TMI Blog1990 (9) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under the Indian Companies Act having its Head Office in Trichur and branches at various places. The first defendant firm consisting of defendant Nos. 2 to 4 as partners who are brothers, was doing business in Tellicherry in hill produces and they were allowed credit facilities by the plaintiff Bank, like accommodation by way of Hundi discount, key loan and cheque purchases upto a limit of ₹ 35,00,000. A promissory note was executed by defendants Nos. 2 to 4 in favour of their mother, the 5th defendant for an amount of ₹ 35,00,000 and the same was endorsed in favour of the plaintiff as security for the facilities granted to the first defendant firm. The 5th defendant had also deposited the title deeds of her properties shown in the plaint schedule to create an equitable mortgage to secure the repayment of the amounts due from first defendant. The first defendant firm had dealings with 6th defendant as well as others. The first defendant firm was supplying goods consisting of hill products and used to receive payments by way of cheques. On 26.10.74, 6th defendant drew a cheque on the Union Bank of India, Palghat Branch in favour of the first defendant payable to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be liable if the hypothecation is not sufficient to discharge the decree amount. The 6th defendant alone filed an appeal in the High Court and the others figured as respondents. The High Court confirmed the findings of the trial court but modified the decree holding that immovable properties described in the Schedule to the plaint would be proceeded against in the first instance and if the entire decree amount cannot be realised by the sale of those properties, the plaintiff-Bank would proceed against the assets of the first defendantfirm, and for the balance, if any, the decree-holder would proceed against defendants Nos. 2 to 4 and 6 and the liability of the 5th defendant is restricted to the extent of immovable properties mortgaged by her. Aggrieved by the said judgment and decree, the 6th defendant has preferred this appeal. Dr. Chitale, learned counsel appearing for the appellant submitted that respondent No. 1 herein namely the plaintiff-Bank is not a 'holder in due course' and therefore cannot maintain any legal action against the appellant i.e. defendant No. 6 who had drawn the cheques. His main submission is that the plaintiff Bank acted negligently and did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his own name to the possession of a cheque or bill of exchange or a promissory note and to receive or recover the amount due thereon from the parties thereto. Section 118 of the Act which deals with the presumptions as to negotiable instruments provides in clause (g) that the holder of a negotiable instrument shall be presumed as a holder in due course. Section 118(g) reads as under: 118. Until the contrary is proved, the following presumptions shall be made: XX XX XX XX XX XX (g) that the holder of a negotiable instrument is a holder in due course; provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or accept or thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him. In the instant case, the holder namely defendant No. 1 made the necessary endorsements in the two cheque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tle of the person who negotiated it. Section 90 of this Act reads as under: 90. Good faith:--A thing is deemed to be done in good faith within the meaning of this Act, where it is in fact done honestly, whether it is done negligently or not. These provisions have been understood and interpreted to mean that the holder should take the bill in good faith and he is deemed to have 'acted in good faith and if he acts honestly and negligence will not affect his title. In Byles of Bills of Exchange, 25th Edn. Page 206 a passage reads thus: A wilful and fradulent absence of inquiry into the circumstances, when they are known to be such as to invite inquiry, will (if the jury thinks that the abstinence from inquiry arose from a suspicion or belief that inquiry would disclose a vice in the bills) amount to general or implied notice. There must, however, be something to put the holder on inquiry. In Nelson v. Larholt, [1948] 1 K.B. 339 the defendant received cheques for value drawn by an executor in fraud of the testator. Denning, J. held that the defendant could not escape liability because he knew or ought to have known of the executor's want of authority. In Baker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e banking account is overdrawn negotiates to this bankers a cheque. drawn by a third party, to reduce the overdraft, the banker becomes a holder for value of the cheque. The pre-existing debt of the overdraft is a sufficient consideration for the negotiation of the cheque to the banker. A consideration of the above passages and decisions goes to show that English law requires that the holder in taking the instrument should act in good faith and that he had no notice of any defect in the title and if he has acted honestly, he is deemed to have acted in good faith whether it is negligently or not. With the above background of English Law. we shall now examine the Indian law on the subject. In Bhashyam Adiga on the Negotiable Instruments Act, 15th Edn. at page 171, the authors have dealt with the position in Indian law and it is observed that it would be Seen that the Indian Legislature has adopted the older English law as laid down by Abbott. C.J., (later Lord Tenterden) in Gill v. Cubitt, English Reports 107 King's Bench 806. Relying on this passage the learned counsel proceeded to submit that the Indian law is stricter than English law and requires the person to exercise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .J. further observed that: The question whether a bill or note has been taken bona fide involves in it the question whether it has been taken