VE. A. Firm and Others vs The Indian Overseas Bank Ltd. and Another

T. Ramaprasada Rao, J.—This appeal is directed against the judgment and decree of the Subordinate Judge of Tiruchirapalli. The

defendants therein are the appellants and the plaintiffs are bankers having their head office at Madras and branches in India and has an overseas

branch in Penang as well. The first defendant is a partnership firm carrying on business at Tiruchi and other places including overseas trading at

Penang. The name and style of the first defendant''s firm is M/s. VE. A. Firm. This was originally started by VE. A. Annamalai Chettiar and his

divided son VE. A. Vairavan Chettiar, the third defendant. On 3rd February, 1959, Annamalai Chettiar died, and thereafter, the third defendant on

his behalf and as the trustee and executor of his father, as also the second defendant and the fourth defendant continued the firm as per a fresh

deed of partnership dated 13th April, 1960. Defendants 5 and 6 were inducted into the partnership by a deed dated 13th April, 1964, under

which the defendants agreed to take over the assets and liabilities of the quondam partnership. In the course of such partnership dealings, the firm

and, therefore, its partners secured from time to time accommodation from the plaintiffs-Bankers and more particularly, from their Penang branch.

The account between the first plaintiff and the defendants were settled on 30th July, 1964, and on that date a sum of 1,71,800 Malaysian dollars

were due by the defendants to the plaintiffs under what is known as the Miscellaneous Cash Credit account. In connection with the said debt, the

defendants with the permission of the Reserve Bank offered Indian securities in the shape of fixed deposits which they deposited with the Tiruchi

branch of the Bankers in India. Under Exhibit B-1 dated 3rd June, 1958 the firm at Penang requested the Tiruchi branch of the plaintiffs Bank to

take delivery of their fixed deposits receipts for which they gave due discharge receipts even at the time of deposit and hold them as security to all

the monies which the defendants firm may owe in respect of the facilities offered to the firm at the Penang branch of the Bankers. The firm

undertook to renew the fixed deposits from time to time and agreed to lodge such securities duly discharged, so that such fixed deposits may

continuously operate as securities against their debt which they may owe to the Penang branch. They have also expressly authorised the Bankers at

Tiruchi to adjust the outstandings of the firm''s account with their Penang branch at any time from and out of the said deposits without any reference

to the firm. It may be also pointed out that the accommodation was granted by the firm on condition that all outstandings shall be repaid by the

firm'' on demand from local funds meaning thereby that the debt was repayable in dollars. (Vide: Exhibit A-4 dated 15th August, 1951). It is

common ground that the Reserve Bank gave sanction to the plaintiffs to advance monies to the firm in dollars against deposits made by the firm at

their Tiruchi branch (Vide: Exhibit A-64 dated 14th June, 1958 and Exhibit A-5 dated 5th August, 1958). Due to certain circumstances the firm

was unable to clear their debt due and owing to the Penang branch. Hence, they wrote under Exhibit A-62 dated 25th April, 1966 stating that they

were unable to pay either the interest or the overdraft amount due to the Bank and requested the Penang branch to obtain the Reserve Bank''s

permission and arrange for the remittance of the Indian deposits and adjust the outstanding overdraft. Based on this request the Penang branch,

requested their head Office to permit them to write to their Tiruchi office for repatriation of the Indian deposits for purposes of settling the account

at Penang (Vide: Exhibit A-7 dated 9th May, 1966). Under Exhibit A-8 dated 13th May, 1966, the Central Office gave such permission and the

Penang branch, therefore, wrote under Exhibit A-28 dated 20th May, 1966, referring to the request of the firm and also to their correspondence

with their head office and asked the Tiruchi branch to obtain the Reserve Bank''s permission and remit the proceeds of the deposits. On 6th June,

1966, the Malaysian dollar was devalued to the prejudice of the customer. The fixed deposits ho doubt were to mature on 24th June, 1966. On

the 25th July, 1966 under Exhibit A-10, the head Office of the plaintiffs'' bank set out in full the history of the advances taken by the defendants

firm at Penang and referred to the permission which the Reserve Bank itself granted to keep the Indian fixed deposits as security to the foreign

debt and sought for permission to comply with the customer''s request for adjusting the outstanding overdraft. Meanwhile, the Penang branch on

the basis of the devaluation of the Malaysian dollar and after adjusting the value of the Indian securities towards the outstanding claimed a shortfall

of about 59,881 Malaysian dollars, apparently calculating the Indian deposits at the new exchange rate after devaluation. The Reserve Bank

wanted some more particulars regarding request for (sic) repatriation made by the Tiruchi branch. Such particulars were furnished as is seen from

