UNIT-IV
4.0
4.1
4.2
4.3
4.4
Introduction
Promissory Note
4.1.1.
Promise to pay on demand creates promissory note
4.1.2.
When a document is a promissory note
4.1.3.
When a document is not a promissory note.
Consideration – presumption
4.2.1.
Burden is on the defendant
4.2.2.
Presumption is Rebutiable
4.2.3.
Unstamped promote is admissible.
Holder in Due course
4.3.1.
Holder is due course and holder for collection (difference)
4.3.2.
Holder is due course
4.3.3
Cheque-Holder is due course – proof of
Pronote bond and suits
4.4.1.
Pronote and bond (distinction)
4.4.2.
Suits.
4.4.3.
Miscellaneous Provision
4.4.3.
a) Section 131
4.4.3.
b) Section 138
4.5
Important Reference Books
4.0
INTRODUCTION
Origin of Negotiable Instruments
In ancient times, the routes along which vast commerce was carried on were insecure, and merchants
carrying coins were usually robbed of their wealth roving pirates of sea and by marauding robbers on land, In the
course of some centuries there came into existence an idea of exchange, whereby Letters Credit, generally called
Bills of Exchange from a merchant of one country to his debtor who was a merchant of another country, were
issued, requiring the debt to be paid to a third person who carried the letter of credit to the place where the debtor
resided.
A bill of exchange was, thus, originally an order to pay a trade-debt, and a system of such bills afforded a
convenient and facile way for the payments or debts in one country due to a person in another, without the danger of
encumbrance of carrying money from one place to another : e.g., A in Madras buys goods from B who is a merchant
of London, and C, a merchant in London, owes A some money, B, on getting the order from A on C for the payment
of that money to himself, can collect the price of his goods London without the risk or trouble of carrying the coins
from Madras to London. Thus the trouble is saved, danger is averted, and no time in carrying the money is lost.
Although these bills of exchange or letters of credit came into existence to effect the transfer of trade-debts of
persons residing in distant countries, their utility made them applicable to inland debts also.
Origin of negotiable instrument in India
In India, there is reason to believe that instruments of exchange were in use from early times and we find
that papers representing money were introduced into the country by one of the Muhammadan sovereigns of Delhi in
the early part of the fourteenth century. The word 'hundi', a generic term used to denote instruments of exchange in
vernacular is derived from the sanskrit root 'hund' meaning 'to collect' and well expresses the purpose for which
instruments were utilised in their origin. With the advent of British rule in India, commercial activities increased to a
great extent. The growing demands for money could not be met by mere supply of coins, and the instruments of
credit took the function of money which they represented. The law of negotiable instruments as prevalent in England
was applied by the courts in India when any question relating to such instruments arose between Europeans. When
the parties were Hindus or Muhammadans, their personal law was held to apply. Though neither [he law books of
Hindus nor those of Muhammadans contain any reference to negotiable instruments as such, the customs prevailing
among the merchants- of the respective community were recognized by the courts and applied to the transactions
among them. During the course of time, there had developed in the country a strong body of usage relating to
hundis, which even, the Legislature could not, without hardship to Indian bankers and merchants, ignore. In fact, the
Legislature felt the strength of such local usages and thought fit to exempt them from the operation of the Act with a
proviso that such usage may be excluded altogether by appropriate words. In the absence of any such customary
law, the principles derived from English law were applied to the Indians as rules of equity, justice and good
conscience.
In 1866, the Indian Law Commission drafted the Negotiable Instruments Bill which was introduced in the
Council in December, 1867. The Bill was referred to a Select Committee. Objections were raised by the mercantile
community to the numerous deviations from [he English law which it contained. The Bill had to be re-drafted in
1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the
chambers of commerce, the Bill was revised by the Select Committee. In spite of this the Bill could not reach the
final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On
the recommendation of the new Law Commission the Bill was re-drafted and again it was sent to a Select
Committee which adopted most of the additions recommended by the new Law Commission. The draft thus
prepared for the fourth time was introduced in the Council.
