Holding

A holder who acquires a negotiable instrument for value without sufficient cause to believe any defect in the transferor’s title is a holder in due course, and in the present case the bank met this test.

Summary

The Catholic Syrian Bank Ltd. extended credit facilities to a partnership (defendants 2‑4) secured by an equitable mortgage and purchased two cheques drawn by defendant 6 on Union Bank of India. The cheques were credited to the partnership’s account, later dishonoured, and the bank sued defendant 6 for the balance. Defendant 6 contended that the bank was not a holder in due course because it had no valid consideration, acted negligently and had sufficient cause to doubt the title of the drawer. The Supreme Court examined the meaning of "holder in due course" under Section 9 of the Negotiable Instruments Act, emphasizing that the holder must acquire the instrument for value without sufficient cause to suspect a defect in the transferor’s title, and that only gross negligence can defeat this status. Finding that the bank purchased the cheques for valid consideration, that no material indicated a defect in the drawer’s title, and that the presumption under Section 118(g) was not rebutted, the Court held the bank to be a holder in due course. Consequently, the bank’s suit against all defendants, including defendant 6, was upheld and the appeal dismissed.

Issues considered

The true meaning and scope of the expression 'holder in due course' under Section 9 of the Negotiable Instruments Act, 1881.
Whether the bank satisfied the requirements of consideration, good faith, and lack of sufficient cause to believe a defect existed in the drawer's title.
Whether negligence on the part of the holder can defeat holder‑in‑due‑course status.

Legislation cited

Negotiable Instruments Act, 1881s. 118(g), s. 8, s. 9, s. 90

Subjects

holder in due courseNegotiable Instruments ActSection 9considerationgood faithnegligencechequesbankequitable mortgage

Judgment

A U. PONNAPPA MOOTHAN SONS, PALGHAT
v.
CATHOLIC SYRIAN BANK LTD. AND OTHERS

SEPTEMBER 18, 1990

B [J.S. VERMA AND K. JAYACHANDRA REDDY, JJ.]

Negotiable Instruments Act, 1881-Section 9---'Holder in due
course'-No defect in the title of the transferor-Requirement of.

What is the true meaning and scope of the expression 'holder in
(
due course' as defined in Section 9 of the Negotiable Instruments Act,
c 1881, was the question that arose for consideration in this appeal.

Consequent upon the pleading of promissory note and other title
deeds relating to her property by Defendant No. 5, (mother of Defen-
dants 2 to 4) in favour of the respondent Bank as security, thereby
D creating an equitable mortgage, the respondent Bank allowed credit
facilities like accommodation by way of Hundi discount, Key loan and
cheque purchases upto a limit of Rs.35,00,000 to Defendant No. I, a
fir"! consisting of defendants Nos. 2 to 4 as partners. The first defendant
firm had business dealings with the appellant defendant No. 6. In •
course of business it was supplying goods consisting of hill products and
E used to receive payment by way of cheques from defendant No. 6.
Defendant No. 6 issued two cheques drawn on the Union Bank of India,
Palghat, in favour of the first defendant payable to the first defendant
firm on order. The cheques were purchased by the Respondent-bank
and proceeds thereof,were credited by the bank to the account of first
defendant: on valid consideration. The first defendant withdrew the
amount at various dates. When the respondent-bank sent the ·cheques
for collection; the Union Bank of India returned the cheques with the
endorsement "full cover not received". Defendants 2 to 5 agreed to pay
the amounts to the Bank but could not pay the full amount, with the
result the Bank filed a suit for recovery of the balance amount from
Defendant No. 6 also who had issued the cheques in question. At ·the
G trial, Defendant No. 6 contended that since the firm (defendant No. I)
did not supply the goods, it could not pay the money in the bank.
According to Defendant No. 6, the appellant, did not admit the pur-
chase of cheques by the respondent-bank for valid consideration and
hence denied that the bank was 'holder in due course'. The trial court
held that the respondent-bank is a 'holder in due course' and as such
H entitled to enforce the liability against the appellant-defendant No. 6.

