Sita Ram Jhunjhunawala vs Bombay Bullion Association Ltd. and Ors

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 56 of 1962

Decision Date: 25 November 1964

Coram: N. Rajagopala Ayyangar, A.K. Sarkar, J.R. Mudholkar

In the matter titled Sita Ram Jhunjhunawala versus Bombay Bullion Association Ltd. and others, the Supreme Court of India delivered its judgment on 25 November 1964. The judgment was authored by Justice N. Rajagopala Ayyangar, with Justices A. K. Sarkar and J. R. Mudholkar forming the bench. The case is reported in 1965 AIR 1628 and 1965 SCR (2) 249, and is cited in RF 1991 SC1579 (7). The issue concerned the interpretation of a banking practice relating to a cheque “certified as good for payment” under the bye‑laws of the Bombay Bullion Association. Under the Forward Contracts Control Act (Bombay Act 64 of 1947), members of the Association were allowed to engage in forward bullion transactions, subject to the Association’s bye‑laws. The petitioner, a member of the Association who conducted a business as a bullion merchant, failed to fulfil his obligation to deliver the silver he had agreed to sell on the settlement date. Consequently, the Association, claiming authority under its bye‑laws, purchased the required quantity of silver at the petitioner’s risk and demanded from him the price differential. The petitioner complied with the payment but subsequently filed a suit seeking a refund, alleging that the treatment of him as a defaulter was unlawful. The High Court dismissed the suit, and on appeal to the Supreme Court the petitioner argued that the Association should not have made the purchase because the purchasers had not complied with the payment conditions prescribed in the bye‑laws. Specifically, the petitioner contended that (i) certain purchasers who had deposited payments into the Association’s Clearing House by cheques drawn on their Clearing House accounts had not obtained the certification “good for payment” required by bye‑law 137‑B, and (ii) one purchaser had paid by a cheque drawn on a city branch of the Clearing House rather than on the Clearing House itself, and that cheque also lacked the required certification. The Court held that when a payment is effected by a cheque drawn on an account with the Clearing House and the amount is transferred to the Association’s Clearing House account, the transaction is essentially equivalent to a cash payment, even though it is executed by cheque; because cash payments are a recognized mode of payment under the bye‑law, the requirement of a valid payment was satisfied. The Court further observed that if the Clearing House accepts a cheque and credits it to the Association after confirming with the branch on which the cheque was drawn that the drawer possessed sufficient funds, the cheque need not bear the certification “good for payment.” This reasoning was supported by reference to the case of Arsene A. Larocque v. Hyacinthia Beauckemin (1897) A.C. 358.

The Court observed that the legal effect of a cheque drawn on an account at a branch of the Clearing House is identical to the effect of a cheque drawn on an account maintained in the same branch, because the certificate of the banker required by the association’s bye‑law is in fact a certificate issued by a bank other than the one to which the cheque is being paid. Consequently, the source of the certification does not alter the status of the cheque under the bye‑law. Moreover, the Court held that when the staff of the Clearing House verified, by contacting the branch on which the cheque had been drawn, that the customer’s account at that branch possessed sufficient funds to honour the cheque, the verification satisfied the statutory requirement that a cheque be certified as good for payment as stipulated in the bye‑law. The verification by the Clearing House staff therefore fulfilled the condition that a cheque must be backed by a bank’s certification, even though the cheque was not physically endorsed by a certificate from the bank into which it was ultimately deposited. The Court cited the relevant paragraphs of its earlier reasoning, noting that the requirement was met once the branch confirmed the availability of funds, and that this confirmation was equivalent to a formal certification of payment under the association’s regulations.