What s a Negotiable Instrument
The proverb of English Law is "Nemo dot qziod non habet", i.e., no person can give to another that of
which he was not the true owner. Thus, if a thief transfers to me for value a thing stolen by him, the true owner can
claim it from me even though I paid value for it, and had no notice of [he theft. There are certain exceptions to this
general rule, of which a negotiable instrument is one. But what is the meaning of a Negotiable Instrument ? "A
negotiable instrument is one, the property in which is acquired by one who takes it bona fide and for value,
notwithstanding any defects of title in the person from whom he took it; from which it follows, that any instrument
cannot be negotiable unless it is such and in such a state that the true owner can transfer the contract or engagement
contained therein by simple delivery of the instrument". The latter part of this definition is very important. It means
that the instrument must be complete the time of the transfer.
Transfer by mere delivery
It was pointed out above that the latter part of the definition of Negotiable Instruments is very important. It
means that [he instrument is in such a state that the contract in it can be transferred by mere delivery.
Anybody, even if he does not have an indorsement from the holder of the note can get payment; this is what is meant
by "Payable to bearer on Demand".'
Nothing more is to be done. A case will illustrate this point. In Whistler v. Forster a cheque was drawn to the order
of the payee. Whistler gave the payee full and complete value for the cheque, but in the transaction he forgot to take
the signature of the payee, (i.e., the person to whom the bill was payable) which was essential for negotiation.
Thereupon Whistler got notice from the person who drew the cheque, that it was obtained by fraud. After this notice
he secured the signature of the payee. The Court laid down two propositions, viz.: (1) that the bill was not, at the
time Whistler took it, in such a state that mere delivery of it could have transferred the contract in it to him, because
it did not bear the signature of the payee, (2) certainly he could have secured the signature of the payee afterwards.
But when he did it actually, he had notice that it was fraudulently obtained. Thus, in this case, we get an illustration
of both the parts of the definition.
Negotiable instrument & ordinary chattel-distinction
In short a negotiable instrument has three characteristics which çlifferentia[e it 'from an ordinary chattel. They are:-
(a)
(b)
(c)
the property in the negotiable instruments passes to the holder by mere delivery. It is the
ownership, i.e., the right of retaining it as against the previous owner that passes and not mere
possession. In the case of chattels nobody can claim ownership over a thing as against its rightful
owner.
The holder in due couçse is not affected by any defects of title on the part of transferor. This is not
so in the case of chattels.
The holder can sue upon them in his own name.
These three qualities make up the negotiability. A rough and ready test of negotiability is
"can, a title be made through a thief ?" If the answer is in the affirmative, the instrument is
negotiable.
Bill of lading
It is well-settled that a Bill of lading is negotiable even though it is not a negotiable instrument, in the strict
sense. However judicial opinion conflicts on the point of negotiability of a railway receipt.1
Analysis of definition of negotiable instrument
Now, let us analyse the definition of a negotiable instrument. The first clause of it requires that the
instrument must be taken bonafide and for value. If it is so, then the holder of it is an absolute owner of it. But what
is meant by "bonn fide" ? This means, that when a person takes an instrument he must not have any notice of the
defect of title in the person from whom he takes it. In this connection we ought to remember the case of Raphael v.
The Bank of England. Some Bank of England notes were stolen. The Bank gave notice of this to Victor St. Paul
amongst others, of this loss. Paul read this notice and filed it. After some days a gentleman comes with a stolen note
of the Bank of England and asks St. Paul for payment. St. Paul had absolutely forgotten of the Bank's notice of the
loss. He took the note and paid for it, quite honestly. He sent that note to Raphael, his agent in England, for
collection from the bank. The Bank refused payment saying that St. Paul had notice of the theft and ought not to
have paid. The House of Lords decided that a man who takes a note or a bill of exchange honestly and truly for
value, although he has the means at his command of determining whether the note or bill was one that he ought not
to take, but for the moment forgot to make use of the knowledge or those means, is entitled to assert himself as the
true owner, and to assert his right against'5every other person. Thus Raphael won the case. Howsoever negligent he
may be at the time of taking the instrument if he really took it honestly, he is a bona flde holder.
Doctrine of constructive notice-inapplicable
In considering whether a man is bonaflde holder you are to determine what knowledge he has actually, and
not what knowledge he might or ought to have had, or what enquiries he ought to have made. In short the doctrine of
constructive notice does not apply here.