542
PONNAPPA SONS v. C.S.B. 543

The triai court also held defendants 2 to 4 personally liable for the plaint A
claim. Against the ·order of the trial court the appellant-defendant No. 6
alone appealed to the High Court. The High Court affirmed the findings
of the trial court but modified the decree holding that the immovable
properties mentioned in the schedule to the plaint would first be pro-
ceeded against and in case the entire amount 'of decree is not realised by
the sale of those properties, the Bank would 'proceed against the assetS B
of the firm-defendant No. 1 and for the balance, if any, the decree-
holder would proceed against the defendants Nos ..2'4 and 6. Aggrieved
by the said order of the High Court, the 6th defendant has preferred
·, this appeal. ·

Dismissing the appeal, this Court,
c
HELD: Indian Law is stricter, and is not satisfied merely with the
honesty of the person taking the instrument, but requires the person to
exercise due diligence, and goes a step further than English Law in
scrutinising the causes which go to make up the belief in the mind of the
transferee. [3598] D

' In the instant case, the holder namely defendant No, 1 made the
necessary endorsements in the two cheques in favour of the· plaintiff
Bank and the Bank endorsed "payee account credited". The defendant
No. 1 withdrew this amount and there is no dispute about it. It must
also be noted in this context that there is no endorsement on the cheque E
made by the drawer namely' the appellant that cheques are not negoti-
able. In the absence of the cheques being crossed "not negotiable"
nothing prevented the plaintiff Bank to purchase the cheques for a
valuable consideration and the presumption under Section 118(g) comes
to his rescue and there is no material whatsoever to show that the
cheques were obtained in any unlawful manner or for any unlawful F
consideratiOn. [358E-G I ·

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. [370A] G
The court while examining these requirements including valid
consideration must also ·go into the question whether there was a con-
tract express or implied for crediting the proceeds to the account of the
bearer before receiving the same. The enquiry regarding the satisfac-
tion of this requirement invariably depends upon the facts and cir· H
544 SUPREME COURT REPORTS [ 1990] Supp. 1 S.C.R.

A cumstances in each case. The words "without having sufficient cause to
believe" have lo be understood in this background. [3708-C]

In the instant case, there is also an implied contract to credit the
proceeds of the cheques in favour of defendant No. I to his account
before· actually receiving them. As a question of fact this aspect is
B
established by the evidence on record. In such a situation the plaintiff
need not make enquiries about the transactions of supply of goods etc.
that were going on between defendants No. 1 and 6. Even if defendant
No. 1 has not supplied the goods in respect of which the cheques in
question were issued by defendant No. 6 there was no cause at any rate
sufficient cause for the plaintiff to doubt the title of defendant No. 1 nor
c can it be said that the plaintiff acted negligently. Viewed from this
background it cannot be said that there was sufficient cause to doubt
the title .nor there is scope to infer gross negligence on the part of the
plaintiff. [370E-G]

Nelson v. Larhald, [1948] 1 K.B. 339; Baker v. Barclays Bank
D
Ltd., (1955] 2 All E.R. 571; Gill v. Cubitt English Reports, 107 Kings'
Bench 806; Durg Shah Mahan Lal Bankers v. Governor General in
Council and Others, AIR 1952 Allahabad 590; Sunderdas Sabhraj, a
firm v.. Liberty Pictures, a firm, AIR 1956 Bombay 618; A. L. Under·
wood Ltd. v. Bank of Liverpool and Martins; Same v. Barclays Bank,
[1924] All E.R. 230 at page 241, referred to.
E
Raghavji Vizpal v Narandas Parmanandas Bombay Law Repor-
ter, Vol. VID (1906) 921, Overruled.

Chitty on Contracts, 26th Edn. Paragraphs 2778 & 2781; Chal-
mers on Bills of Exchange, 13th Edn. at p. 283; Parathasarathy on
F Cheques in Law and Practice, 4th Edn. p. 74; Halsbury's Laws of
England, 4th Edn. paragraph 221 page 186 and paragraph 222, refer-
red to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 183 of
1984.
G
From 'the Judgment and Order dated 23. 10. 1982 of the Kerala
High Couri in A.S. No. 309 of 1977.