The judgment was delivered in the Civil Appellate Jurisdiction of the Supreme Court in Civil Appeal No. 56 of 1962, which had been entertained by special leave from the Bombay High Court’s decree dated 3 and 4 March 1958 in Appeal No. 27 of 1957. Counsel for the appellant included legal representatives, while counsel for respondents numbered one through twenty, excluding a few, represented the Association and its directors. The opinion was authored by Justice Ayyangar. The appeal presented a singular question concerning the proper interpretation of bye‑law 137‑B of the Bombay Bullion Association Ltd., hereinafter called the Association, specifically whether the factual circumstances of the present case satisfied the conditions stipulated in that bye‑law. The appellant was a member of the Association and conducted his trade as a bullion merchant. Under a Government of Bombay notification dated 14 March 1949, issued pursuant to section 6 of the Bombay Forward Contracts Control Act, 1947 (Bombay Act LXIV of 1947), the Association’s bye‑laws were sanctioned, thereby permitting its members to engage in forward bullion contracts subject to the association’s rules. The dispute arose from a purchase order effected by the Association under its bye‑laws, wherein the Association bought a quantity of silver on the appellant’s risk, alleging that the appellant had defaulted on his obligations as a seller on the settlement day of 3 February 1953. Acting on the basis that the appellant was in default, the Association demanded and claimed a sum of Rs 1,37,880‑12‑0 as the differential amount owed. The appellant complied with the demand on 5 February, but he did so under protest and immediately instituted proceedings the following day, seeking restitution of the amount on the ground that the Association’s purchase, being at his risk, was invalid because it contravened the Association’s bye‑law and therefore could not be binding upon him. While the appellant acknowledged that he had indeed failed to deliver the bullion he was obligated to provide on the settlement day, he contested the legality of the Association’s subsequent purchase and the consequent demand for payment.

The appellant argued that, although he was bound by the relevant bye‑laws to deliver bullion, a purchase could not be lawfully made unless the forward purchasers for that settlement had fully complied with their obligations under those bye‑laws; because the purchasers had allegedly failed to do so, the Association, in the appellant’s view, lacked authority to effect a purchase on their behalf or for their benefit. The suit was heard before Justice Coyajee sitting as a judge of the Original Side of the Bombay High Court. The learned judge concluded that none of the forward purchasers had been in default and accordingly dismissed the suit. The appellant then appealed to a Division Bench of the High Court, but that appeal was likewise dismissed, and the correctness of the High Court’s decision is the subject of the present appeal.

While the trial record contains a detailed examination of the events that transpired on the Vaida day of 3 February 1953, including a specific inquiry as to whether each of the parties identified as purchasers had actually deposited their cheques into the Association’s Clearing House on that date as required by the bye‑laws, the Court does not need to revisit those factual intricacies. Both the trial judge and the Division Bench reached the same factual finding: every cheque belonging to the various purchasers was indeed paid into the Clearing House on 3 February 1953. It is now evident from the evidence that, for some of those transactions, the corresponding entries were recorded by the receiving bank or by the Clearing House only on the following day, 4 February 1953. This undisputed finding, which was not challenged before this Court, forms the basis on which the points raised in the present appeal will be examined.

In addition, the pleadings and the High Court judgments referred to another issue that the Court has elected to set aside. The appellant contended that a director of the Association had acted in bad faith by allowing certain breaches of the bye‑laws on 3 February, thereby treating purchasers who were actually in default as if they had fulfilled their obligations. The allegation further suggested that some members of the Board of Directors, in their personal capacity, had acted as purchasers on that settlement day and that their personal interest motivated them to favour those purchasers over the sellers at the Vaida. No evidence was produced to substantiate this allegation, and Justice Coyajee rejected it. The matter did not appear before the Division Bench, and the appellant’s counsel did not attempt to revive it, presumably because it could not be sustained. Consequently, this aspect is excluded from the Court’s consideration in the present appeal.

In this case the Court identified the principal issue as the determination of whether the purchasers who had entered into forward contracts for the Vaida had complied with the obligations imposed by the Association’s bye‑laws. The Court first noted that the settlement date for the Maha Vaida had originally been scheduled for 2 February 1953. According to bye‑law 32, the Board or a Sub‑Committee appointed by it was authorised to fix the settlement days, taking into account the provisions of the Rules and bye‑laws. Clause (3) of the same bye‑law further empowered the Board, when it was of the opinion that circumstances required a change, to postpone any settlement day for a period not exceeding five days. Exercising this authority, the Board postponed the Vaida settlement from 2 February 1953 to 3 February 1953. The appellant raised no dispute as to the Board’s competence to make this alteration or to the validity of the change that had been effected. The Court then turned to bye‑law 120, which provides for the establishment of a Clearing House under the Board’s jurisdiction. The Clearing House was to act as an ordinary agent for the members, facilitating settlement of forward transactions in gold, silver and sovereigns by exchanging delivery orders and by making payment of any differences through the Clearing House. Under the powers conferred by this bye‑law, the Bank of Baroda, which had opened a branch on the Association’s premises, was appointed to function as the Clearing House. Bye‑law 125 further authorized the Board of Directors to appoint a Clearing House Committee. The duties and powers of that Committee were set out in bye‑law 127. Clause (1) required the Committee to prepare standard forms, delivery forms and “Kaplis” (slips) for the payment of differences, delivery of goods and other necessary documents, and to mandate that every member use the prescribed forms or forms of identical size and similar lettering, with the Committee also having authority to fix charges for those forms. Clause (2) empowered the Committee to issue instructions concerning the work of the Clearing House, which all members were obliged to follow. Clause (3) provided that if any member failed to comply with such instructions, committed an error or mistake in filing any form or document, produced illegible writing, or delayed submission of any form or document to the Clearing House, the Committee could impose a penalty of up to Rs 500, and could appoint a Sub‑Committee to attend to work relating to that sub‑clause.