"Lex non cogit ad impossibilia"
The rule that "when the law creates a limitation, and the party is disabled to conform to that limitation
without any default in him, and he has no remedy over, the law will ordinarily excuse him," is merely an application
of the ordinary maxim lox non cogit ad impossibilia. But this general principle cannot prevail against the express
provisions of Section 3, Limitation Act, any more than principles of equity can prevail against the provisions of
statutory law.'
The bar of limitation does not destroy the cause of action, if any, but only bars the remedy. Truly speaking
limitation does not destroy the right.
A shipping company against whom the claim for non-delivery is made may elect to waive a clause in the
contract of carriage according to which the suit should be brought within one year. Hence, it cannot be argued that
by reason of a condition, express or implied, in the bill of lading issued by the defendant in connection with the
instant contract of carriage, the plaintiff's remedy by way of compensation for non-delivery is any way lost.
The payment of time barred debt does not cease to exist by Section 3 of the Limitation Act and the creditor
may appropriate the payment towards time barred debt.
Negotiability and Assignability of Letters of Credit
A letter of credit is not a negotiable instrument. If A steals a letter of credit from the seller and attempts to
negotiate it by delivery to B, B can acquire no rights against the issuing bank.
As regards the transferability of a letter of credit, a credit can be transferred only on the express authority of
the opening bank, and the opening bank will not authorise transfer unless instructed by its customer to do so.
Consequently in the absence of instructions by the customer to the bank to make the credit transferable and the,
subsequent issue by the bank of a "transferable" or "assignable" credit, a letter of credit is not transferable.
Transferable credits have now come into existence in order to finance a sale of goods, not by the actual
supplier or manufacturer, but by a middleman, to the ultimate purchaser.
Position in the USA
In the United States of America the transaction, which in the United Kingdom is known as "Transfer", is called
"assignment"8
Sometimes a credit is transferred as to part only, but transfer is always undertaken at the written request of
the prime beneficiary. It asks that the transferee be advised and sets out the differences between the terms of the
original and [he transferred credits; provides for the substitution of the prime beneficiary's drafts and invoices for
those of the transferee and permits the delivery of the latter's to the bank's principals in the event of the prime
beneficiary's failing so to deliver. It may provide for the payment to the prime beneficiary of the difference between
the amount of the payment to the transleree and the amount of the main credit. It may authorise the banker to pay
under indemnity and relieves the banker of any responsibility for "the description, quantity, quality or value of the
merchandise shipped under the assigned letter of credit, or for the correctness, genuineness or validity of the
documents, or for the general or particular conditions stipulated in the documents, or for any other
cause beyond control."
Bankers' liability
The banker is not under any liability to the transferee until he accepts liability, and wherever the word
"divisible" is used in instruction relating to a credit, it should refer to the customer for elucidation of the instruction
to make sure whether or not part shipments are allowed. It should be remembered that there is a singular lack of
unanimity regarding the documentary credit practice of banks. thus, there is apparently no agreement as to the
meaning of the words "transmissible credit", although they seem to suggest the authorisation of the transfer of the
credit to a place other than that of the domicile of the prime beneficiary.
"Red clause", "Green clause"
A form of credit, which appears to be confined mainly to the South African, Australian and New Zealand
wool trades, contains what is called a "red clause" which authorises the seller to obtain money before shipment by
means of sight drafts on the issuing bank on terms set out in the clause, and provides that such advances are to be
deducted from the proceeds of drafts honoured when the documents are presented under the credit.2 –
The leading decision on this matter is Oelhermann v. The National City Bank of New York. 3 In that case the
beneficiary of the credit maintained with the negotiating bank a personal account and art account for his drawings
under the "red clause". I us personal account was in overdraft, and he withdrew from the "red clause" account
money which he deposited in his personal account. The withdrawals from the "red clause" account were never
covered by shipments, and the negotiating bank was reimbursed therefor to the eventual cost of the buyer.
Thereafter, however, the buyer commenced an action against the negotiating bank on the theory that the bank's
acceptance of the amount of the "red clause" withdrawals was a fraud on the buyer.
