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Judgment
S.S. Subramani, J.—Plaintiff in O.S. No. 698 of 1978, on the file of Subordinate Judge''s Court, Coimbatore, is the appellant. Even though
there are five defendants in the suit, this Appeal is filed only against defendants 3 and 4 and hence they alone are arrayed as respondents. As
against the other defendants, the decree passed by the trial Court was confirmed by the lower appellate court and the same has become final.
Appellant filed the suit for recovery of nearly Rs. 14,000/- from all the defendants on the following allegations:-
4th defendant in the suit is a firm of which 3rd defendant is a Managing Partner. It issued a cheque in favour of 3rd defendant-company for Rs.
11,000/- on 17.6.1977. First defendant, as proprietor of the 2nd defendant-company discounted the said cheque on the same day with the plaintiff
and received a sum of Rs. 11,000/-. There was also an agreement to pay interest.
Plaintiff, who purchased the cheque, presented the same through his bankers and the same was dishonoured for want of funds. It is said that the
plaintiff contacted defendants 1 and 2 and after waiting for a reasonable time, issued a registered notice to the defendants. A reply was sent by
third defendant alleging some kind of arrangement between himself and first defendant. It is said that plaintiff being a bona fide holder in due course
of the cheque, is not concerned with the internal arrangement between defendants. It is said that the 5th defendant as partner of the 4th defendant-
firm, and 3rd defendant as manager of the 4th defendant firm acted as agent of 5th defendant and issued the cheque. It is said that being a holder in
due course, plaintiff is entitled to recover the entire amount from all the prior parties to the transaction, and, therefore, the plaintiff is entitled to a
decree even against defendants 3 and 4, who are respondents herein.
In the written statement filed in defendants 1 and 2. they admitted the transaction and they said that they are paying interest on the amount
covered by the cheque. It is further said that 4th defendant refused to honour the cheque.
In the written statement filed by 3rd defendant, it is contended that there is no privity of contract between plaintiff and defendants 3 and 4 and,
therefore, he has no cause of action as against them. Defendants 3 and 4 were purchasing gun-metal scrap from defendants 1 and 2, and some
time in May 1977, defendants 3 and 4 placed orders with defendants 1 and 2 for the supply of 500 Kgs. of gun-metal scrap. The understanding
was that the goods will have to be delivered on or before 17.6.1977, and, only on supply of those materials, the cheque already handed over to
defendants 1 and 2 should be presented for encashment. It is said that the cheque was issued post-dated, and it was not negotiable. It is further
said that the plaintiff was also aware of the conditions and circumstances under which the cheque was issued and, therefore he is not a bona fide
purchaser for consideration. It is also contended that plaintiff was aware of the defect in title of the first defendant over the cheque and it is
collusive transaction between plaintiff and defendants 1 and 2. The suit is, therefore, liable to be dismissed
On the above pleadings, the trial Court took oral and documentary evidence. It came to the conclusion that the goods were not supplied by
defendants 1 and 2 to defendants 3 and 4, and to that extent, the cheque dated 17.6.1977 is not supported by consideration so far as defendants
3 and 4 are concerned it also found that there is no privity of contract between plaintiff and defendants 3 and 4. The further contention of
defendants 3 and 4 that the cheque is not negotiable since the word ""bearer"" has been scored out, cannot be accepted. In spite of the word
Bearer "" having been scored out, it continued to be negotiable instrument. Trial Court also found that there was no word prohibiting transfer, and it
continued to be a negotiable instrument, and the first defendant was competent to transfer the same to the plaintiff. Therefore, trial Court further
found that plaintiff has purchased the cheque for valid consideration and he is a holder in due course. It also came to the conclusion that no
evidence has been let in to show that the plaintiff had sufficient cause to believe that there is defect in title of the first defendant over the cheque.
Being a holder in due course, it was further found that defendants 3 aid 4 could not have proper defence so long as plaintiff did not have any cause
to believe the defect in title. The suit was decreed as against defendants 3 and 4. Ail the defendants were directed to pay interest at the rate of 6%
per annum from the date of cheque till date of realisation, and also costs of the suit.
Defendants 3 and 4 preferred appeal before lower appellate Court as A.S. No. 195 of 1981. The lower appellate Court reversed the tending.