The Committee was authorised to impose a monetary penalty on any member who failed to comply with the prescribed instructions, and such penalty could not exceed five hundred rupees. In order to manage the work relating to this particular sub‑clause, the Committee could appoint a Sub‑Committee. The same Committee was also empowered to determine the Havala rates that would apply to outstanding transactions – that is, transactions that had not yet been squared up – between any two members. Every member was required to record Havala entries for these outstanding transactions at the rates fixed by the Committee, and to prepare statements of differences using the same rates. Delivery orders were to be issued at those identical rates as well. The purpose of fixing Havala rates was to facilitate the settlement of the transactions; however, the fixation of such rates did not in any manner diminish the liability that the members owed with respect to the underlying transactions.

The Clearing House Committee possessed the authority to declare any member a defaulter. In exercising that power, the Committee could pass any resolutions or issue any orders that it considered appropriate and necessary to deal with the defaulting member. Furthermore, if the Committee encountered difficulty in completing a forward settlement on the scheduled settlement days, it was authorised to alter the settlement schedule by up to forty‑eight hours, either for all settlement days or for any particular settlement day that formed part of the forward settlement in question.

Bye‑law 134(1) stipulated that a member who wished to have his transactions settled through the Clearing House must forward to the Clearing House a clearing sheet in the prescribed settled form, identified as Form No. 1, on the days fixed for that purpose. Those days would subsequently be referred to as “Clearance Day.” Bye‑law 137 set out the obligations of members who were required to make deliveries. It mandated that a member who had to give delivery must submit to the Clearing House a number of delivery orders signed by him equal to the quantity required, calculated on the basis that each delivery order represented either five bars of silver, one thousand tolas of gold bar, or one thousand sovereigns. If a member submitted delivery orders without his signature, the member was required to appear before the Clearing House at ten o’clock in the morning on the date fixed for the receipt of delivery orders and to sign them at that time. The Clearing House retained the discretion to call for additional delivery orders from any member, and the member was obliged to provide those additional orders immediately. In cases where the goods were held by a bank, the member was required to issue delivery orders directly to the bank as previously outlined.

Bye‑law 137‑A(1) addressed the obligations of a member whose clearance sheet indicated outstanding sales. According to this provision, such a member was required to submit, together with his delivery orders, a comprehensive list of the gold or silver bars that were either in his possession or in the possession of his banker in Bombay. The list had to include the numbers and marks of each bar, and the bars listed were to be delivered against the corresponding delivery orders. The record shows that it has become an accepted fact that the appellant failed to fulfil his obligations under this bye‑law. Bye‑law 137‑B, whose correct interpretation is the subject of the present appeal, sets out the obligations of members whose clearance sheet shows outstanding purchases.

