state of pleadings, the learned Single Judge relying

on Haryana Urban Development Authority Vs. Anupama Patnaik

(2000) 10 SCC 649 and ABL International Ltd. Vs. Export Credit

Guarantee Corporation of India Ltd. (2004) 3 SCC 553 held that there

were highly contested questions of fact which cannot be adjudicated in a

writ petition and that the defence of the respondent Bank could not be

viewed as vexatious or imaginary or raising disputes only to frustrate the

writ petition.

6. The senior counsel for the appellant has contended that though in

the counter affidavit, the respondent Bank had pleaded collusion of the

appellant and its officials also in issuance of the Bank Guarantees but in

the First Information Report (FIR) which was ultimately filed, the case is

only against the official of the respondent Bank and not against any

official of the appellant. It is argued that when the customers / persons

with whom the appellant has been dealing, in pursuance to their

transactions / dealings with the appellant produce a Bank Guarantee and

on the basis whereof the appellant supplies goods or lends other facilities

to them, the Bank cannot be so permitted to wriggle out of its obligation

under the guarantee on the plea that its officer who has issued the Bank

Guarantee was not authorized or for the reason of any other neglect /

fraud of its own officers; it is contended that the appellant is not

concerned with the said pleas and the appellant having changed its

position on the basis of such Bank Guarantees, the Bank is bound to

honour the same. The contention is that where the fraud alleged is on the

part of the employees of the Bank only, with the beneficiary of the Bank

Guarantee i.e. the appellant having no role therein, the Bank is liable

under the Bank Guarantee. Reliance in this regard is placed on Indian

Bank Vs. Godhara Nagrik Cooperative Credit Society Ltd. JT 2008 (5)

SC 575.

7. We however on careful consideration of the judgment Indian Bank

(supra) find the same to be against rather than in favour of the appellant.

Paras No.16, 16.1 and 17.2 of the said judgment are as under:

"16. A writ court exercising the power of judicial review has a limited jurisdiction. A writ petition would lie against a State within the meaning of Article 12 of the Constitution of India. Indisputably, exercise of jurisdiction by the High Court is permissible in a case where action of the State is found to be unfair, unreasonable or arbitrary. The question which should have been posed by the High Court was as to whether the action of the bank was so arbitrary so as to invoke the public law jurisdiction. If the answer to the said question was to be in the negative, the High Court should have refused to exercise its jurisdiction.

16.1. A fraud has been practiced on the banks. Primary accused may be the bank officers but a conspiracy with them by the outsiders has also been alleged. The original FDRs only in some cases are available; in most of the cases they are not. Even the Committee could not decide for as to which one was the original FDR and which was not. It could not distinguish between an original FDR and the Xerox copy thereof.

17.2 Would the ratio laid down therein apply in the instant case? We do not think so. The question as to whether fraud has

been committed by the officers of the bank is pending consideration before a competent criminal court. There are other various disputed questions which are required to be gone into in the said proceeding. The role played by some of the writ petitioners - respondents is also in issue. Such a seriously disputed questions of fact, in our opinion, could not have been gone into by the writ court."

The Paras No.20 to 22 of the said judgment on which the senior

counsel for the appellant places reliance cannot be said to be precedent,

intended to be binding on the Courts. The Supreme Court, after having

held that the writ petition was not maintainable, finding that the affected

parties therein were Cooperative Societies / Cooperative Banks, who the

Supreme Court felt should not be pushed to institute civil suits, issued

certain directions in Paras No.20 to 22 but in Para No.23 clarified that no

law was intended to be laid down therein and the said directions should

not be treated as precedent as the same were issued only for the reason of

the hardships which the Cooperative Societies would have suffered.

8. We may also notice that the Supreme Court Godavari Sugar Mills

Ltd. Vs. The State of Maharashtra (2011) 2 SCC 439, after

consideration of the entire case law including ABL International Ltd.

(supra) referred to by the learned Single Judge in the impugned judgment,

has made the legal position as to the maintainability of the writ petition

clear as under:

(i) Normally, a petition under Article 226 of the Constitution of

India will not be entertained to enforce a civil liability

arising out of a breach of contract or a tort to pay an amount

of money due to the claimants. The aggrieved party will

have to agitate the question in a civil suit. But an order for

payment of money may be made in a writ proceeding, in

enforcement of statutory functions of the State or its officers;

(ii) If a right has been infringed--whether a fundamental right or

a statutory right and the aggrieved party comes to the Court

for enforcement of the right, it will not be giving complete

relief if the Court merely declares the existence of such right

or the fact that existing right has been infringed. The High

Court, while enforcing fundamental or statutory rights, has

the power to give consequential relief by ordering payment

of money realized by the Government without the authority

of law;

(iii) A petition for issue of writ of mandamus will not normally

be entertained for the purpose of merely ordering a refund of

money, to the return of which the petitioner claims a right.