The court held that the bank was not liable and said:
"The Red Clause imposed upon the appellant (Bank) no duty whatsoever in this respect. The particular
form of the Red Clause in these instances required the bank to get nothing more from Smith when he desired the
money Smith's withdrawals of the money and later misapplication was a wrong to the Appellees (buyer), but it is not
a wrong for which bank may be held responsible."
However, in view of more recent decisions, particularly in New York,' banks which permit drawings under
a "red clause" should see that the proceeds are not used to reduce an indebtedness of the beneficiary lo them. The
holding in the Oelbermann Case does not grant absolution to banks.
A refinement of the "red clause" is the "green clause." Which is used in credits mainly in the Australasian
wool trade and permits pre-shipment advances and also covers storage in the name of the bank.
"Back to back credit"
The benefit of an irrevocable credit may be transferred where a prime beneficiary uses it to obtain a credit
in favour of his supplier, not necessarily from the intermediary banker but from the prime beneficiary's own banker.
This is called a "back-to-back credit". So far as the documents are concerned, the mechanics of the transaction are
the same; the invoice and draft of the prime beneficiary must be exchanged for those of the supplier, which means
that the former's banker cannot avail himself of the security of the original credit until he (the prime beneficiary)
delivers the documents to the intermediary banker. The banker's security is, of course, the undertaking embodied in
the original credit. It is obvious, too, that such a transaction can take place only where the goods supplied by the
supplier are those for which the buyer has contracted. If the prime beneficiary has to do anything to the goods in
order to render them acceptable to the buyer, the documents tendered by the ultimate supplier could not be
acceptable to the intermediary banker.3
This device of secondary or "back-to-back credit", if used carefully, affords the supplier a maximum of
security and greatly enhances the utility of the commercial letter of credit.
Tactical & strategic problems-letter of credit etc.
Any problem raised by a letter of credit or its variations is incidental to the over-all credit problem involved
in moving goods. It is tactical rather than strategic. The strategic problems are those of security and risk. The
balancing of those two factors is a specific challenge to the ingenuity of bankers. It may be rejected because of the
difficulty of tactical adaptation. But hope combines with commercial history to create the expectation that bankers
will accept the challenge and that the result will be new techniques of foreign and domestic trade.'
Law in force in British India prior to the Negotiable Instruments Act
In those days if a question arose between parties, who were Europeans, on matters relating to the negotiable
instrument, English Law was made applicable. If the parties were Hindus, Hindu Law governed; but if they were
Mohammedans, Mohammedan Law prevailed. If there were no principles available in these personal laws, their
respective customs governed. Though neither the law books of Hindus nor those of Mohammedans contained any
reference to Negotiable Instrument as such, the customs prevailing amongst the merchants of the respective
community were recognised by the courts, and applied to the transaction among them.
Act not a complete code
The Act, as it stands, cannot be said to be exhaustive and all comprehensive touching all objects of the
negotiable instruments.
The Act regulates the issue and negotiation of bills, notes and cheques, but does not provide for the
transmission of rights in such instruments by operation of law or by transfer:' The Act is not a complete code as its
Preamble makes it clear that it is to define and amend the law relating to promissory notes, bills of exchange, and
cheques". The Act is not exhaustive and does not cover either all kinds of negotiable instruments or even all matters
relating to them. Wherever, therefore the Act is silent, the law merchant including merchantile usage is a relevant
consideration.
The portions of Negotiable Instruments Act are legislations within the field of contract.
The Act is not exhaustive of all the matters pertaining to negotiable instruments. Thus, English Exchequer
and Treasury Bills, Bank notes, Bonds, Dividend, Warrants and Share Warrants have all been held to be Negotiable
Instruments but they are not covered by the Act.7
Upon their plain language and also upon authority, certain definitions in the Act, such as that of "negotiable
instrument", "holder" and "holder in due course" are exhaustive but it does not necessarily follow that the Act is a
compendium of the whole law relating to the transfer of interest in negotiable instruments or the procedure
governing actions on them. For instance, there is no special provision as regards the form of a suit by a firm or of
representative action, If a firm is the holder of a negotiable instrument, one has to fall back upon the general rules of
procedure in the CPC for that purpose.1
In so far as the modes of transfer of negotiable instruments are concerned, the negotiable Instruments Act is
not exhaustive and does not prevent the passing of property in the note by operation of law. Therefore, in proper
cases, it is not necessary for the person suing on the promissory note to rely only on an endorsement or such other
mode as is provided for in the Negotiable Instruments Act, and a suit by a person on whom the right devolves by
operation of law cannot be defeated for absence of the endorsement. Case law referred to.