In this case, the Court explained that Bye‑law 137‑B governs the obligations of members whose Clearance Sheet records outstanding purchases. The provision states that a member whose Clearance Sheet shows outstanding purchases must, together with that sheet, submit either a cheque certified “good for payment”, a demand draft drawn on a bank, a bank’s payslip, or cash in an amount sufficient to settle all outstanding purchases at the rate fixed by the Association. If the member fails to make such payment, the outstanding purchases, either in whole or in part, may be auctioned on the same day at the purchaser’s risk. The cheques, demand drafts and other instruments received by the Clearing House are to be deposited into the Clearing House Account maintained with the Bank of Baroda Ltd., Bullion Hall Sub‑branch. Crossed cheques payable to the bearer or payslips of the Bank, when drawn in favour of the sellers whose delivery orders are issued by the Clearing House to the purchasers, must be handed over by the Clearing House to those purchasers. The sellers are then required to deliver the goods covered by the delivery order to the purchasers against the said cheque or payslip. If a seller refuses to deliver the goods against such a cheque or payslip within the time fixed for delivery, this refusal is deemed a failure to give delivery and the consequences prescribed in Bye‑law 147 will follow.

The Court noted that it was not contested that, where members whose Clearance Sheets showed outstanding purchases complied with the requirements of Bye‑law 137‑B, the Association was entitled to effect purchases at the risk and cost of the appellant under the subsequent bye‑laws that empower the Association to square the transactions of defaulting members. An examination of Bye‑law 137‑B reveals that on the Vaida day a member must file his Clearance Sheet and simultaneously make a payment into the Clearing House sufficient to cover all his outstanding purchases at the Association‑determined rate. This payment must be made in one of four permitted forms: (a) a cheque certified “good for payment”, (b) a demand draft on a bank, (c) a bank’s pay‑in slip, or (d) cash. The issue raised on appeal concerned whether certain purchasers had actually made the required payments into the Clearing House in any of these authorized modes. The Court added that the Bank of Baroda, acting as the Clearing House, confirmed that it had received the amounts payable by the various purchaser‑members on the 3rd of the month, and that the total of these payments had been credited to the Association. Before addressing the specific controversies regarding the form of payment employed by particular purchasers under Bye‑law 137‑B, the Court indicated that it would first set out the factual background concerning those transactions.

It was necessary to begin the account with several factual observations. The judgment recorded that the Bank of Baroda Limited had been designated as the Association’s Clearing House under bye‑law 120 around the year 1949 and had continued in that capacity ever since. To make it easier for members to remit and receive payments, the Bank established a dedicated branch named the Bullion Hall Sub‑branch within the Association’s own premises. Bye‑law 174(3) required every member to open an account with the Bank so that cheques could be drawn and paid conveniently for the purpose of clearance. In compliance with that provision every member opened such an account. The Bank then issued special pay‑in slips for its clearing‑house operations. Each slip consisted of three identical parts formed in triple foil, and the member making a payment was required to complete all three copies. When a member presented a payment at the Bullion Exchange Branch, the copy on the extreme right, which recorded the payment to the credit of the Association’s Clearing House, the name of the paying member, the amount, and other particulars, was signed or initialed by the Cashier and the Ledger Keeper and retained by the Bank. The remaining two copies, also signed or initialed by the Bank officials, were handed to the member. The member was then required to submit one of these copies together with the Valan or the Clearance Sheet to the Clearing House. Upon receipt the Clearing House department endorsed the left‑hand copy, returned it to the member, and kept the other copy for its own records.

The settlement for the Vaida dated 3 February 1963 was described as exceptionally heavy because of the unusually large volume of sales and purchases that had to be settled on that date. A total of 1,897 bars of silver were outstanding for sale, and the same number of bars were outstanding for purchase. Sellers of 1,004 bars complied with the requirement of bye‑laws 137 and 137‑A by delivering the necessary delivery orders, but the appellant, who had an outstanding sale of 853 bars, failed to present the required delivery orders to the Clearing House. Under the bye‑laws, the purchasers of all 1,897 bars were obligated to file their Clearance Sheets and to pay a cumulative amount of Rs 88,31,050 into the Clearing House in accordance with bye‑law 137‑B by 3 February 1953. Because of the extraordinary burden of payments and a strike by the members’ clerks on the preceding day, the Association’s Directors passed a resolution extending the deadline for payment and for the submission of Clearance Sheets beyond normal banking hours, allowing submissions until 7 p.m. on 3 February. The matter in dispute before the appellate court was whether the required amount had in fact been paid into the Bank in the manner prescribed by bye‑law 137‑B.