Dr. Y.S. Chitale, Aseem Mehrotra, Mukul Mudgal, R.K.
Aggarwal, S.K. Aggarwal and Sudhir Gopi for the Appellant.
H
PONNAPPA SONS v. C.S.B. !REDDY, J.I 545

G. Viswanatha Iyer and P.K. Pillai for the Respondents. A;

The Judgment of the Court was delivered by

K. JAYACHANDRA REDDY, J. In this appeal an important
question touching upon the interpretation of Section 9 of The Negoti-
able Instruments Act, 1881 ('Act' for short) defining 'holder in due B
course' falls for consideration. The appeal is directed against the judg-
ment of the High Court of Kerala confirll)ing the judgment of the
Subordinate Judge, Tellicherry in Original Suit No. 74 of 1975. To
appreciate the question involved it becomes necessary to state the
relevant facts and while stating so we shall refer to the parties as ·
arrayed in the suit for convenience sake.
c
The plaintiff Catholic Syrjan 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 D
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
Rsc35,00,000 and the same was endorsed in favour of the plaintiff as
security for the facilities granted to the first defendant firm. The 5th ' E
, defendant had also deposited the title deeds of her properties shown in
the plaint schedule to create an equitable mortgage to s.ecure 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 Fl
defendant drew a cheque on the Union Bank of Ind.ia, Palghat Branch
in favour of the first defendant payable to the first defendant firm on
order a sum of Rs.2,00,000. The cheque was purchased by the plaintiff.
Bank from fhe first defendant on 30.10.1974 on valid consideration and
proceeds were credited by the Bank to the account of the f.irst
·defendant. Similarly another cheque was drawn on 31.10.197.4 and the G
first defendant endorsed the same to,the plaintiff for valid considera-
tion and the proceeds were credited to the account of the first
defendant who withdrew the amount at various dates. The plaintiff
Bank sent the ~heques for collection but the Union Bank of India
,... returned the s'ame with the endorsement "full cover not received".
The defendant Nos. 2 to 5 by two separate agreements offered to pay H
546 SUPREME COURT REPORTS [1990] Supp. 1 S.C.R.

the amounts to the plaintiff Bank and as per the terms therein they
A were to pay Rs.1,000 per month and the 5th defendant was to pay the
amount realised by her from the tenants by way of rent and they could
pay only 12,313.35 p. Thereupon after exchange of notices between
defendant No. 6 and other defendants a suit was filed for the recovery
of the balance amount from defendant No. 6 also who issued the
B cheques.

The defendant No. 6 who is the appellant herein, contended that
the cheques·were issued to the first defendant on their representation
that they would supply a large consignment of pepper, dry ginger etc.
and the understanding was that the cheques would be presented only
after the consignment was despatched. Since the first defendant failed
c to despatch the goods, the 6th defendant could not pay the money in
the Bank and therefore the cheques were not honoured. He also
pleaded that he would not admit the purchase of cheques by the
plaintiff and that plaintiff was only a collection agent and there was no
consideration for purchase and therefore the plaintiff was not a holder
D in due course. It was also contended that plaintiff acted negligently
and in disregard of the provisions of law, therefore there was no valid
cause of action against the defendant. It may not be necessary for us t~
refer to the stand taken by the other defendants. The trial court hel4
that the plaintiff is a 'holder in due course' and as such is entitled to
enforce the liability against the 6th defendant, who is the maker of the
E cheques. The trial court also held that the defendant Nos. 2 to 4 were
personally liable for the plaint claim and the assets 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 tile trial court but modified the decree
F holding that immovable properties described in the Schedule to the
plaint would be proceeded against in the first instance and if the en lire
decree amount cannot be realised by the sale of those properties, the
plaintiff-Bank would proceed against the assets of the first defendant-
firm, 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
G defendant is restricted to the extent of immovable properties mort-
gaged by her. Aggrieved by the said judgment and decree, the 6th
defendant has preferred this appeal.

Dr. Chitale, learned counsel appearing for the appellant submit-
ted that respondent No. I herein namely the plaintiff-Bank is not a
H 'holder in due course' and therefore cannot maintain any legal action
-PONNAPPA SONS v. C.S.B. [REDDY, J.] 547

against the appellant i.e. defendant No. 6 who had drawn the cheques.
His main submission is that the plaintiff Bank acted negligently and A
did not act in good faith in paying the amounts due under the cheques
to the defendant firm without making any enquiries regarding the
"title" of the person namely defendant No. 1 from whom the Bank
claims to have purchased the cheques for consideration. It is submitted
that the cheques were issued by defendant No. 6, the appellant, with
the understanding that the goods would be supplied and the pfaintiff
Bank without making any enquiries whether the goods we.re supplied
or not and without any verification from the Union Bank of India paid
-, the amounts to the payee namely defendant No. 1 within few days in a
hasty and negligent manner. Therefore. according to the learned
counsel. the necessary ingredients of the definition of 'holder in due
course' in the case of plaintiff are not satisfied and consequently the c
plaintiff Bank can not maintain any claim against the appellant.