Exhibits A-15 dated 10th May, 1967, A-16 dated 30th May, 1967, A-18 dated 13th July, 1967. Finally, the officials of the Tiruchi branch

prepared what is known as A-7 Form which is the prescribed Form for permission to transfer Indian funds on conversion to a foreign country and

gave the reason for payment originally reading as ""Transfer of Funds in liquidation of the overdraft given to the firm at Penang against the security of

the deposits in India"", and later corrected as ""Transfer of Funds as part adjustment of the overdraft given"" etc. This Form was signed by the firm on

22nd July, 1967. The balance outstanding in the overdraft account of the firm at Penang as on 10th January, 1967, was noted as Malaysian dollars

177,678-55. Finally, the Reserve Bank under Exhibit A-72 dated 15th September, 1967 granted permission to the plaintiffs'' bank to remit the

proceeds of the Indian fixed deposits amounting to Rs. 2,85,153-45 to liquidate the overdraft availed of by the firm. Even there, we do not find as

to what is the conversion rate to be adopted for purposes of remittance. As according to the plaintiffs, the overdraft account was adjusted on 11th

October, 1967 at the exchange rate of 2.45 Malaysian dollars that left a balance of 73,227.38 dollars as still payable. After debiting further interest

to the outstanding amount under the account, the bank instituted the suit for recovery of Rs, 1,87,445-40 as per the ruling exchange rate, together

with further interest of Rs. 4,026-21. The plaintiffs averred that they were under no obligation to adjust the account till the fixed deposits matured

on 24th June, 1966 and that there was no negligence or delay on their part so as to make them indirectly responsible for the loss consequent upon

the devaluation of the Malaysian dollar in June, 1966, which was before the date of maturity of the fixed deposits. In any event, they would say that

repatriation of the funds was payable only after obtaining the permission from the Reserve Bank, and even though they took steps for such

permission on 23rd May, 1966 they could got the permission only in September, 1967 and as the money was repayable in Malaysian dollars, the

first defendant as the partnership firm and defendants 3 to 6 as partners thereto are liable for the suit amount.

The defendants'' contention is that even though the amount is repayable in dollars, the Indian deposits ought to have been adjusted at the ruling

rate which was prevailing on 25th April, 1966, on which date they wanted the plaintiffs to adjust the deposits towards the overdraft account and

that on such adjustment, it is the plaintiffs, who had to pay the defendants and no amount is due and payable by the defendants to the plaintiffs.

They would refer to the delayed action taken by the plaintiffs in the matter of obtaining permission from the Reserve Bank and would aver that the

plaintiffs are under a legal obligation to make the adjustment as on the date when the customer made the request for closure of the account and the

later proceeds of actual repatriation being only ancillary to the main incident, the defendants cannot suffer the loss as a result of the devaluation

which was long after the date when they requested for adjustment and subsequent repatriation of the Indian funds to Malaysian dollars. The

defendants would say that there was no impediment or obstacle to the Bank in making the required adjustment before 24th June, 1966, which was

the date of maturity of the Indian deposits. As the adjustment should have been made on 25th April, 1966 and as the permission of the Reserve

Bank in September, 1967, would not alter the material situation, the suit ought to be dismissed, and on the other hand they made the counterclaim

in the sum of Rs. 29,592.38 on the basis of the value of the Malaysian dollar as on 23rd April, 1966. They also raised certain contentions about

the additional claim for interest.

The plaintiffs in their reply statement would deny their liability to the counterclaim.

The following issues were framed for trial:

Whether the plaintiffs were bound to adjust the fixed deposits standing to the credit of the defendant in the Tiruchirapalli Office of the plaintiffs

towards the overdraft balance against the defendants in the Penang branch of the plaintiffs before the due date of the maturity of the deposits?

Whether the permission of the Reserve Bank of India was necessary for making the said adjustment?

Whether there was any default, delay inaction or negligence on the part of the plaintiffs in obtaining the permission of the Reserve Bank of India

as contended by the defendants ?

Whether the plaintiffs are entitled to claim and charge the interest as stated in the plaint?

To what interest is the plaintiff entitled and from what date?

Whether the suit is barred by limitation ?

Whether defendants 2 to 6 are liable for the suit claim ?

Whether the counterclaim made by the defendants is true and valid?

To what relief are the plaintiffs entitled?

Additional issues:

Whether the 2nd plaintiff has any locus standi to maintain the suit?

Whether the claim by the 2nd plaintiff is in time?

The trial Court on issues 1 and 2 concluded that the permission1 of the Reserve Bank of India is absolutely necessary for adjusting the fixed

deposit amount in India to the credit of the defendants firm towards the overdraft advance made by the plaintiffs-Bank in Malaysian dollars at

Penang. The findings on issues 3 and 4 were not canvassed before us in the appeal. On issue No. 5, the learned Judge held that the suit was in

time. In so far as the issues Nos. 6 and 7 are concerned, the lower Court held that defendants 3 and 6 were liable for the suit claim, and in all, it

held in favour of the plaintiffs and decreed the suit with proportionate costs and dismissed the counterclaim of the defendants but without costs.