On 3 February, the required sum of Rs 88,31,050 was to be credited to the Clearing House in the manner set out in bye‑law 137‑B. Of this total, cash payments amounted to Rs 42,99,400. Cheques drawn by members on their accounts with the Bullion Hall Sub‑branch of the Bank of Baroda Ltd. were presented for Rs 24,64,050 in favour of the Association’s Clearing House account. Additionally, four pay slips issued by other banks were submitted for Rs 24,64,050, also in favour of the Bank of Baroda Ltd. Transfers made by two members from their accounts at the Jhaveri Bazar branch of the same bank amounted to Rs 15,30,150, and these funds were transferred to the Bullion Hall Sub‑branch for payment to the Association. Finally, a cheque drawn by a member on his account with the Fort Branch of the Bank of Baroda Ltd. for Rs 4,65,000 was presented in favour of the Association’s Clearing House account. The appellant contended that only the cash payment satisfied the requirements of bye‑law 137‑B and that the remaining modes of payment did not comply with that provision.

Before addressing the appellant’s submission, the Court noted that the Bank of Baroda Ltd. Clearing House had issued a statement on 4 February 1953 indicating that it had received the entire amount of Rs 88,31,050 and had credited it to the Association. Turning first to the cheque payments drawn on members’ accounts at the Bullion Hall Sub‑branch, the appellant advanced several arguments. The primary argument was that the banking hours at that branch ended at 2.30 p.m. on 3 February, and many of the cheques were presented after that time. The appellant therefore asserted that, despite the presence of sufficient funds in the members’ accounts, the cheques could not be treated as cash because they were presented after the official banking hours had closed.

The Division Bench rejected this contention. It held that there was nothing unlawful about the bank continuing to operate for the benefit of the Clearing House members beyond the ordinary closing time of 2.30 p.m. on that day. Evidence was placed before the Court showing that the bank’s ledgers and other books remained accessible, allowing verification of whether each member’s account held sufficient funds to honour the cheques. Further evidence demonstrated that the status of each member’s account was ascertained before the triplicate forms were accepted by the bank and before the two left‑hand foils were handed to the depositing member for delivery to the Clearing House. Moreover, the bank’s statement, submitted the following day, acknowledged receipt of the amounts represented by the cheques and confirmed that these sums had been credited to the Association’s account. In light of these facts, the learned Judges of the High Court concluded that the payments had been made in accordance with the requirements of bye‑law 137‑B on 3 February.

In this case, the Court noted that the High Court had held that there was no illegality in the Bank’s acceptance of cheques after the ordinary banking hours had ended, and the Court agreed with that conclusion. It observed that on February 3, 1953 the bank had extended its normal closing time from 2.30 p.m. to 7 p.m., and that such an extension was not prohibited by any statute. Moreover, even if the extended hours had disadvantaged any bank constituent, in the present circumstances the extension had actually benefited the customers. Consequently the Court found that the continued operation of the bank, including its function as a clearing house, was neither illegal nor improper.

The Court also considered additional objections that were raised to argue that the payments in question violated bye‑law 137‑B. To assess those objections, the Court set out further factual details. It explained that the purchasers had paid a total of Rs 42,99,400 into the clearing house to settle the amounts they owed, and that the whole sum had been presented in the form of cheques drawn on the Bullion Hall Sub‑branch of the bank. The Court further recorded that the bank staff who received those cheques had marked on the accompanying slips that sufficient funds existed in each drawer’s account to allow the cheques to be cleared. After this verification, the pay‑in slips together with the clearance sheets were forwarded to the clearing house, thereby satisfying the requirements of bye‑law 137‑B.

Having described the procedure, the Court turned to the argument that certain members—approximately seventeen of them—did not possess enough funds in their accounts before 7 p.m. on that day to honour the cheques they had drawn in favour of the clearing house. The argument contended that, despite the bank’s acceptance of the cheques, such payments could not be regarded as valid under bye‑law 137‑B. The Court accepted that it was common ground that at 2.30 p.m. on February 3 the balance crediting several of those members was indeed insufficient to cover the cheques they later issued. However, the Court noted that before the cheques were actually presented, the purchaser‑members had received two types of credit into their accounts: (a) refunds of margin money that they were entitled to under the bye‑laws, and (b) other cheques payable to the Bank of Baroda. The Court explained that, under the bye‑laws, purchasers were required to deposit margin money when they bought bullion, and that such margin was to be returned to them once certain conditions were fulfilled. The margin amounts originally paid by the purchasers had been credited to the Association, and when the conditions for refund were satisfied, payment orders were issued by the Association to return the margin to the purchasers.