As already indicated, the Negotiable Instruments Act deals only with transfer by negotiation and leaves
untouched the rules of general law which regulate the transmission of negotiable instruments by operation of law or
by legal devolution or by assignment in writing under section 130 of the Transfer of Property Act and their transfer
as chose in action according to the general law. Having regard to the provisions of section 137 of the Transfer of
Property Act which excludes negotiable instruments from the purview of the provisions of that Act relating to
transfer of actionable claims, it can be argued on the one hand that no writing as contemplated by section 130 of the
Act is necessary at all and an oral transfer is possible and on the other that any assignment of such instrun3ents is
not possible at all. According to D.F. Mulla, neither view is correct. He observes in his treatise on the Transfer of
Property Act, 4th Edition at page 739 as follows:
"If the promissory note is negotiable, some early cases supposed that the note could not be assigned as an
actionable claim. But later cases have held that even if the promissory note is negotiable, it may be assigned by
instrument in writing although such an assignment renders the assignee under section 132 subject to the equities to
which the assignor was subject".3
Section 130 of the Transfer of Property Act provides for transfers of actionable claims which include
negotiable instruments also by means of written instruments. Section 137 however merely excludes the negotiable
instruments from the operation of section 130. There is nothing in section 137 which prohibits the transfer of such
instruments by means of separate written instruments. The transfer therefore of a promote by means of a registered
deed is valid.4
Amendment Acts and Adaptation Orders
1.
The Negotiable Instruments Act, 1885 (2 of 1885).
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
The Amending Act, 1891 (12 of 1891).
The Negotiable Instruments (Amendment) Act, 1897 (6 of 1897).
The Decentralization Act, 1914 (4 of 1914).
he Negotiable Instruments (Amendment) Act, 1914 (5 of 1914).
The Negotiable Instruments (Amendment) Act, 1919 (8 of 1919).
The Negotiable Instruments (Amendment) Act, 1920 (25 of 1920).
The Negotiable Instruments (Amendment) Act, 1921 (12 of 1921).
The Negotiable Instruments (Amendment) Act, 1922 (18 of 1922).
The Negotiable Instruments (Interest) Act, 1926 (30 of 1926).
The Negotiable Instruments (Amendment) Act, 1930 (25 of 1930).
The Negotiable Instruments (Amendment) Act, 1934 (17 of 1934).
The Government of India (Adaptation of India Laws ) Order, 1937.
The Negotiable Instruments (Amendment) Act, 1947 (33 of 1947).
The Indian Independence (Adaptation of Central Acts and Ordinances) order 1948.
The Adaptation of Laws Order, 1950.
The Part B States (Laws) Act, 1951 (3 of 1951).
The Notaries Act, 1952 (53 of 1952).
The Negotiable Instruments (Amendment) Act, 1955 (37 of 1955).
The Jammu and Kashmir (Extention of Laws) Act, 1956 (62 of 1956).
The Repealing and Amending Act, 1957 (36 of 1957).
The Banking, Public Financial Institutions and Negotiable Instruments kws (Amendment) Act,
1988 (66 of 1988).
The Negotiable Instruments (Amendment and Miscellaneous 'revisions) Act, 2002 (55 of 2002).
Statement of objects and reasons of Negotiable Instruments Act '4mendment and
Miscellaneous Provisions) Act, 2002
The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and
Negotiable Instruments Laws (Amendment) Act, 1988 where in a new Chapter XVII was incorporated for penalties
in case of dishonour due to insufficiency of funds in the account of the drawer of the Diese provisions were
incorporated with a view to encourage the culture heques and enhancing the credibility of the instrument. The
existing in the Negotiable Instruments Act, 1881, namely, sections 138 to 142 in Chapter XVII have been found
deficient in dealing with dishonor of cheques. Not only the punishment provided in the Act has proved to be
inadequate, the prescribed for the Courts to deal with such matters has been found to be cumbersome. The Courts
are unable to dispose of such cases expeditiously in
a hound manner in view of the procedure contained in the Act.