It was of the view that since the word ""Bearer"" has been struck off, plaintiff ought to have been little more careful in purchasing the cheque. It
further found that the plaintiff himself has not been examined, and consideration for the cheque is also not proved. There was a further finding that
the bona fide of defendants 3 and 4 is proved in view of the fact that on 25.6.1977 itself, they have intimated the Bank to stop payment. Plaintiff
was negligent in not having verified the genuineness and validity of the cheque. On the above findings, it was held that the plaintiff is not entitled to
recover any amount from defendants 3 and 4. As against the other defendants, the trial Court decree was confirmed. It is against the said
judgment, plaintiff has preferred this Second Appeal.
At the time of admission of the Second Appeal, the following substantial question of law was raised for consideration:-
Whether on the facts and in the circumstances of this case, the appellant is or is not a holder in due course?
Section 9 of the Negotiable Instruments Act defines as to who is a holder in due course. It reads thus:-
Holder in due course "" means any person who for consideration became the possessor of a promissory note, ""bill of exchange or cheque if
payable to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having
sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
In this case, defendants 1 and 2 who received while delivering the cheque, have admitted the transaction. They have also admitted receipt of
consideration by them. So. it cannot be said that the plaintiff came into possession of the cheque without consideration. The first part of the
definition is proved. In fact, learned counsel for the respondents also did not seriously urge that part of the finding of the trial Court. In this
connection, it is better to consider two decisions, namely (1) AIR 1930 Madras 879 (Aluri Venkataratnam v. Alluri Kanakasundara Rao and
another and (2) Federal Bank Ltd. Vs. P.S.P. Panicker Simon Carves India Ltd., . In the first decision, it was held thus:-
Where the finding of the Court that the plaintiff is not a holder in due course, is based on the fact that he did not go into the witness box and did
not prove that he had paid considerations for the endorsement, and is not based on any evidence showing that the plaintiff did not act in good faith
and did not pay consideration for endorsement. the finding is vitiated by a material error of law on account of omission by the Court to bear in
mind the presumptions contained in Cls.(a), (c) and (g), S.118.
In the second decision, the Kerala High Court has held thus:-
The provision applicable to the case is Section 43 which has to be read in conjunction with Section 36. The rights conferred to a holder in due
course u/s 36 are not intended to be defeated on the ground that a prior transaction relating to the instrument was bad for want of consideration.
The latter part of Section 43, thus, is to preserve in tact the rights conferred on a holder in due course under the general provision contained in
Section 36. Thus, by virtue of Section 36 and the latter part of Section 43 the plaintiff is entitled to recover the amounts due not only from Y but
also from X, the drawer, even though as between X and Y there was failure of consideration.
In fact, the Kerala High Court, in the decision cited supra, has followed a still earlier decision of this Court reported in Uppalapati Hemadri Vs.
Kodali Seshamma and Others,
The question, therefore, that requires consideration is, whether plaintiff had sufficient cause to believe that the defect existed in the title of first
defendant from whom he derived title.
Before coming to the case -law on the point, a discussion on the evidence may be relevant. P.W.1 said that he is doing business in banking,
and he was not aware as to the inter se arrangement between the defendants. He bona fide believed that first defendant has got title to the cheque
and purchased it. He further said that the cheque issued by defendants 3 and 4 and handed over to first defendant earlier was also purchased by
him, and it is not the first time that he is transacting business with 1st defendant. Even though he said that he was not personally acquainted with
defendants 3 and 4, the cheque issued by them has been transacted by him. by purchasing the same. Even though he was cross-examined
strenuously, nothing was brought out to show that he had knowledge of the defect in title. The only circumstance referred to by learned counsel for
the respondents is that even after the cheque was delivered to the plaintiff, he wanted the plaintiff not to present the same, and sought for time. This
according to learned counsel, will show that the funds will not be available and, therefore, plaintiff was put to knowledge. According to me, the
mere request by first defendant to postpone the encashment or presentation of the cheque to the bank will not in any way prove the lack of title,
nor will it prove any other arrangement entered into between defendants. He further said that he was not aware as to whether the first defendant
had supplied goods to defendants 3 and 4. He further denied the suggestion that it is only after countermanding of the cheque, he obtained the
same from first defendant. He said mat he purchased the same on 17.6.1977 itself. Third defendant was examined as D.W.1. He said that this
cheque dated 17.6.1977 was post-dated and the same was given on the understanding that the same could be encashed only on supply of
materials. He said that the understanding was that the cheque should not be encashed and till 17.6.1977 when the goods were not delivered, he