On the 3rd of February the Association issued orders for the amounts that were due to be refunded, and these refund orders were paid by the individual purchasers into the credit of their accounts at the Bullion Hall Sub‑branch. The appellant did not dispute that the members were entitled to receive the refunds; rather, the appellant contended that the refunds were not actually due on that day and that the Association had improperly paid them in advance of the time prescribed by the bye‑law. Bye‑law 33‑C(2) governs the refund of margin money and provides that: “Where the conditions described in clause (a) or (b) as the case may be, cease to exist, the Association shall return the margin amount to the members concerned on the day following the next clearance day after making the necessary adjustment.” The appellant argued that, under this provision, the margin money could have been returned only on the 4th of February and that the Association’s decision to refund the amounts on the 3rd was improper because it allowed the purchasers to use the money to meet their settlement obligations. The Court found no substantive basis for this complaint and considered the issue irrelevant to the principal question, namely whether Bye‑law 137‑B had been complied with. The Court noted that the Vaida had originally been fixed for the 2nd of February, which, if it had remained unchanged, would have made the refund due on the 3rd. However, a strike by the members’ Gumashtas created circumstances that required postponing the Vaida by one day. Whether, as argued by counsel, a proper construction of Bye‑law 33‑C would shift the refund day together with the Vaida day, or whether the refund would remain payable on the originally fixed day, was deemed by the Court to be immaterial to the outcome.

The Court observed that Bye‑law 33‑C imposes an obligation on the Association to refund the margin money on the day immediately following the Vaida. The provision further states that if the conditions in clauses (a) or (b) cease to exist, the Association may make the refund, and in the present case those conditions had ceased to exist as early as the 2nd of February. Consequently, there was nothing in the bye‑law that prevented the Association from refunding the margin money on the 3rd. Moreover, even assuming that the margin money had been returned before a legal entitlement arose, the Court held that the propriety or impropriety of that early refund had no bearing on the sole issue for determination, namely whether Bye‑law 137‑B was complied with. The relevant test under Bye‑law 137‑B was whether the members’ accounts were in credit at the time the cheques were presented. The Court then turned to the next category of objection, which concerned the bank’s extension of credit to one of the members for a specific amount.

In this case the Court examined a cheque for two lakh rupees that had been drawn on the Bank of India, Australia and China. The evidence showed that the member known as Khimji Poonja & Co. was required to pay four lakh sixty‑five thousand rupees as a purchaser. At 2.30 p.m. on the third day of the month, the member held a credit balance of one lakh ninety‑three thousand two hundred fifteen rupees and thirteen paise. To make good the cheque of four lakh sixty‑five thousand rupees that he had drawn on the Bullion Hall Sub‑Branch, the member transferred one lakh five thousand five hundred rupees into his account as a refund of margin money. In addition, he issued a cheque for two lakh rupees from his account with the Bank of India, Australia and China in favour of the Bank of Baroda and deposited that cheque to the credit of his account with the Head Office of the Bank of Baroda.

The Head Office communicated this credit to the Bullion Exchange Branch. When the member later presented his cheque for four lakh sixty‑five thousand rupees to the Bullion Exchange Branch, the branch honoured the cheque and the amount was credited to the Association’s account. The learned Judges accepted this testimony and explanation, concluding that the member possessed sufficient funds with the Bank of Baroda to satisfy the cheque of four lakh sixty‑five thousand rupees. Counsel for the respondent challenged the credibility of this evidence, but the Court declined to examine that challenge further.

The Court reasoned that, assuming the Bank of Baroda, as a banking institution, had extended credit of two lakh rupees to Khimji Poonja & Co., that transaction was a private matter between the two parties and did not affect the validity of the payment of four lakh sixty‑five thousand rupees made by the member. It was undisputed, and indeed could not be disputed, that the Head Office of the bank had credited Khimji Poonja & Co. with the sum of two lakh rupees, and there was evidence of the Head Office’s notice of this credit. Although the cheque issued by the member on the Chartered Bank was not stamped “good for payment,” that requirement did not apply under bye‑law 137‑B. The Head Office accepted the cheque, and its failure to demand a “good for payment” stamp did not create any legal consequence.