Before considering the contentions of parties certain general observations are necessary. It is true that sympathy and generosity do not have any

part to play while deciding the problems arising under the Foreign Exchange Act. It should however, be remembered that there is a difference

between the commission of an offence and a bona fide intent to avoid the committing of the offence. In order to escape the clutches and stringency

of the technical law of Foreign Exchange Control, the persons, who are in the pale of such activity, are not expected to mechanically adopt the

norms of that law as a shield for each and every involvement of theirs in Foreign Exchange transactions. Section 3 of the Foreign Ex-change

Regulation Act, 1947, creates persons, who could authorisedly deal in foreign exchange. Section 4 thereto imposes restrictions on the dealing in

foreign exchange. In particular Section 4(1) and (2) of the Act read as follows:

(1) Except with the previous general or special permission of the Reserve Bank, no person other than an authorised dealer shall in India, and no

person resident in India other than an authorised dealer shall outside India, buy or otherwise acquire or borrow from or sell or otherwise transfer or

lend to or exchange with, any person not being an authorised dealer, any foreign exchange.

(2) Except with the previous general or special permission of the Reserve Bank, no person whether an authorised dealer or otherwise, shall enter

into any transaction which provides for the conversion of Indian currency into foreign currency or foreign currency into Indian currency at rates of

exchange other than the rates for the time being authorised by the Reserve Bank.

Section 5 says that any payment to or for the credit of any person resident outside India shall be in accordance with general or special

permission granted by the Reserve Bank of India from time to time. Even in the case of creation and transfer of securities or in the matter of placing

any sum to the credit of any person resident outside India such a permission is required. Section 20 sets out the various situations whereunder the

permission of the Reserve Bank is necessary for repatriation of funds. Section 21 creates a bar against the entering into any contracts or

agreements which would directly or indirectly result in evasion or avoidance of any of the provisions of the Act. The scheme of the Foreign

Exchange Control Act appears to be that with the permission of the Reserve Bank, a resident in India could offer securities, which are current in

India towards a debt payable by that resident to a foreigner. These are the principal guidelines which should be borne in mind in the particular case.

We have already seen that the appellant-firm in order to ensure the repayments of the advances granted to them by the Penang branch of the

plaintiff-Bank under their Miscellaneous Cash Credit Account deposited at their Tiruchi branch fixed deposits, and this security was given by the

appellants after getting permission from the Reserve Bank of India to offer such securities. Under Exhibit A-5, dated 5th August, 1958 the Reserve

Bank of India accorded permission for the grant of the overdraft advances to the appellants and also permitted the appellants and in consequence,

the respondents also to accept the securities offered to the Bank which securities were in Indian currency in rupees in order to ensure the

repayment of the debt in dollars. In fact, the caption of the account, which the Penang branch of the Indian Overseas Bank Ltd., was maintaining in

connection with its dealing with the appellants, is named as overdraft against the Indian deposits. This is also clear by the conduct of the Bank itself

as is seen from their letter Exhibit A-64, which is as follows:

From

Indian Overseas Bank Ltd.

Central Office, Madras.

To

The Reserve Bank of

India, Exchange Control Dept., Madras.

Ref. 261|F|3912-dt. 14th June, 1958.

Dear Sir,

Ref. : Trading and Commercial Loans and Overdrafts - A|C VE. A. Firm.

We refer to your letters Nos. MA; EX: COM: 876|120|57, dated 25-6-57 MA: EC: COM: 607|120|58, dated 10-2-1958 and MA: EC: COM:

1212| 120|(43)|58, dated 14-3-1958, whereby advance limit of $ 125,000|- $22,000|-and $25,000|- respectively were authorised by you to be

Held at our Penang office in favour of the captioned firm against deposits at our Tiruchi branch.

The firm has now requested for renewal of the facilities for an amount of $172,000|- in consolidation of the 3 limits and accordingly an application

in duplicate is submitted herewith. We shall thank you to let us have your early sanction in the matter.

Yours faithfully,

Sd. x x x x

Officer-in-Charge

x. F.E.A|cs. Dept.

Encl. Supplementary statement attached to the main application in regard to the private loans and O.Ds. Long afterwards, under Exhibit A-62 the

defendants wrote to the plaintiffs as under:

Copy of letter dated 25th April, 1966 from VE.A. Firm, 134, Penang St., Penang, addressed to the Manager, Indian Overseas Bank Ltd.,

Penang.

Dear Sir,

Overdraft against Indian deposits with your Bank.

With reference to the above, I have to inform you that the collections of our advances have been poor and there have been many bad debts.