Section 9 of the Act which defines 'holder in due course' reads as
under:
D
"Holder in du.e course" means any person who for consid-
eration 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
E
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."

The definition makes it clear that to be a 'holder in due course' a p'
person must be a holder for consideration and the instrument must
·have been transferred to him before it becomes overdue and he must
be a transferee ·in good faith· and another important condition is that
the transferee namely the person who for consideration became the
possessor of the cheque should not have any reason to belive that
there was any defect in the title of the transferor. G

It is beyond dispute that the plaintiff bank credited the proceeds
to the account of the first defendant who also withdrew the amount on
various dates. Therefore it has been rightly held that the plaintiff
purchased the cheques for valid consideration after the necessary
endorsement by the bearer before the~ became overdue. In this con- If

•
548 SUPREME COURT REPORTS [1990] Supp. 1 S.C.R.

text, the iearned counsel. however, contended that the plaintiff was
A
only a holder and was only a collection agent as per the endorsement
made by the defendant No. 1. Section 8 defines '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
B 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 1 l8(g) reads as under:

"118. Until the contrary is proved, the following presump- <
lions shall be made:
c 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
D obtained from its lawful owner, or from any person in law-
ful custody thereof,. by means of an offence or fraud, or has
been obtained from the maker or accept or thereoT by
means of an offence or fraud, or for unlawful considera-
tion, the burden of proving that the holder is a holder in
due course lies•upon him."
E
In the instant case, the holder namely defendant No. 1 made the
necessary endorsements in the two cheques in favour of the plaintiff
Bank and the Bank endorsed "payee account credited". The defen-
dant No. J withdrew this amount .and there is no dispute about it. It
must also be noted in this context that there is no endorsement on the
c!ieq ue made by the drawer namely the appellant that the cheques are
not .negotiable. In the absence of the cheques being crossed as "not
negotiable" nothing prevented the plaintiff Bank to purchase the
cheques for a valuable consideration and the presumption under
Section 118{g) comes to his rescue and there is no material whatsoever
to show that the cheques were obtained in any unlawful manner or for
G any unlawful consideration.

Now the question is whether the other requirement of the defini-
tion i.e. "without having sufficient cause t\l believe that any defect
existed in the title of the person from whom he derived his title" is
H satisfied. It is contended on behalf of the appellant that the cheques
were issued on the representation that the defendant No. 1 would
PONNAPPA SONS v. C.S.B. !REDDY, J.] 549

supply the goods and tliat the cheques would be presented after the A
despatch and delivery of the goods but defendant No. 1 failed to
despatch the goods and that plaintiff without any enquiries about the
ti\!~ \lt th~ payee could not have purchased the cheques because there
W!!S sufficient cause to believe that the title of the bearer was not free
fro!Il rlefects. According to the learned counsel, the Indian Law is
B
stricter, and is not satisfied merely with the honesty of the person
taking the instrument, but requires the person to exercise due dili-
gence, 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 c
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 'hgjger in due course'. The relevant part of Section
29( 1),(lJ,) rna<ls tlws•
D
"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 E
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 und~r:
F
"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
honestiy, whether it is done negligently or not."

These provisions have been understood and interpreted to mean that · G
the holder shoold take the bill in good faith and he is deemed to have
·acted iii 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:
H
lj
f
'
550 SUPREME COURT REPORTS I 1990] Supp. 1 S.C.R.
"A wilful and fradulent absence of inquiry into the cir-
A
cumstances, 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
B holder on inquiry."

In Nelson v. Larho/t, [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 v. Barclays Bank Ltd., [1955] 2 All E.R. 571 the expression
c "notice" occurring in Section 29(1)(b) of the Bills of Exchange Act,
1882 is interpreted to mean actual notice and there is no question of
constructive notice.

In Chitty on Contracts, 26th Eda. the learned author states the
D requirement that must be fulfilled before a person may be considered a
holder in due course as under:

"First, he must take the bill when it is complete and regular
on its face. Secondly, he must take it before it is overdue
and without notice that it was previously dishonoured, if
E such was the fact. Knowledge that a bill is bound to be
dishonoured may also be relevant. Thus, a Canadian
authority suggests that a holder, who has .taken a cheque
with the knowledge of its having been countermanded, is
not a holder in due course. Thirdly, he must take it in good
faith and without having notice of any defect in the title of
F the person who negotiates the bill to him. In particular the
title of the person wh~ negotiates the bill is defective when
he obtained the bill or its acceptance by fraud, duress or
other unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith or under circum-
stances amounting to fraud. Last, a holder in due course
G must take the bill for value i.e. consideration."