The Court noted that the Head Office’s acceptance of the cheque implied that the cheque would be cleared, and indeed the clearance occurred on the following day. The propriety of the Head Office’s decision to credit the member before actual realisation was irrelevant to the Bullion Exchange Branch, the Association, or the appellant, because once the bank credited the amount, there was sufficient credit to meet the cheque of four lakh sixty‑five thousand rupees, which was the sole point of concern for the Court.

The third ground of objection raised by the parties, and the issue that had been vigorously contested in the High Court and before this Court, concerned whether the cheques presented to the Bullion Exchange Sub‑branch satisfied the requirement of being “certified good for payment” under bye‑law 137‑B.

It was argued that the cheques which had been presented together with the Clearance Sheets were said to be “certified good for payment” under bye‑law 137‑B. The argument further asserted that the bye‑law recognised only four modes of payment and that even a cheque drawn on the customer’s own account in the same bank remained a cheque; consequently, unless the cheque bore a certification indicating it was good for payment, it did not satisfy the requirement of a valid payment under bye‑law 137‑B. In support of this view, counsel emphasized that the consequences of a payment or a non‑payment under the bye‑law demanded a strict and literal construction of the provision, and that the courts should interpret the bye‑law literally rather than accept a merely substantial compliance, such as the fact that the Clearing House had received the amount.

Addressing the contention that cheques drawn against a customer’s account in the same branch could not be “cheques certified good for payment” despite the presence of sufficient funds, counsel highlighted that certification of a cheque is a well‑known commercial practice adopted by bankers to facilitate clearance. Under this practice, the bank that certifies the cheque and the clearing bank become mutually bound. Counsel relied on the Privy Council’s observations in Gaden v. The Newfoundland Savings Bank(1), which explained that certification gives a cheque additional currency by indicating on its face that it is drawn in good faith on funds sufficient to meet its payment and by adding the credit of the drawer’s bank. Additional reference was made to the judgment of Lord Wright in Bank of Baroda v. Punjab National Bank(2), which discussed the historical development of cheque certification and marking in India.

The Court, however, stated that it could not draw any assistance from those authorities for the issue presently before it. The first observation concerning the objection to certification was that no question of certification arose where a cheque drawn on an account in a branch of a bank was deposited into the same branch and credited to another party’s account in that branch. Certification is a method employed when a bank on which a cheque is drawn verifies the drawer’s account and marks the cheque to show that sufficient funds exist to meet it. It is evident that such certification cannot occur when the drawer deposits the cheque to the credit of a different account within the same branch, because the verification of the constituent’s account for the purpose of determining the availability of funds takes place at the moment the cheque is cleared, and there is no separate certifying bank distinct from the clearing bank.

The Court observed that the verification of the drawer’s account, which is required before a cheque can be certified, actually occurs at the moment the cheque is cleared. Consequently, there is no longer a distinction between a certifying bank on which the cheque is drawn and a separate clearing bank that receives the cheque. In this situation, the payment should be treated as a cash payment even though the instrument used is a cheque. The Court referred to the Privy Council decision in Arsene A. Larocque v. Hyacin the Beaumont, where Lord Macnaghten, quoting the judgment of James L.J. in Spargo’s case, stated that it would be absurd and unjustifiable to interpret the statutory provision in a way that excludes a cheque transferred by a banker from being considered a cash payment. The Court also cited a passage from Mellish, L.J., who affirmed the general rule that when a transaction reduces to a payment of money from one party to another and then the same amount is returned, the parties may set the demands against each other without having to physically exchange the money again. Applying these authorities, the Court held that a payment made by a cheque drawn on an account held at the Bullion Exchange Sub‑branch, where the amount represented by the cheque is transferred to the Clearing House Account of the Association, is in effect a cash payment, though it is formally effected by a cheque.