Hence, we are unable to pay either the interest or the overdraft amount due to your Bank. Therefore, we shall be glad if you will obtain the

Reserve Bank''s permission and arrange for the remittance of Indian deposits and adjust the outstanding overdrafts.

Yours faithfully,

per Pro. VE. A. FIRM

Sd. SP. Srinivasan.

They wanted the Penang branch of the Bank to adjust the outstanding overdraft, since they were unable to pay the interest or the overdraft amount

due to the Bank. The Penang branch in their letter to their head office, after referring to the request of the customer said that the Tiruchi office may

be advised for the repatriation of the deposits. Even the Central Office under Exhibit A-8 agreed with their Penang branch that the Tiruchi branch

may apply to the Reserve Bank of India for permission to repatriate the proceeds of the deposits held as security towards the liquidation of the

Miscellaneous Cash Credit account. Accordingly, under Exhibit A-28 the Penang branch wrote to Tiruchi branch requesting them to obtain the

Reserve Bank''s permission and remit the proceeds of the deposits.

At this stage it would be convenient to refer to the correspondence that passed between the appellants'' firm and the Bank''s Tiruchi branch

when they offered the Indian fixed deposits as security for their debt due to the Penang branch. Under Exhibit B-1 they would ask the Tiruchi

branch to take delivery of the fixed deposit receipts which have been discharged by them and hold the same as security for all the monies which the

firm may owe to the Penang branch of the Bank in respect of the facilities offered to them. The express understanding between the firm and the

Tiruchi branch which was obviously known to the Penang branch as well is to the following effect.

I hereby authorise you to renew the said deposits from time to time until the account in M|s. VE.A. Firm''s name with your Penang branch is closed

and hereby undertake that they will lodge with you the renewed fixed deposit receipts from time to time duly discharged.

I hereby authorise you to adjust the outstanding in M|s. VE.A. Firm''s account with your Penang branch at any time from out of the said deposit

without any reference to me whatsoever.

No doubt when the cash credit account was opened in Penang the undertaking between the firm and the Penang branch was that the amount which

might be outstanding from time to time will be repaid on demand from local funds and that the Bank may retain the relative deposits in India until

such time as the overdraft of the overseas branch is fully adjusted.

Mr. C. Ramakrishnan, appearing for the Bank, after referring to the above relevant correspondence and other documents such as Exhibits A-

34, A-28, A-8 and A-9, would lay an accent upon the alleged intention of the parties that at all material times the debt was repayable in dollars

and there could be an adjustment of the account only after the Reserve Bank passes an order for repatriation of the funds in India, so that the

account of the firm could be closed by entering the credit in dollars against the existing debit representing the debt of the firm. He would say that

not with sanding request for adjustment and the other steps taken by the respective branches with the Reserve Bank of India as per the letter

Exhibit A-62, dated 25th April, 1966, there could be no enforceable adjustment having regard to the primary intention of the parties to repay the

debts in dollars. Even assuming that the devaluation of the Malaysian dollar has no impact on the situation, yet as the statutory sanction to repatriate

was given by the Reserve Bank after such devaluation and as such repatriation was effected in the teeth of such devaluation and as until then, the

relationship of debtor and creditor continued as between the firm and the Bank, the exchange rate has to be worked out as on the date when the

Reserve Bank sanctions such repatriation.

What, therefore, is the intention of the parties in the instant case? While Mr. Ramakrishnan would say that the intention was to pay back the

debt in dollars which was the local currency, the learned Advocate-General appearing for the firm would say that eo instanti the firm requested for

adjustment on the plea of inability to pay the debt and as soon as that information reached both the Tiruchi branch as well as the Central branch on

which necessary action was taken, then the fact that the Reserve Bank took sometime to pass an order for repatriation would not make any

difference, and the debt ought to be adjusted as on 26th April, 1966.

It is true that it is the dollar which is referred to as the measure of the obligation between the parties. But an overemphasis should not be made

on this obligation so as to buttress and ignore the realities of the situation. The fact that the plaintiffs have filed the suit in India for recovery of the

monies in rupees, though the alleged intention was that the debt should be repaid in local currency, also throws considerable light upon the intention

of the party. No doubt the customer has promised to repay the debt in dollars. Should that be understood as meaning that although the dollars are

made available or could be made available within the framework of the Foreign Exchange Law, the debtor is bound to suffer because relationship

of ''debtor'' and ''creditor'' has been snapped within the meaning of common law. When the customer in this case has requested the Banker to

adjust the available securities, then the time, taken by the Bank in conjunction with the Reserve Bank to adjust the amount is only in the stream of

procedural process of realisation and does not have an impact upon the substantive relationship of ''debtor'' and ''creditor''. The principle of

depitum in presenti and selvindum in futuro has a part to play in such situation. It may be that a credit in the pure accountancy sense is not possible

because the Penang account has to be closed with reference in Malaysian dollars. But on the facts and circumstances of this case, it only remained

for the Penang branch as creditor or their complement the Tiruchi branch to obtain the permission of the Reserve Bank to convert rupee account in