The learned author dealing with the presumption of good ·faith has
noted in paragraph 2781 thus:

"Presumption of good faith. Every party whose signature
ff appears on a bill is prima facie deemed to have become a, _
PONNAPPA SONS v. C.S.B. [REDDY, J.] 551

party thereto for value. Every holder of a bill is prima fade
~lee med to be a holder in due course; but if the acceptance,
A
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 illegaliiy, 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)
c
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 over-
drawn negotiates to this bankers a cheque, drawn by a third D
party, to reduce the overdraft,. the banker becomes a
holder for value of the cheque. The'Jlre-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 E
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 lo have acted in good
faith l;Vhether it is negligently or not. With the above background of
English Law, we shall now examine the Indian law on the subject.
F
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 'G
that the Indian law is stricterthan English law and requires the person
to exercise due dili.gence and in this context the Indian law goes
even a step further than English law in scrutinising the causes which
go to make up the belief in the mind of the transferee. Gill's case
(supra) is a case where a bill of exchange was stolen during the night.
and taken to the office of a discount broker early in the following H
552 SUPREME COURT REPORTS [ 1990] Supp. 1 S.C.R,

A morning by a person whose features were known, but whose name was
unknown to the broker and the latter being satisfied with the name
of the acceptor, discounted the bill, according to his usual practice,
without making any enquiry of the person who brought it. On these
facts it was held that the plaintiff had taken the bill under circum-
stances which ought to ·have excited the suspicion of a prudent and
B
careful man.

Abbott. C.J. (later Lord Tenterden) observed:

"It appears to me to be for the interest of commerce, that <.
no person should take a security of this kind from another
c 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 has done
all any person could do. But if it is to be laid down as the
law of the land, that a person may take a security of this
kind from a man of whom he knows nothing, and of whom
D
he makes no enquiry at all, it appears to me that such a
decision would be more injurious to commerce than con- ·
venient for it. by reason of the encouragement it would
afford to the purloining, stealing, 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
E
those with whom they are dealing, should have no diffi-
culties 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."
F
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 /ides whether the plaintiff had asked
all those questions which, in the ordinary and proper
G
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 /ides; and it has been
so put in former cases."

H
Holroyd, J.. having agreed with Abbott, C.J. further observed that: ....
PONNAPPA SONS v. C.S.B. [REDDY, J.l 553

"The question whether a bill or note has been taken bona
fide involves in it the question whether it has been taken A
with due caution. It is a question of fact 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 ans•,;er- B
ing 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. lf 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 C
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 eossession 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 D
whom he was to apply if the bill should not be taken up by
the acceptor. I think those circumstances tend strongly to
show that the party who discounted the bill did not choose
to make inquiry, but supposing the questions might not be
satisfactorily answered, rather than refuse to take the bill,
took the risk in order to get the profit arising from commis- E
sion and interest."
(emphasis supplied)

In Chalmers on Bills of Exchange, 13th Edn. at page 283 the learned
author deals with the expression 'good faith' occurring in Section 90 of
the said Act and it is stated as under: F

"Test of bona fides

The test of bona fides as regards bill transactions has varied
greatly. Previous to 1820 the law was much as it now is
under the Act. But under the influence of Lord Tenterden G
(Abbott, C.J. in Gill v. Cubbitt) due care and caution was
made the test, and this principle seems to be adopted by
Section 9 of the Indian Negotiable Instruments Act."
(emphasis supplied)

The learned author Parathasarathy in his book 'Cheques in Law and H
'·

554 SUPREME COURT REPORTS [ 1990) Supp. 1 S.C.K

Practice', 4th Edn.· has also noted this aspect. At page 74, a passage
A reads thus: ·

"The Indian definition imposes a more stringent condition
on the holder in due course than does the English defini-
tion. Under English law, he should not have notice of a
B defect in the transferor's title and he should have taken the
instrument in good faith. Under 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 caution in taking the instrument. - <
Perhaps, the Indian definition is based on Gill v. Cubbit,
[ 1824) 3 B & C 466)''.
c
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:
D
"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
E acting in good faith if he shuts his eyes to the.facts pre-
sented 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
F the above decision. In Bhashyam & Adiga on the Negotiable Instru-
ments 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 deci-
sions with approval and applied them to the facts of the
G 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 com'
mentaries on the Indian Act."