The next transaction that was challenged involved a sum of Rs 4,65,000 being paid into the Bullion Hall Sub‑branch by Sri Bansilal & Sons. Evidence showed that the cheque was not drawn on an account at the Bullion Hall Sub‑branch but on an account held at the Bank of Baroda’s Fort branch in Bombay. The Court accepted the evidence that, when the cheque was presented, the bank staff verified that the drawer had sufficient funds in the Fort branch account for the cheque to be cleared, accepted the cheque, and credited the same amount to the account of the Bullion Exchange Association. The objection to the receipt of this payment was also based on the allegation that the cheque had not been certified as good for payment. The Court noted that the only distinction between this cheque and the earlier cheques drawn on accounts of members with the Bullion Hall branch was the branch at which the drawer’s account was maintained. This difference did not affect the essential observation that the cheque, once presented, was verified for sufficient funds and credited to the Association, thereby satisfying the requirements for a valid payment despite the absence of a formal certification.

In this case the Court observed that the only distinction between the cheques previously examined, which were drawn on accounts held with the Bullion Hall branch, and the cheque for Rs 4,65,000 was that the latter was drawn on the drawer’s account at the Fort branch of the same bank rather than on an account with the Bullion Hall sub‑branch. The Court held that it was unnecessary to decide whether the two branches of the same bank constituted separate legal entities. While it is true that a customer may generally draw a cheque only on the branch where his money is deposited and on the specific account for which the cheque is issued, the controversy in the present matter did not centre on that principle. Here the cheque drawn on the Fort branch was presented for payment at the Bullion Hall sub‑branch, and the bank staff at that sub‑branch accepted the cheque and credited the amount to the Association after confirming that the drawer possessed sufficient funds in his Fort‑branch account to honor the cheque. The pivotal issue, therefore, was whether such a payment could be regarded as a cheque “certified as good for payment” under bye‑law 137‑B. The Court reasoned that the same reasoning applied to cheques drawn on an account in the same branch and that the banker’s certificate referred to in the bye‑law would, in this situation, be a certificate issued by a bank distinct from the one into which the cheque was being paid. Even assuming any doubt on this point, the Court was satisfied that once the staff at the Bullion Hall sub‑branch ascertained that the cheque was backed by adequate funds in the drawer’s Fort‑branch account, the requirement of a “cheque certified as good for payment” under bye‑law 137‑B was fulfilled. Consequently, the Court agreed with the learned Judges of the High Court that this payment was not outside the payments permitted by the said bye‑law. The Court then turned to the last of the payments, namely a cheque for Rs 1,16,250 drawn by Jethalal Sangji Shah in favour of the Bank of India Ltd. that was not certified as good for payment and was deposited in the Bullion Hall sub‑branch. The Clearing House accepted this cheque after obtaining a declaration from the drawer that he had sufficient credit in his Bank of India account to meet the cheque. The Court noted that the Directors of the Association had been consulted by the Bank regarding the acceptability of such a cheque, and on the Bank’s advice a declaration in the prescribed form was obtained from the member before the payment was accepted as meeting the requirements of bye‑law 137‑B. Counsel submitted that this payment could not fall within the scope of bye‑law 137‑B, and the Court considered the submission in the context of the foregoing analysis.

The Court noted that the counsel’s argument was correct, but observed that this point did not assist the counsel because it related only to the price of twenty‑five bars of silver. Considering the total quantity of silver that was the subject of the dispute, the Court held that Mr Purshottam could not refuse to acknowledge that, even if the payment made by that particular member was irregular, such irregularity would not invalidate the purchase that had been undertaken at the appellant’s risk.

Consequently, the Court concluded that, with the exception of the final payment – which was not perfectly regular but whose irregularity was not material – all of the other payments were substantially, if not literally, in compliance with the conditions laid down in bye‑law 137‑B. Accordingly, the purchase executed by the Directors, also at the appellant’s risk, was lawful and justified under the applicable bye‑laws.

Before reaching this conclusion, the Court considered the extensive analysis that had been conducted both before the learned trial Judge and before the Division Bench. That earlier analysis examined the numerous payments made by approximately seventeen members of the Association in order to determine whether those payments satisfied the requirements of bye‑law 137‑B, even where they were purportedly made on the third day. The learned Judges had addressed the various objections raised against the validity of those payments, discussed the details of the individual cases presented to the Court, and ultimately recorded findings that the payments met the requirements of the relevant bye‑law.

In view of the materials and arguments now before it, the Court did not re‑examine each objection in detail. Instead, it dealt only with the objections specifically raised in the present appeal and with the general soundness of the principles underlying those objections. Having done so, the Court held that the appeal failed. Accordingly, the appeal was dismissed and costs were awarded to the respondent.