NATIONAL INSURANCE CO. LTD Vs. FEDERAL BANK LTD

JUDGEMENT

(1.) The Judgment of the court was delivered by Janaki Amma, J.- The appeal is against a decree for money based on a policy of fidelity insurance, passed in favour of the Federal Bank Ltd., Alwaye, represented by its Managing Director. The appellant; who was the first defendant in the concerned suit is the Ruby General Insurance Company Ltd., Calcutta (for short the Company), which has got a branch office at Mattancherry, Cochin. Defendants 2 and 3 were employees of the Federal Bank Ltd., Alwaye, at the relevant time. They stand at present discharged from their jobs in the Bank and are employed elsewhere. The first defendant, had a scheme of insurance styled as "Policy Number Bankers (in and out) 112". On 17th October 1962, the plaintiff took a policy paying Rs. 5,493 as premium, and by virtue of the said policy the first defendant undertook to make good to the bank all direct losses to the extent of rupees one lakh that the Bank might during the space of 12 calendar months from the noon of the 4th August 1962 to the noon of 3rd August 1963, discover to have sustained in the manner set forth in Clause.1 to 4 of the policy. The policy is marked Ext. A-1 in the case.

(2.) The suit was in respect of a claim made by the plaintiff Bank (hereinafter referred to as the Bank) in connection with its dealings with one of its customers. "M/s A. Pareed Pillai and Brothers", a firm of merchants carrying on business in buying and exporting coconut oil to customers outside Kerala. The firm had a cash credit accommodation in the Bank's branch at Alwaye upto a limit of Rs. 50,000. It had a Document Purchase Bill Account (for short the Document Purchase Bill Account), of which the limit had been fixed at Rupees one lakh! The modus operandi followed in connection with the Document Purchase Bill Account was as follows: The firm would collect coconut oil in tins for sending to parties outside the State with whom it used to enter into contract. The goods would then be booked by the Railway. The railway receipt, the invoice for the goods and a demand bill of exchange drawn on the buyer outside the State would be presented at the Bank. The Bank would debit the amount under the bill in the Document Purchase Bill Account of the firm and give credit of the amount in its current account. The firm would draw amounts from the current account as and when required for its business transactions. The Bank would send the bills for collection through other banks having branches at the places where the purchasers of the goods had offices. These banks would present the bills, collect the amounts and remit the money to the plaintiff Bank. On receipt of the amount, the same would be credited to the Document Purchase Bill Account and the transaction would be closed. Though there was at one time a practice of presenting clean bills (that is, at bills unaccompanied by railway receipts and other documents of title) upto a specified limit and advancing money on their basis, it was stopped as per instructions from the Reserve Bank of India. All those concerned with the Bank and the customers were aware that no amount would be advanced on bills unsupported by railway receipts and other documents of title.

(3.) Defendants 2 and 3 (hereinafter referred to as employees) were respectively the Agent and Accountant of the Alwaye Branch of the Bank during April 1963. The current account of the firm stood overdrawn during the period upto the maximum extent. In the Document Purchase Bill Account, several bills backed by railway receipts were pending collection even though the normal period of collection of one month had expired in many cases. The face value of such bills amounted to Rs. 3,65,000.75. But since the limit of Rupees five lakhs had not been reached the Document Purchase Bill Account could accommodate further bills. While so the firm won over defendants 2 and 3, the Agent and the Accountant of the Alwaye Branch and made them advance amounts on bills without production of railway receipts. The bills were kept in the possession of the second defendant. He did not send them for collection. The transactions were entered in the Document Purchase Bill Account as though there were supporting documents for the bills. It was the third defendant who wrote the accounts and prepared the necessary statements for transmission to the Head Office. The statements contained the signature of defendants 2 and 3. Since in the returns to the Head Office, the bills were described as Document Purchase Bills, the Bank also classified them as advances under that head and in the statements to the Reserve Bank as secured advances. The Head Office of the Bank was thus purposely kept in ignorance about the real position of the dealings with the firm. On 20th December 1963, the amount due from the firm was found to be Rs. 4,27,143.98. As the affairs of the firm were in a precarious position and there was default in payment of the amount under the bills O.S. No. 43 of 1963 of the District Court, Parur was filed for realisation of the amount from the firm.