India into a dollar account so as to repatriate it to Malaysia. This process may take time, and naturally it has to, since the Reserve Bank being the

apex Foreign Exchange Bank, with all the national and international commitments cannot be expected to act forthwith and grant the necessary

permission. Let us take for instance a case where the Reserve Bank takes some years before sanction is accorded or refuses permission. If within

that period, there is more than one devaluation or revaluation to the prejudice of the customer, then it would be illogical to conclude that all such

prejudices caused as a result of such devaluation should be passed on to the customer as if it was by automatic transmission. Tiruchi as well as the

Penang branch understood the situation correctly and furthered the intention behind the contract by taking steps to obtain permission from the

Reserve Bank to repatriate the Indian Funds. The Penang branch as well as the Tiruchi Branch applied to the Central Office expeditiously for

permission to enable them to apply to the Reserve Bank for due conversion of the rupee fund into dollars and transmit the same to Malaysia. These

steps were taken by the branches prior to 6th June, 1966; the date of devaluation. The Central Office takes up the matter with the Reserve Bank

setting out the history of the Indian fund and asking for permission to comply with the parties'' request for adjustment of their debt as against the

Indian deposits. Exhibit A-10 dated 25th July, 1966 is self-explanatory. Thereafter, correspondence passed between the Central Office on the one

hand and their Tiruchi branch office on the other hand and with the Reserve Bank also in connection with the transmission of funds. This is seen

from Exhibits A-14, dated 4th April, 1967, A-15 dated 10th May, 1967, Exhibit A-16 dated 30th May, 1967 and Exhibit A-18 dated 13th July,

1967. It is after all this and in or about September, 1967, permission to transfer the rupee account was made in due Form under A-7. By this time

it was more than one year since the firm asked for adjustment. It is therefore, fairly clear that the time taken by the bankers in the matter of

forwarding an application for permission to convert the funds and transfer the same to Penang was considerably long. The Bankers sent the Form

A-7 duly filled up by them and that is marked as Exhibit A-19 in the case. In Exhibit A-19 while asking for permission to transfer the above rupee

amount, they stated the purpose for which, the transfer was required. They would say that the reason for the application was the transfer of funds

in India in liquidation of the overdraft account as against the appellant-firm. Though they have originally mentioned the word ''in liquidation'' they

corrected it in their own handwriting to ''part adjustment'' of the overdraft. Admittedly, this Form was prepared by the Bank officials. They

definitely say that the permission to transfer the funds was for purposes of adjusting the overdraft account against securities of the Indian deposits

to the tune of Rs. 2,85,153.45 inclusive of interest. They also would commit themselves to the effect that the outstanding balance in the overdraft

account at Penang was $177,678.55 Malaysian dollars. It is clear from this application that the parties did apply their mind, as it was the Bank

which sent the Form duly filled for the firm''s signature. Therefore, the intention of the parties, notwithstanding the recitals in the original contract to

repay the debt in dollars, is that on the date when they applied for sanction to repatriate the funds, the Bank treated the account as having been

fully or partly adjusted having regard to the exchange value of the Indian securities in rupees. In other words, they acted upon the letter of request

by the customer to adjust and understood the bargain as one under which they should either liquidate the debt in full or partially adjust the same

according to the exchange value of the securities, on the date of such request for adjustment and that they entertained the view that the loan ought

to be adjusted on the date when the customer sought for adjustment. On the only ground that the Reserve Bank gave permission to repatriate

dollars to Malaysia after devaluation, the debtor-firm should not suffer the consequential prejudice. We find that the intention was originally to

repay the debt in dollars and that by reason of the letter of request for adjustment of the overdraft from and out of the Indian securities, the rupee

value of such securities should be converted into dollars on that date and the necessary adjustments, though not physically but notionally be made,

and the rights and obligations of parties should be worked out in that light.

In the light of the above discussion, the question is as to what is the relevant date when the Indian securities should be converted into Malaysian

dollars. In other words, when does the right to set-off arise in the instant case, when once it is found that the intention of the parties was to get the

account adjusted no sooner a specific request to that effect was made by the customer. It is also for consideration whether the non-maturity of the

fixed deposit on the date of the request by the customer for adjudication makes any difference in the ultimate conclusion to be reached.

