Mutual-dealings set-off under insolvency law and lack of holder-in-due-course protection defeated recovery on a promissory note.

Section 46 of the Provincial Insolvency Act, 1920 was treated as an equitable rule for mutual adjustment of debts, and the defendant was entitled to invoke set-off based on mutual dealings even in a civil proceeding on a promissory note. The court also held that the plaintiff, as assignee of the note, was not a holder in due course because he took the instrument with knowledge of its security character and surrounding insolvency-related circumstances. That notice was sufficient to defeat holder-in-due-course protection, so the plaintiff could not override the defendant's set-off defence.

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Issues: (i) whether the set-off based on mutual dealings under Section 46 of the Provincial Insolvency Act, 1920 was available in a civil revision arising out of a suit on a promissory note; (ii) whether the plaintiff, as assignee of the promissory note, was a holder in due course so as to defeat the defendant's plea of set-off.

Issue (i): Whether the set-off based on mutual dealings under Section 46 of the Provincial Insolvency Act, 1920 was available in a civil revision arising out of a suit on a promissory note.

Analysis: Section 46 was treated as a provision embodying the principle of mutual adjustment of debts in insolvency, and its language was read in the light of the corresponding English bankruptcy provision. The reasoning adopted was that the statutory rule is one of equity and is not confined to proceedings strictly within the insolvency court, because limiting it to insolvency proceedings alone would permit circumvention of the adjustment of mutual liabilities.

Conclusion: The defendant was entitled to invoke the statutory set-off arising from mutual dealings even in the civil proceeding.

Issue (ii): Whether the plaintiff, as assignee of the promissory note, was a holder in due course so as to defeat the defendant's plea of set-off.

Analysis: The plaintiff took the assignment with knowledge that the instrument had been executed only as security for future instalments and with notice of the surrounding insolvency-related circumstances. A transferee cannot claim holder-in-due-course protection when he has sufficient cause to believe that there is a defect in the title or some irregularity affecting the instrument, and the knowledge required is of something being wrong with the instrument, not necessarily the precise nature of the defect.

Conclusion: The plaintiff was not a holder in due course, and his claim could not override the defendant's defence.

Final Conclusion: The revision petition failed because the statutory set-off under insolvency law was available and the assignee of the promissory note was not protected as a holder in due course.

Ratio Decidendi: The statutory set-off for mutual dealings under insolvency law is an equitable rule capable of application outside the insolvency forum, and an assignee with notice of defect in the instrument cannot claim holder-in-due-course protection against that defence.

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