requested his bankers to stop payment. This is pursuant to the same, plaintiff could not collect the proceeds on presentation of the cheque. In his
cross-examination, he was not in a position to say the date when he issued the cheque, though he said that it was post-dated. He was not in a
position to say the circumstances under which even before supply of materials, the cheque could be given. The dealings between them are only
business dealings. Further, from the evidence in the case, I do not find, nor was the counsel in a position to pin-point any particular passage from
which knowledge in defect of title or sufficient cause to believe that there was defect existed in the title of defendants 1 and 2. Learned counsel for
the respondents submitted that there was a duty cast on the part of the plaintiff to enquire as to whether first defendant had title. Learned counsel
further submitted that the cheque was issued for Rs. 11,000/- only, and if it is a case of purchasing the cheque, the entire amount is not usually
given to the holder. The Banker will adjust the commission and only the balance amount will be given. But. in this case, the entire amount covered
by the cheque is given by plaintiff. Therefore, the transaction can never be said as a bona fide transaction. It was further submitted that even though
the cheque is dated 17.6.1977. nothing prevented the first defendant from presenting the cheque himself, instead of getting the proceeds from
plaintiff. So, the sale of cheque to plaintiff cannot be said as a bona fide act. Further, the conduct in not presenting the cheque for about three
months also shows that the plaintiff also did not act bona fide. If these circumstances are taken together, according to learned counsel, it will be
dear that the plaintiff is aware as to the defect in title.
I cannot appreciate the said argument for more than one reason.
The question of sufficient cause to believe the defect in title must exist at the time when the plaintiff purchased the cheque. Any subsequent
event may not be relevant for the purpose of Sec. 9 of the Negotiable instruments Act. I am supported to take this view. for, the words used are.
before the amount mentioned in it becomes payable"". The amount in this case is payable on 17.6.1977. On that date, whether plaintiff was aware
of the defect in title is material, and not any subsequent event. In that regard, absolutely no evidence has been let in by defendants.
In ''Cheques in Law and Practice'' by M.S. Parthasarathy - 2nd Edition (1972), the learned Author has said thus at pages 78 and 79:-
The rights of a holder in due course have been mentioned in the previous chapter. He occupies a privileged position by acquiring an indefeasible
title to the instrument not affected by any defect in the transferor''s title. He holds the instrument free from any defect of title of prior parties, as well
as from mere personal defences available to prior parties such as the absence or failure or illegality of consideration, or that there was only a
conditional deliver.'' or no delivery at all of the instrument, or that the instrument had been stolen or obtained by fraud, coercion or undue influence.
Every prior party is liable to a holder in due course until the instrument is duly satisfied. A holder in due course cannot however succeed if non est
factum is proved or it is shown that the instrument was incomplete and not properly delivered.
Regarding defect in transferor''s title, learned Author has completely discussed the same from page 74 onwards in the same book. The learned
Author has discussed the difference between English Law and Indian Law, and said that so far as Indian Law is concerned, some stringent
conditions are required. Relevant portion of the text at pages 74 to 78 reads thus:-
�Under the English Act, instrument should have been taken in good faith and without notice of any defect in title of the person from whom it was
taken. The N.I. Act does not speak of good faith but stipulates that the instrument should have come into the possession of the person claiming as
a holder in due course without his having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
It is implied that person who has not acted in good faith cannot claim to be a holder in due course. A thing is said to be done in good faith when it
is done honestly whether negligently or not. Hence mere carelessness will not amount to lack of good faith. Under certain circumstances, however
negligence may be such as to indicate bad faith. Lord Herschell said in London Joint Stock Bank v. Simmons.
But regard to the facts of which the taker of such instruments had notice is most material in considering whether he took it in good faith. If there is
anything wanting which excites suspicion that there is something wrong in the transaction, the taker of the instrument is not acting in good faith if he
shuts his eyes to the facts presented to him and puts the suspicion aside without further inquiry.
In Jones v. Gordon, Lord Blackburn observed:
But if the facts and circumstances are such that the jury or who ever has to try the question, comes to the conclusion that he was not honestly
blundering, but that he must have had suspicion that there was something wrong, and that he refrained from asking questions not because he was
an honest blunderer, but he thought in his own secret mind - I suspect there is something wrong, and if I make further enquiry it will be no longer
my suspecting it but my knowing it and then I shall not be able to recover - I think that is dishonesty.
