TaxTMI 
TaxTMI 
1990 (9) TMI 365
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....ic Syrian Bank Ltd. is a banking company incorporated 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 Rs. 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 Rs. 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 fav....
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....ssets of the first defendant would 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 plaintif....
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.... 'holder' as a person entitled in 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 &....
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.... but requires the person to exercise due diligence. and goes a step further then English Law in scrutinising the causes which go to make up the belief in the mind of the transferee. To appreciate the submission of the learned counsel it becomes necessary to refer to the various authorities cited by him including the text books, in the first instance an English law and then on Indian Law on the subject. In English Law, Section 29 of the Bills of Exchange Act, 1882 defines 'holder in due course'. The relevant part of Section 29(1)(b) reads thus: "29. Holder in due course--(a) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions. namely: (a) xx xx xx (b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title 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 und....
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....nature appears on a bill is prima facie deemed to have become a party thereto for value. Every holder of a bill is prima facie deemed to be a holder in due course; but if the acceptance, issue or subsequent negotiation of the bill was affected with fraud, duress or illegality, the burden of proof is shifted, and the holder must prove that. subsequent to the alleged fraud or illegality, value was in good faith given for the bill. Thus, once a fraud is proved. the burden of proof is shifted to the holder who must then show not only that value has been given for the bill. but also that he took the bill in good faith and without notice of the fraud. If the holder can discharge this onus he is, again, in the position of a holder in due course." (emphasis supplied) The learned author Chitty in paragraph 2778 dealing with the subject 'The Consideration for a Bill' has stated thus: "For example, if a person whose 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 t....
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....aling, and defrauding.persons of securities of this sort. The interest of commerce requires that bona fide and real holders of bills, known to be such by those with whom they are dealing, should have no difficulties thrown in their way in parting with them. But it is not for the interest of commerce that any individual should be enabled to dispose of bills or notes without being subject to inquiry." Bayley, J. agreeing with Abbott, C.J.. however, added: admit that has been generally the case; but I consider it was parcel of the bona fides whether the plaintiff had asked all those questions which, in the ordinary and proper manner in which trade is conducted, a party ought to ask. I think from the manner in which my Lord Chief Justice presented this case to the consideration of the jury, he put it as being part and parcel of the bona fides; and it has been so put in former cases." Holroyd. J., having agreed with Abbott, C.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 b....
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.... the holder acts in good faith. He should also exercise due care and caution in taking the instrument. Perhaps, the Indian definition is based on Gill v. Cubbit, [1824] 3 B & C 466)". In Raghavji Vizpal v. Narandas Parmanandas, Bombay Law Reporter Vol. VIII (1906) 921 the Bombay High Court, however. held that negligence does not affect the title of a person taking the instrument in good faith for value. It is observed thus: "The test of good faith in such cases is thus: Regard to the facts of which the taker of such instruments had notice is most material whether he took in good faith. If there be anything 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 suspicions aside without further inquiry." (emphasis supplied) We may also mention it here that there is no reference to Gill'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 a....
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....uniformly stated that Section 9 of the Act is based on the ratio in Gill's case. Learned counsel appearing on both sides could not place any other decision directly on the question. The view taken by the Allahabad High Court in Durga Shah's case is more or less in accordance with the principle laid down in Gill's case. However, with regard to the legal importance of negligence in appreciating the principle of "sufficient cause to believe" a passage from Chalmers' took "The Law Relating to Negotiable Instruments in British India" 4th Edn. may usefully be noted: "All the circumstances of the transactions whereby the holder became possessed of the instrument have a bearing on the question whether he had "sufficient cause to believe'' that any defect existed. It is left to the Court to decide, in any case where the holder has been negligent in taking the instrument without close enquiry as to the title of his 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 b....
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....paid in on the footing that it may be at once drawn against, whether in fact it is drawn against or not; or where the cheque is subject to a lien. However, the mere existence of an overdraft. though the banker's lien in respect thereof makes him a holder for value to the extent of that lien, would not preclude the protection. XX XX XX A banker who gives value for. or has a lien on, a cheque payable to order which the holder derives to him for collection without endorsing it as such, if any rights as he would have had if, upon delivery, the holder has endorsed the cheque in blank. A banker taking such a cheque is the holder thereof and. if the requisite conditions are present, a holder for value or in due course. It is not essential that the cheque be credited to the account of the holder." Yet another important passage in paragraph 222 reads as under: "222. Crediting as cash. The mere fact that the banker has credited the 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 n....
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..... 571. After applying the dictum of Atkin, L.J. in Underwood's case it is observed therein that "it was not enough to show merely that the bank had entered the value of the cheques on the credit side of the account on which the bank received the cheques. To constitute value there must be in such a case a contract between banker and customer, express or implied, that the bank will before receipt of the proceeds honour cheques of the customer drawn against the cheques." We find another passage in the above decision at page 581 which reads thus: "What is suggested is that the bank did not give value. and the question arises which often arises in cases of this sort. namely, whether, when a cheque is given to a bank in these circumstances, the bank takes the cheque giving value for and then becoming a holder in due course, or whether the bank takes the cheque merely to collect the amount of the cheque for someone else. That is 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 ....