When the customer writes Exhibit A-62, dated 25th April, 1966, to adjust the security and when the Bank had the right to close the account at

any time by such adjustment of the Indian security as is seen from Exhibit B-1, it follows that the relationship of debtor and creditor is snapped on

the date of Exhibit A-62, and the events that happened later are all consequential and cannot uproot that legal result that has already cropped up

by reason of the cessation of the relationship of debtor and creditor. In so far as the Indian securities are concerned, the Bank is a debtor. A debt

is repayable according to the contract between the parties. As the Bank has had in its possession discharged receipts in relation to the fixed

deposits, it can pay; itself the debt at any time when so required or when such an occasion arises for adjustment. The Bank can exercise its right to

so adjust under Exhibit B-1. It cannot be said that the customer has no such right, and if he desires that adjustment should be made because of his

financial position, it tantamounts to an unilateral mandate to the banker to do so. On the other hand, it would amount to a request by the customer

to the banker to exercise its privilege or power gained by the Banker under Exhibit B-1 under which the Banker was enabled to adjust the firm''s

outstandings with the Penang branch at any time from out of the Indian deposits without any more reference thereto. It is not unknown in mercantile

practice for Bankers to allow the withdrawal of the fixed deposits before due dates. In the instant case, such was the clear understanding as is

exhibited from Exhibit B-1, the terms of which have already been referred to. For a greater reason such adjustment on the basis of the rate of

exchange prevailing on the date of Exhibit A-62 is possible because the Reserve Bank has already approved the holding of the Indian securities

which were in rupees as against the foreign debt in dollars. This approval was given as early as 1958. Once the Reserve Bank has granted such

permission which authorised the Penang branch to advance monies in dollars as against deposits in India which were in rupees, no fresh approval is

necessary to adjust the overdraft account or to evaluate the rupee account into a dollar account"" on the date when such adjustment was sought.

Actual repatriation of the Indian funds after conversion into Malaysian dollars which again requires a permission from the Reserve Bank of India

may take place after the Reserve Bank of India accords such sanction. But in order to set-off the foreign debt as against the Indian rupees, the only

thing to be done is to find the exchange rate on the date of Exhibit A-62 and convert the Indian deposits into Malaysian dollars in accordance

therewith and cause the adjustment or set-off to be made so that the foreign debt may be commercially wiped out either in full or in part. As

monies deposited in a bank under fixed deposits are the monies of the Bank and they are the owners thereto, it is feasible for the Bank to set-off

that amount as against the debt whether internal or external due to it from the relevant customer and cause an adjustment of it. In our case, the

Indian deposits have been earmarked by way of security for the loan given by the Penang branch to the customer. This transaction obviously

means that until the loan is repaid to the extent of such earmarking of the funds nothing is due by the Bank to the customer nor can the customer be

paid any amount from the said deposit even though it matures unless the bank gives up the security. In a Full Bench case which arose in the Kerala

High Court in Issac Issac Poranganal House Vs. Palai Central Bank Ltd., , the following were the relevant facts:

A had a fixed deposit with the Bank. He took a certain loan from the Bank on a promissory note. Along with the promissory note he also handed

over to the Bank the fixed deposit receipts with an endorsement of discharge thereon and the delivery and instruction letters containing a direction

that on maturity the proceeds of the deposit receipt should be credited to A''s loan account. On insolvency of the Bank before the maturity of the

fixed deposit, A claimed set-off in respect of the proceeds of the fixed deposit against his loan under the promissory note:

Held, (i) that the fact that A handed over to the Bank the fixed deposit receipt with an endorsement of discharge thereon, a delivery letter and an

instruction letter, amounted to no more than the creation of a charge on the amount covered by the fixed deposit or a hypothecation of that fund. A

debt which would have been unsecured, if the promissory note alone was in existence, became a secured debt as a result of that transaction. The

existence of such a security did not affect the question of a set-off.

(ii) that the arrangement between A and the Bank was itself to effect a set-off on the maturity of the fixed deposit.

(iii) that the fact that the deposit had not matured when the winding up commenced was not of material consequence.

(iv) that the effect of the Bank''s insolvency was to accelerate the date on which the set-off should be effected and to make the commencement of

the winding up the time for that purpose. Hence A''s claim to a set-off is valid and could be admitted.

Applying the principle in the above case, it can be safely said that in the instant case the customer''s right to seek a set-off of his deposit as against

the Penang debt was accelerated on the date when he wrote for such adjustment, and the fact that the fixed deposits in India had not matured for

payment was of no consequence.

As was observed by Gentle, J., in In Re: Travancore National and Quilon Bank Ltd., S. Barkatally and Others, , a debt though not presently

payable, can be set-off against monies owing to a company in liquidation. We may also add that even the bankruptcy of the customer, if it

happens, after the date when he request-ed for adjustment of the Indian securities against the foreign debt would not matter at all, because the

banker has secured for himself a vested right to appropriate the securities on the date when Exhibit A-62 was written. If the devaluation which

followed that date was really re-valuation and was to the advantage of the banker, will it give up such a fortuitous addition? We hope not. As the

bank had the indisputable right and recourse against the money covered by the securities we are of the view that the debt ought to have been

adjusted against the account at least notionally and for purposes of this case on the date when Exhibit A-62 was written, that is, 25th April, 1966,

which was long before the date of devaluation of the Malaysian dollar. Following up this reasoning, the correct date for the conversion of the rupee

debt into Malaysian dollars would be the date when the debt became due. The date for calculating the exchange rate should be the date when an

unconditional right to appropriate was given to the Banker and not the date when the dollars were permitted to be sent to Malaysia consequent

upon the permission of the Reserve Bank in 1967.