The aggrieved party seeking refund has to approach the Civil

Court for claiming the amount, though the High Courts have

the power to pass appropriate orders in the exercise of

powers conferred under Article 226 for payment of money;

(iv) There is a distinction between cases where a claimant

approaches the High Court seeking the relief of obtaining

only refund and those where refund is sought as a

consequential relief after striking down the order of

assessment etc. While a petition praying for mere issue of

writ of mandamus to the State to refund the money alleged to

have been illegally collected is not ordinarily maintainable,

if the allegation is that the assessment was without a

jurisdiction and the tax collected was without authority of

law and therefore the respondents had no authority to retain

the money collected without any authority of law, the High

Court has the power to direct refund in a writ petition;

(v) It is one thing to say that the High Court has no power under

Article 226 to issue a writ of mandamus for making refund

of the money illegally collected. It is yet another thing to say

that such power can be exercised sparingly depending on

facts and circumstances of each case. For instance, where the

facts are not in dispute, where the collection of money was

without authority of law, there is no good reason to deny a

relief of refund to the citizens;

(vi) Where the lis has a public law character or involves a

question arising out of public law functions on the part of the

State or its authorities, access to justice by way of a public

law remedy will not be denied.

9. Applying the aforesaid principles also, the present petition arising

out of a contract of a Bank Guarantee and claiming the effective relief of

recovery of money, cannot be said to be maintainable.

10. Though the Supreme Court in Indian Bank left the question of the

vicarious liability of the Bank for the actions of its employees open but

we are of the view that if the Banks were to be held to be so vicariously

liable, the same will make them vulnerable for liabilities in huge amounts

and which if were to be incurred may make the Banks defunct and to the

prejudice of the large number of small investors. An institution, like a

Bank, in its operations is governed by Rules, Regulations and procedure

prescribed under the Banking Regulations Act, 1949 and / or under the

directions / circulars / instructions of the Reserve Bank of India and the

action of an officer of the Bank, not authorized, if were to be treated as

making the Bank liable would expose the Bank to large financial claims.

We are therefore of the opinion that the doctrine of indoor management,

as applicable to Corporations, cannot be ipso facto made applicable to

banks and if so made applicable would have much wider ramifications

jeopardizing the deposits even of small investors.

11. Notice in this regard may be taken of Canara Bank Vs. Canara

Sales Corporation (1987) 2 SCC 666 where the Supreme Court has held

a Bank to be having no mandate to pay out of the monies deposited with

it when the signatures of its customers are forged, howsoever good the

forgery may be. The same principle ought to apply when the officials of

the Bank, not authorized, purport to act on behalf of the Bank. In fact, we

had during the hearing asked the senior counsel for the appellant as to

what would have been the position had the officer of the Bank, not

authorized, issued a pay order. As per the judgment supra in Canara

Bank, the Bank would have been entitled to refuse payment thereunder.

The better legal opinion thus appears to be against holding the Banks

vicariously liable for unauthorized acts of their employees and for

restricting the doctrine of indoor management in its application to Bank.

12. A forged and fabricated document is a nullity and how the

document came to be a nullity should be irrelevant. An interesting

discussion on this aspect is found in the article titled "Nothing for

Nothing: a nullity exception in letters of credit? by Kieran Donnelly

published in Journal of Business Law of the year 2008. Lord

Macnaghten in Ruben Vs. Great Fingell Consolidated 1906 AC 439 held

that a fraudulent certificate though bearing the seal of the company and

signatures of two Directors of the company but which were forged and

authored fraudulently by the Secretary of the company could not give rise

to any right or bind or affect the company inasmuch as it is not the

company's deed and there is nothing to prevent the company saying so.

This was followed subsequently in Kreditbank Cassel Vs. Schenkers Ltd.

1927 All ER 425 where Atkin L.J observed that the principal is not

precluded from setting up the want of authority of the agent and in South

London Greyhound Racecourses Ltd. v. Wake 1931 1 Ch. 496 where it

was held that even when the seal of the company was affixed without

authority of the Board of Directors and fraudulently, the company is not

precluded from denying the authority of the person who purported to sign

thereon on its behalf. The Supreme Court in Shrisht Dhawan (Smt.) Vs.