with due caution. It is a question of]act for the jury, under all the circumstances of the case. whether a bill has been taken bona fide or not; and whether due and reasonable caution has been used by the person taking it. And if a bill be drawn upon parties of respectability capable of answering it, and another person discounts it merely because the acceptance is good, without using due caution, and without inquiring how the holder came by it, I think that the law will not, under such circumstances, assist the parties so taking the bill, in recovering the money. If the bill be taken without using due means to ascertain that it has been honestly come by, the party, so taking on himself the risk for gain. must take the consequence if it should turn out that it was not honestly acquired by the person of whom he received it. Here the person in possession of the bill was a perfect stranger to the plaintiff, and he discounted it, and made no inquiry of whom the bill had been obtained, or to whom he was to apply if the bill should not be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll's case in the above decision. In Bhashyam Adiga on the Negotiable Instruments Act, 15th Edn. at page 172. the author having noticed the ratio in Raghavji's case observed: The Bombay High Court quoted the later English decisions with approval and applied them to the facts of the case before them, but the question is not discussed in the light of the words of this Section, and the decision is opposed to the opinion expressed by Chalmers in his commentaries on the Indian Act. In Durga Shah Mohan Lal Bankers v. Governor General in Council Others, AIR 1952 Allahabad 590 a Division Bench examined the scope of the provisions of Section 9 of the Act and held that: The provision that the person must have become possessor of a cheque without having sufficient cause to believe is more favourable to the person who claims to' have become holder in due course than the words acting bona fide . His claim would be defeated only if it is found that there was sufficient cause for him to believe that a defect existed. If he fails to prove bona fides or absence of negligence, it would not negative his claim. There must be evidence of positive circumstances on account of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor. whether such negligence is so extraordinary as to lead to the presumption that the holder had cause to believe that such title was defective. (emphasis supplied) This view is more sound and logical. The legal position as explained by Chitty may be noted in this context which reads as under: While the doctrine of constructive notice does not apply in the law of negotiable instruments the holder is not entitled to disregard a red flag which has raised his suspicions. We. therefore. modify the view taken by the Allahabad High Court in Durga Shah's case to the extent that though the failure to prove bona fide or absence of negligence would not negative the claim of the holder to be a holder in due course. yet in the circumstances of a given case. if there is patent gross negligence on his part which by itself indicates lack of due diligence. it can negative his claim. for he can not negligently disregard a red flag which arouses suspicion regarding the title. In this view of the matter we hold that the decision in Raghav. ii's case does not lay down correct law. We agree with the view taken by the Allahabad High Court with above modification. Before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheque in his customer's account before receiving the proceeds does not deprive him of protection against the true owner in the event of his customer having no title. or a defective title, to the cheque. Crediting the customer's account does not of itself alter the position of the banker from that of agent for collection to that of holder for value. It is a question of fact in each case. In order to constitute the banker a holder for value on his ground there must be a contract, express or implied, that the customer should be entitled to draw against the amount of the cheque before it is cleared. If the banker becomes a holder for value. he may. in the absence of a forged endorsement and unless the cheque is crossed 'not negotiable' sue upon a cheque in his own name as a holder in due course and may debit the customer if the cheque is dishonoured., He may apparently plead that he is a holder for value as against the person claiming as true owner, except where the endorsement is forged or the cheque is marked 'not negotiable.' (emphasis supplied) The above two passages indicate that the Banker who is asked to collect a cheque can credit the customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a question of fact. The true relationship has to be inferred from the acts of the parties. (emphasis supplied) From the above discussion it emerges that the Indian definition imposes a more stringent condition on the holder in due course then the English definition and as the learned authors have noted the definition is based on Gill's case. Under the Indian law, a holder, to be a holder in due course, must not only have acquired the bill, note or cheque for valid consideration but should have acquired the cheque without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. This condition requires that he should act in good faith and with reasonable caution. However, mere failure to prove bona fide or absence of negligence on his part would not negative his claim. But in a given case it is left to the Court to decide whether the negligence on part of the holder is so gross and extraordinary as to presume that he had sufficient cause to believe that such title was defective. However. when the presumption in his favour as provided under Section 118(g) gets rebutted under the circumstances mentioned therein tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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