The holder in due course should not have notice of any defect in the title of the transferor. The transferor''s title is defective.-
if he has obtained the cheque by fraud, coercion or undue influence or other unlawful means or for an illegal consideration, or if he had negotiated
it in breach of faith or under notice means ""actual, though not formal notice, that is to say, either knowledge of the facts, or a suspicion of something
wrong, combined with a wilful disregard of the means of knowledge."" Notice must therefore be actual and not constructive. Lord Herschell said in
Simmon''s case, ""I should be very sorry to see the doctrine of constructive notice introduced into the law of negotiable instruments.
Ordinarily a person taking a negotiable instrument in good faith and for value is not, under the English law, bound to make enquiries, to qualify as a
holder in due course, unless the circumstances are such as to excite his suspicion. In Lloyds Bank Ltd. Swiss bank were in, Farwell, L.J. said:
The equitable doctrines of constructive doctrines of constructive notice are common enough in dealing with land and estates, but there have been
repeated protests against the introduction into commercial transactions of anything like an extension of those doctrines. and the protest is founded
on perfect good sense. In dealing with estates in land, title is everything and it can be lie surely investigated. In commercial transactions possession
is everything and there is no tune to investigate title; and if we are to extend the doctrine of constructive notice to commercial transactions we
should be doing infinite mischief and paralyzing the trade of the country.
Notice of a defect in the transferor''s title should not have been there only at the time the instrument was taken. Subsequent notice does not alter
the position of a holder in due course.
The Indian definition imposes a more stringent condition on the holder in due course than does the English definition. Under the English law, he
should not have notice of a defect in the transferor''s title and he should have taken the instrument in good faith. Under the Indian law, there should
be no cause to believe that any such defect existed. Hence it is not sufficient if the holder acts in good faith. He should also exercise due care and in
taking the instrument. Perhaps, the Indian definition is based on the principles laid down in Gill v. Cubbit, where Abbot, C.J. said:
It appears to me to be for the interest of commerce, that no person should take a security of this kind from another without using reasonable
caution. If he takes such security from a person whom he knows, and whom he can find out, no complaint can be made of him. In that case he had
done all any person Could do.
and Bayley, J., laid down the rule
that a party cannot in law be considered to act bona fide with due caution and due diligence, if he takes a bill of exchange from a person whose
features alone he knows without knowing what his name is, where he lives, or whether he is a person with whom he has been in the habit of trade.
On the question whether there could be a holder in due course of a post-dated cheque (before the date it bears), the learned judge agreed with the
principle established in Royal Bank of Scotland v. Tottenham that the mere fact that a cheque is post-dated does not preclude a bona fide
purchaser from being a holder in due course. In the present case, however, the learned judge felt that the offer of a post-dated cheque was an
additional factor that should have made the plaintiffs mere diligent in the matter of making some further and independent enquiries about the cheque:
this the plaintiffs neglected to do.
Another case involving post-dated cheques was S. Hajee Mohamed Hanoef Saheb & Co. v. S. Abu Bucker. There the payee of two post-dated
cheques endorsed them to a third party for valuable consideration. When presented on the due date, the cheques were dishonoured and the
endorsee sued the drawer and the payee claiming to be a holder in due course. The drawer contended that he was not liable since the cheque had
been issued on the understanding that they would be presented for payment only after all the goods ordered by him were delivered by the payee.
On the facts, it was held that the endorsee had no notice of the arrangement the learned judge rejected the contention that since the cheques were
post-dated and were negotiated much ahead of their due date, it must be presumed that the endorsee had notice of the circumstances in which the
cheques came into existence. The arguments that post-dated cheques were not negotiable was also rightly rejected. In the result, the endorsee was
held to be a holder in due course. An almost similar case was P.S. Venkatachalapathy, Iyer & Sons v. Subramaniam Co.''