Shaw Brothers (1992) 1 SCC 534 held that fraud in public law is not the

same as fraud in private law. Subsequently, in M.R.F Ltd. Vs. Manohar

Parrikar (2010) 11 SCC 374 it held that suspicion of irregularity has

been widely received as an exception to the doctrine of Indoor

Management and the protection of the doctrine is not available where

circumstances surrounding the contract are suspicious and invite inquiry.

It was further held that the principle does not apply where an agent of the

company has done something beyond the authority given to him. The

Privy Council also, as far back as in Bank of Baroda Ltd. Vs. Punjab

National Bank Ltd. [1944] AC 176 was of the view that the Bank is not

bound by the unauthorised acts of its Manager. A Division Bench of the

Madras High Court in The Secretary, Naguneri Peace Memorial Co-

operative Urban Bank Ltd., Naguneri Vs. Alamelu Ammal AIR 1961

Mad 419 also held that the bank is not liable to the depositor holding a

Fixed Deposit Receipt purportedly issued by the bank but under the

signature of an officer not authorized to issue the same. It was held that a

Fixed Deposit Receipt signed by the officer of a bank without authority is

only a waste paper and that the doctrine of Indoor Management has no

application to fraud and forged instruments as they are simply null and

void. Similarly a Division Bench of Patna High Court in United Bank of

India Ltd. Vs. Muhammad Shamsuddin AIR 1961 Pat 488 held the bank

not liable for fraudulent act of its employee. The judgment of the

Supreme Court of the United States in Western National Bank of New

York Vs. Armstrong MANU/USSC/0090/1894 appears to suggest that

bank cannot be held responsible for the actions of its officers even if

made on behalf of the bank unless a ratification on the part of the bank is

shown.

13. We may however notice that a Division Bench of this Court in

Punjab National Bank Vs. Durga Devi ILR (1977) 2 Del 576 on an

interpretation of the provisions of Negotiable Instruments Act, 1881and

finding the bank to be in breach of its duty of care held it liable for the

fraud practiced by its officials. Mention in this regard may be made of

State Bank of India (Successor to The Imperial Bank of India) Vs.

Shyama Devi (1978) 3 SCC 399 applying the principle of the employer

being liable for his employee's fraud to a bank also. Similiarly, the

Division Bench of the Gujrat High Court in Bank of Baroda Vs. Nadiad

Machinery and Electrical Merchant Credit Co-op. Soc. Ltd.

MANU/GJ/0282/2003 appears to suggest that the vicarious liability of the

bank will arise in case of any wrong committed by the bank employee in

the course of his employment but with a rider that only if the employee is

negligent and the wrongful and not if the act is fraudulent. A Single Judge

of this Court also in The Peerless General Finance and Investment Co.

Ltd. Vs. Punjab and Sindh Bank MANU/DE/8272/2007 held that rights

under the bank guarantee cannot be held to be adversely affected due to a

mistake of the bank in issuing bank guarantee contrary to the terms of

circulars of the Reserve Bank of India especially when the said circulars

do not provide any consequence in case of issuance of guarantees

contrary to the provisions thereof in favour of third parties. The House of

Lords in United City Merchants (Investments) Ltd Vs. Royal Bank of

Canada [1983] 1 AC 168 also held that fraud such as to entitle a bank to

refuse to pay under a letter of credit notwithstanding the strict general

rule regarding payment when the documents were in order on their face,

did not extend to fraud to which the beneficiary was not a party.

14. The purport of the aforesaid discussion is not to render any final

opinion on this subject as discussed in paragraphs 10 to 13 inasmuch as

no arguments were addressed by the senior counsel for the plaintiff in this

regard and is only to strengthen the reasoning that the adjudication of the

dispute in writ jurisdiction is not practical or feasible.

15. We therefore do not find any merit in this appeal and dismiss the

same.

16. The senior counsel for the appellant at this stage seeks liberty to

institute a suit for recovery of money on the basis of Bank Guarantees

against the Bank and for commutation of the time of delay in disposal of

this appeal.

17. The learned Single Judge having commuted the time during which

the writ petition remained pending, we deem it appropriate to, subject to

the suit being filed within 60 days hereof, also commute the time during

which this appeal remained pending. The senior counsel for the appellant

on enquiry has further informed that the Bank has instituted suits for

recovery of money against the respondents No.3 & 4 and which suits

have been decreed but the Bank is facing difficulties in execution of the

said decrees.

In the facts aforesaid, no costs.

RAJIV SAHAI ENDLAW, J

CHIEF JUSTICE DECEMBER 13, 2012 'gsr'