In Durga Shah Mohan Lal Bankers v. Governor General in Council &
H Others, AIR 1952 Allahabad 590 a Division Bench examined the scope
PONNAPPA SONS v. C.S.B. [REDDY. J.] 555

of the provisions of Section 9 of the Act and held that:
A
"The provision that the person must have become posses-
sor 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 B
there was sufficient cause for him to believe that a defect
existed. If he fails to prove bona /ides or absence of negli-
gence, it would not neg~tive his claim. There must be evi-
dence o-f positive circumstances on account of which he
ought to h·a~e believed that some defect existed.,, - -
(emphasis supplied)
c
In this case also there is no reference to Gill's case. The learned
counsel for the appellant submitted that the decision in Raghavji's case
is in favour of the appellant He, however. conceded that the Durga
Shah's case is in favour of the respondent i.e. the plaintiff Bank .. We
may, however, note another judgment of the learned Single Judge of D
' - the Bombay High Court in Sunderdas Sobhraj, a firm v. Liberty
Pictures, u firm, AIR 1956 J3ombay 618 wherein the scope of Section 9
is considered and it is held thus:

"The rule as laid down in S. 9 of the Negotiable Instruments
Act which defines "holder in due course" is stricter than E
the rule of English law on the subject and a payee or
endorsee of a negotiable instrument can, under our.law.
prefer a claim to be a holder in due ·course of the instru-
ment only if he obtained the same without having sufficient
cause to believe .that any defect existed in the title of the
person from whom he derived his title. F

A bona fide holder for value without notice is, of
course, as I have already observed, in a different position."

The learned Single Judge has not. however, referred to the Raghavji's
case. We have. already noted that in Raghavji's case reliance was G
placed on English decisions later to the decision in Gill's case. The·
authors Chalmers, Bhashyam & Adiga and Parathasarathy have
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 accord-ance H
556 SUPREl;IE COURT REPORTS (1990] Supp. I S.C.R.

with the principle laid down in Gill's case.
A
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:
B
"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 be-
lieve" that any defect existed.

It is left to the Court to decide, in any case where the
c 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."
D (emphasis supplied)

This view is more sourtd and logical. The legal position as explained by
Chitty may be noted in this context which reads as under:

E
"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
F 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 thedecision in Raghavfi's
G case does not lay down correct law. We agree with the view taken
by the Allahabad High Court with above modification.

Before we apply the above principles to the facts of this case we
would like to advert to another submission of the learned counsel Dr. ,,._,
Chitale. He urged that in the instant case the plaintiff Bank has not
H acted in good faith and with due diligence in crediting the proceeds to
PdNNAPPA SONS v. C.S.B. [REDDY, J.l 557

the account of the defendant No. I inasmuch as there is no authority
A
either by way of express or implied contract between them and 1he
defendant No".. L In support of this submission he relied on certain
passages in fiatsburys Laws of England. In Halsbury's Law of
England, 4th Edn. in paragraph 221 (page 186) the author says:

''Bank as holder for value. A bafikef.who is asked·by a B
customer to collect a cheque and who. pursuant to a con-
tract express or implied to do so. credits the customer
forthwith with the amount of the cheque before the pro-
ceeds are received. in fact receives the sum for himself and
not for the customer; but he has the same statutory protec-
tion in such circumstances as if he had received payment of
the cheque for the customer. c
xx xx xx
Every hoider is deemed to be a holder in due course; but, if
the instrument is shown to be affected by fraud. a banker
dealing wiih it must show that he gave value ih good faiill lJ
, - subsequent to the fraud. The status of holder for value may
be claimed by the. bank; where cash has been given for the
cheque over the counter; where the cheque is paid in inreduc-
tion of an overdraft, where the cheque is 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 sub- E
ject 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 pre-
clude the protection. ·
'·
xx xx xx
F
A banker who gives value for, or has a lien on, a cheque
payable to order which the holder derives to him for collec-
tion wi.thout endorsii1g it as such,.if any righ-ts as·he ~ould
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, G
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 222reads as under:

"222. Crediting as cash. The mere fact that the banker has H
558. SUPREME COURT REPORTS [ 1990] Supp. I S.C.R

A 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 lltle, 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
B 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 entitl~d to draw against the amount of
the cheque before it is cleared.