(Emphasis supplied)
Learned Author has also further said that even in respect of post-dated cheques, the possessor can claim himself as the bona fide purchaser
and can be treated as a holder in due course. Even in this case, defendants 3 and 4 have miserably failed to prove that the cheque dated
17.6.1977 was issued post -dated. Even assuming that the contention can be accepted, that will not present the plaintiff from claiming benefit as a
holder in due course. The learned Author M.S. Parthasarathy has said about a holder in due course of a post-dated cheque at pages 77 and 78 of
the book ''Cheques in Law and Practice'' and the relevant portion has already been extracted. Recently, the Supreme Court had occasion to
consider this question and the same is reported in (1991)-I-SCC 113 (U. Ponnappa Moothan Sons, Palghat v. Cathelic Syrian Bank Ltd. and
others). In Paragraph 17, their lordships said thus:-
From the above discussion it emerges that the Indian definition imposes a more stringent condition on the holder in due course than the English
definition and as the learned authors have noted the definition is based on Gill case, Under the Indian law, a holder, to be a holder in due course,
must not only have acquired the bill, note of 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 the 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 u/s 118 (g) gets rebutted under
the circumstances mentioned therein then the burden of proving that he is a ''holder in due course'' lies upon him. In a given case, the court, white
examining these requirements including valid consideration must also go into the question whether there was a contract express or implied for
crediting the proceeds to the account of the bearer before receiving the same. The enquiry regarding the satisfaction of this requirement invariably
depends upon the facts and circumstances in each case. The words ''''without having sufficient cause to believe''"" have to be understood in this
background.
(Emphasis supplied)
To deprive the holder the benefit of a holder in due course, negligence on his part should be so gross and extraordinary as to presume that he has
sufficient cause to believe that such title was defective. According to me, if this standard is accepted, I can only hold that defendants 3 and 4 have
miserably failed. In this connection, we have to take into consideration the statutory presumption u/s 118(g) of the Negotiable Instruments Act.
When the statutory presumption is in favour of plaintiff, defendant will have to prove all the statutory ingredients to come to the conclusion that the
plaintiff is not a holder in due course. Except for alleging a contract between defendants 1 and 2 and defendants 3 and 4. how was the plaintiff
aware of the infer se dispute between them is nowhere elicited. It is in this connection, we have to give importance to the deposition of P.W.1
when he said that even on prior occasions, the cheque issued by defendants was purchased by him from first defendant and he did not find any
defect in title. That part of the examination was never cross-examined or -challenged. It was in re-examination, this question was put to P.W.1. He
said, ""I have discounted about 3 or 4 cheques of the same drawer prior to Ex. A-3"". After reexamination, he was cross- examined. Not a single
question was put to him challenging the correctness of such statement. If the plaintiff was, in the ordinary course of his business, purchasing
cheques issued by defendants 3 and 4, his bona fides in purchasing Ex. A-3 also can only be part of his dealings unless some special notice is
imputed to him. A mere negligence, even assuming that there is any, cannot take away the right of plaintiff the privilege as a holder in due curse
I am also reminded of a decision of this Court reported in 92 L.W.316 (K.B. Ghani (died) & other v. M/s. Dena Bank, Bombay and others)
where S. Mohan, J., as he then was, said thus (in para 7) :-
... As rightly pointed out by the learned counsel for the first respondent, the (appellant) has woefully failed to let in any evidence. In the case of a
negotiable instrument, the presumptions, as are available under Ss. 118 to 122 of the Act, cannot be denied to the first respondent-plaintiff.
Further, the plaintiff is a holder in due course. As against such a holder, no plea of lack of consideration or forgery, etc., could be made. This is a
settled law.......................
In view of the above, the finding of the lower appellant court that plaintiff is not entitled to recover the amount from defendants 3 and 4 has to
be set aside. Plaintiff is a holder in due course, and I find that absolutely there is no evidence to hold that the plaintiff had sufficient cause to doubt
that there was defect in the title of defendants 3 and 4 over the same. The finding of the lower appellate Court is based only on surmises and not on
evidence. A smoke of suspicion alone was attempted to be created. Therefore, I set aside the judgment of the lower appellate Court and restore
the judgment of the trial Court in so far as defendants 3 and 4 are also concerned. Regarding interest, there is no agreement to pay interest by
defendants 3 and 4. Trial Court has granted 6% interest and that has become final as against defendants 1 and 2. Respondents herein cannot be
saddled with a higher rate of interest. Hence, they are also liable to pay interest at the rate of 6% per annum as awarded by the trial Court. Interest
will be paid by them at the same rate from 17.6.1977 till date of payment. Appellant is also entitled to costs in all the three Courts.