In re: British American Continental Bank Credit General Liegeois'' Claim (1922) 2 Ch.D. 589, the Court accepted the principle that for

ascertaining the correct date for conversion in an action brought in England for recovery of a debt due in a foreign country in the currency of that

country it is the date when the debt became due. In Di Ferdinando v. Simon, Smits & Co. (1920) 3 K.B. 409, the same principle was reiterated

when the occasion arose for the Court to assess the damages incurred abroad consequent upon a breach of a contract. The Court of Appeal said

that in arriving at the proper equivalent in British currency for the purposes of assessing these damages, the rate of exchange prevailing on the date

of breach and not that prevailing at the date of judgment should be adopted. In The Ottoman Bank v. Chakarian (1930) A.C. 277, when an

employee was wrongfully dismissed and when he laid a suit for damages for such wrongful dismissal and when it was found that the employee was

unjustifiably dismissed, and therefore, entitled to damages, the House of Lords made the following observation:

Conversion into sterling of the damages in Turkish currency in respect of the respondent''s pension under the contract should be at the rate of

exchange at the date of his dismissal, not at the date of the judgment.

In re, Russian Commercial and Industrial Bank (1955) 2 W.L.R. 62, the Court said that the correct date for the conversion of the rouble debt into

sterling was the date on which it became due. Finally, In Re: United Railways of the Havana and Regle Warehouses Ltd. (1960) 2 All. E.R. 332,

the House of Lords referred to an earlier decision of the Privy Council and approved of the following principle:

At what date must the prate of exchange be calculated? There can, their Lordships apprehend, be now no doubt as to the English law on this

point. It is true that different views have been taken at different times and by different systems of law. Indeed, there are at least four different

alternative rules which might be adopted. The rate of exchange might be determined as at the date at which payment was due, or at the date of

actual payment, or at the date of the commencement of proceedings to enforce payment, or at the date of judgment.--English law has adopted the

first rule, not only in regard to obligations to pay a sum certain at a particular date, but also in regard to obligations the breach of which sounds in

damages, as for an ordinary breach of contract, and also in regard to the satisfaction of damages for a wrongful act or tort.

In our case long before Malaysian dollar was devalued on 6th June, 1966, the banker obtained an indefeasible right to appropriate the Indian

funds towards the Penang debt. Thus, the cause of action to adjust and set-off had already arisen on 25th April, 1966. Devaluation being a

nonforeseeable circumstance, cannot make any inroad on the right of the Banker to assess the value of the Indian securities in Malaysian dollars as

on the date of the cause of action which in this case is 25th April, 1966.

How does the process of the repatriation interact on the situation? In the peculiar circumstances of this case as the Reserve Bank had already

blessed the transaction of keeping the Indian fixed deposits as security for the overdraft dollar debt, no second permission is necessary for the

Bank to exercise its right to adjust and set-off one account as against the other. Repatriation arises only in the course of the execution of the

contract. It has no relevancy or impact on the right of the customer to ask for adjustment and the legal entitlement of the Banker to so adjust and

set-off by conversion of the rupee security into a Malaysian dollar security, when the occasion is called for under the contract. This is not

impossible of calculation and reckoning. The grant of permission by the Reserve Bank to repatriate converted funds is not adjudication by the

Reserve Bank, as if it was a quasi-judicial determination of certain rights of parties. Ismail, J., in A.R. Ramiah Vs. Reserve Bank of India

(Exchange) (Central Department) Fort Glacis and Another, , while considering the scope of Section 21(3) (c) of the Foreign Exchange Control

Act, said that as far as possible the permission contemplated by Section 21(3) (c) of the Act is concerned, it does not purport to adjust the rights

of any parties. The rights and obligations of the parties have already been determined in the suit on legal proceedings instituted in which a decree

has been passed in favour of one party against the other. Once a decree has been passed the judgment-debtor is under an obligation to discharge

the decree debt and it is not the intention or object of the Act to wipe out or obliterate that obligation or to confer any benefit on him with reference

to that obligation. The ratio in this case justifies our conclusion that once the Bank is in seisin of the Indian fund over which it has obtained control

to the extent necessary for them to make a book adjustment, and thus set-off the security as against the debt, then the Banker cannot take undue

advantage of the statutory formality which is thereafter required for mere transmission of the converted dollar fund to Penang. It would be highly

unjust and illogical to assume that it is only on the date when the dollar''s reached Penang as a result of the permission granted by the Reserve Bank

that the debt has been paid and until then the relationship of debtor and creditor continued. The principle has been well laid and clearly set out by

the House of Lords in Contract and Trading Co. v. Barbey (1959) 3 All. E.R. 846. The short facts as set put in the headnote are as follows:

The respondents carried on business and were resident outside the ""scheduled territories"" as defined in the Exchange Control Act, 1947. They

were holders in due course of three bills of exchange of which the appellants were acceptors and which were dishonoured on presentation. The

appellants did not dispute that, apart from the effect of the Act of 1947, they would be liable to pay the amount due on the bills claimed by the

respondents. No permission of the Treasury to make a payment u/s 5 was obtained by the appellants. By Section 33(3) and para. 4(1) of schedule

IV to the Act, a claim for the recovery of a debt in a prescribed Court might not be defeated ""by reason only of the debt not being payable without

the permission of the Treasury"". By Section 33(1) of the Act, it was an implied condition of any contract that a term of the contract should not be

performed except in so far as Treasury permission was given or was not required. The respondents brought ah action in the High Court (which

was a prescribed Court) for the amount of the bills, and the appellants contended that, by reason of the term implied in the bills by Section 33(1),

the bills were not due and payable since Treasury permission had not been given.

Lord Radcliffe, speaking for the Board clearly explained the position at page 851 thus:

judgments for payment of money are subjected to similar conditions requiring Treasury consent before payment; in effect, the hand of control is

shifted from the contract to the right arising under the judgment. Moneys due under judgments or orders can be paid into Court, thus discharging

the debtor, and the fund itself still remains out of the control of the creditor until consent has been obtained.

The only difference in our case is that instead of a judgment of a Court, we have the contract which governs the parties and the same is in

writing. The Bankers have secured their right to adjust whenever they pleased which obviously would include the legal obligation to adjust

whenever a request is made by the customer to so adjust. Therefore, by reason of Exhibit A-62, a situation has arisen in and by which a right to

set-off and adjustment has become vested in the Banker. This, therefore, discharged the appellants as debtors. The relationship between the

customer and the banker as debtor and creditor eo instanti ceased. The Indian securities remained out of the control of the creditor until the

permission was obtained from the Reserve Bank to transmit the same for purposes of regularising the book entries in Penang, but for all purposes,

both legal and equitable, and by reason of the right to set-off the securities as against the debt, and sometimes to avoid unjust enrichment, the debt

has become discharged on 25th April, 1966. If as per the rate of exchange as on that date any more amount is still payable by the appellants to the

Banker that amount only can be claimed by them.

In the instant case, however, the Bankers demanded not the amount as above but the amount which was the difference between the debt as in

the Penang Books and the value of the Indian securities converted into Malaysian dollars on the date when the Reserve Bank granted permission

namely 15th September, 1967, and they claimed this difference in this action. It is common ground that if the conversion rate as on 25th April,

1966 is invocable and the Indian securities converted on that basis, there would be nothing due by the customer. But on the other hand, the Banker

has to refund the excess amount in their hands.

It is as a result of this, the appellants as defendants in their written statement made a counterclaim. The lower Court decreed the suit on the

ground that the exchange rate has to be worked out on the date when the Reserve Bank gave permission. As a consequence, it dismissed the

counterclaim. But, in the light of the reasoning as above, the appeal has to be allowed and even so the counterclaim, because if the rate of

exchange as on 25th April, 1966, is adopted, then the bookishly converted Malaysian dollars as on that date was more than sufficient to wipe off

the Penang debt. There remained also some more money with the Tiruchi Bank, which is the subject-matter of the counter claim, which has been

rightly laid.

The other question which was raised in this appeal whether defendants 4 to 6 are liable at all does not arise for consideration, as the suit ought

to be dismissed and the counterclaim be allowed. We are not, therefore, inclined to consider the question whether on the facts and circumstances

of the case, defendants 4 to 6 could be made personally liable for the debt of the firm. Prima facie, however, it appears to us, that as they took

over liabilities of the firm when they were inducted into it, they would be bound by the contract and even so under the provisions of the Indian

Partnership Act. No more discussion on this question is necessary.

We therefore, allow the appeal in full and accept the counterclaim as claimed by the appellants in their written statements. The appellants will

be entitled to their costs throughout.

This appeal having been posted this day for being spoken to, the Court delivered the following Judgment:

This appeal is posted today for being spoken to. As the subject-matter raised a question which is bereft of authority and as both the counsel

rendered their best possible assistance to come to a conclusion, we feel that the parties should be directed to bear their costs throughout

themselves.