If the banker becomes a holder for value. he may. i~
c the absence o(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
D true owner, except where the endorsement Is forged or ihe
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 with the amount before the
E proceeds are received and if he has acted in good faith he has the
necessary statutory protection and crediting the customer account
does not by itself alter his position but that however is a question of fact
in each case namely whether there was such a contract express or
implied that the customer should be entitled to draw against the
amount of cheque before it is cleared.
F
In A.L. Underwood Ltd. v. Bank of Liverpool and Martins,
Same v. Barclays Bank, [1924] All. E.R. 230 at page 241 Atkin. L.J.
dealing with the protection th~t.can be availed by a banker in such
case, observed as under:

G "It is sufficient to say that the mere fact that the bank. in
their books. enter the value of the cheques on the credit
side of the account on the day on which they receive the
cheques for collection, does not, without more, constitute
the bank a holder for value. To constitute value there must
be in such a case a contract between banker and customer.
H express or implied, that the bank will, before receipt of the
PONNAPPA SONS v. C.S.B. [REDDY, J.l 559

proceeds. honour cheques of the customer drawn against
the cheques. Such a contract can be established by course of A
business and may be established by entry in the customer'&
pass book, communicated to the customer and acted upon
by him. Here there is no evidence of any such contract."
(emphasis supplied)
B
To the same effect is the ratio laid down in Baker v. Barclays Bank
Ltd .. [ 1955] 2 All E.R. 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 c
receipt of the proceeds honour cheques of the customer drawn against
the cheques."

We find another passage in the above decision al page 581 which
reads thus: D

"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
it, and then becoming a holder in due course, or whether E
the bank takes the cheque merely to collect the amount of
fhe 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) F

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 defi-
nition 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 G
cheque.for valid consideration but should have acquired the cheque
·wit1rout 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 sllould act in good faith and with reasonable caution,·
-;.ii.
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 H
560 SUPREME COURT REPORTS [1990] Supp. I S.C.R. '
Court to decide whether the negligence on part of the qoider is so gross
A 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 than the burden of proving that he is
a 'holder in due course' lies upon him. In a given case, the Court. while
B examining these requirements including valid considerat\pn must ·also
go into the question whether there w~s a comract e~press or imp\i.ed
for crediting the proceeds to the account of the bearer before receiving
the same. The enquiry regardjng the satisfaction of this requirement
invariably depends upon the facts and circumstances in ea oh case. The .....
words "wihtout having sufficient cause to believe" have IP pe µnder-
stood in this background.
c
In the instant case there is sufficient evidence establishing the
fqct that the defendants were allowed credit facilities upto a limit of
Rs.35,00,000 by the Bank and this fact is not in dispute. The pledging
of the title deed by 5th defendant of her properties with the bank with
D an intention to create an equitable mortgage to secure the repayment
of the amounts due from !st defendant and the fact that q pronote fo.r
an amount of Rs.35,00.000 executed by defend~nt Nos. 2 to 4 in fav9.µr
of the 5th defendant was endorsed in favour of the plaiqtiff Sank
would establish that there was an expr\'ss contract for providing the
credit facilities. It should therefore necessarily be inferred that there
E is also an implied contract to credit the proceeds of th,e ci\,ques in
favour of defendant No. I to his account before ac:tually receiving
them. As a question of fact this aspect is established by the evidence
on record. In such a situation the plaintiff need not make enquiries
about the transactions of supply .of goods etc. that were going on
between defendants Nos. 1 and 6. Even if defendant No. I has not
F supplied the goods in respect of which the cheque in question were
issued by defendant No. 6 there was no cause at any rate sufficient
cause for the plaintiff to doubt the title of defendant No. I nor can it qe
said that the plaintiff acted negligently disregarding 'red flag' raising
suspicion. Viewed from this background it cannot be said that there
was sufficient cause to doubt the title nor there is scppe to infer gross
G negligence on the part of the plaintiff.

There is no material which amounts to rebuttal of the presump-
tion in his favour as provided under Section 1!S(g). On the other hand .
.the plaintiff has discharged the necessary burden to tile extent on him
and has proved that he is a holder in due course for valid considera-
H tion. Therefore, we hold that he could validly maintain an action
-PONNAPPA SONS v. C.S.B. (REDDY, J.) 561

against all the defendants including defendant No. 6. Therefore, we A'
affirm the judgments of the courts below and dismiss the appeal. In the
circumstances of the case, parties are directed to bear their own costs
throughout.

Y. Lal Appeal dismissed.
B