2.
3.
4.
A large number of cases are reported to be pending under sections 138 to 142 of the Negotiable Instruments
Act in various courts in the country. Keeping in view the large number of complaints under the said Act
pending in various courts, a Working Group was constituted to review section 138 of the Negotiable
Instruments Act, 1881 and make recommendations as to what changes were needed to effectively achieve
the purpose of that section.
The recommendations of the Working Group along with other representations from various institutions and
organisations were examined by the Government in consultation with the Reserve Bank of India and other
legal experts, and a Bill, namely, the Negotiable Instruments (Amendment) Bill, 2001 was introduced in the
Lok Sabha on 24th July, 2001. The Bill was referred to Standing Committee on Finance which made
certain recommendations in its report submitted to Lok Sabha in November, 2001.
Keeping in view the recommendations of the Standing Committee on Finance and other representations, it
has been decided to bring out, inter alia, the following amendments in the Negotiable Instruments, Act,
1881, namely:(i)
to increase the punishment as prescribed under the Act from one year to two years;
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(xi)
(x)
(xi)
to increase the period for issue of notice by the payee to the drawer from 15 days to 30 days;
to provide discretion to the Court to waive the period of one month, which has been prescribed for
taking cognizance of the case under the Act;
to prescribe procedure for dispensing with preliminary evidence of the complainant;
to prescribe procedure for servicing of summons to the accused or witness by the Court through
speed post or empanelled private couriers;
to provide for summary trial of the cases under the Act with a view to speeding up disposal of
cases;
to make the offences under the Act compoundable;
to exempt those directors from prosecution under sectionl4l of the Act who are nominated as
directors of a company by virtue of their holding any office or employment in the Central
Government or State Government or a financial corporation owned or controlled by the Central
Government, or the State Government, as the case may be;
to provide that the Magistrate trying an offence shall have power to pass sentence of imprisonment
for a term exceeding one year and amount of fine exceeding five thousand rupees;
to make the Information Technology Act, 2000 applicable to the Negotiable Instruments Act, 1881
in relation to electronic cheques and truncated cheques subject to such modifications and
amendments as the Central Government, in consultation with the Reserve Bank of India, considers
necessary for carrying out the purposes of the Act, by notification in the Official Gazette; and
to amend definitions of "bankers' books" and "certified copy" given in the Bankers' Books
Evidence Act, 1891.
5.
The proposed amendments in the Act are aimed at early disposal of cases relating to dishonour of cheques,
enhancing punishment for offenders, introducing electronic image of a truncated cheque and a cheque in
the electronic form as well as exempting an official nominee director from prosecution under the
Negotiable Instruments Act, 1881.
6.
The Bill seeks to achieve the above objects.
PROMISSORY NOTE
4.1.
Promise to pay on demand creates promissory note—Section
Defendant Nos. 1 and 2 are brothers carrying on business as partners of a firm, Messrs. Bharat
Hardware Stores at Thangal Bazar, Imphal, and defendant No. 3 is the partnership finn. On 3 1-8-1968,
defendant No. 1 in his capacity as a partner of the firm and on its behalf borrowed a sum of Rs. 9,240/from the plaintiff and executed a promissory note (Ext. A/i) promising to repay the loan on demand.
Defendant No. 4 stood surety guaranteeing the repayment of the loan. The plaintiff made a demand of the
defendant Nos. 1 arid 2 for the repayment of the loan by registered letters dated 13-5-1969, a copy whereof
was sent to defendant No. 4. The letters were refused and no payment was made suit was filed.
In written statement the defendants denied the alleged loan. They however admitted that defendant
No. 1 received a sum of Rs. 7,808/- payable with interest of Rs. 1,432/-. They, however, aver that by way
of acknowledgement of the receipt of the above sum of Rs. 7,808/-, the defendant Nos. 1 and 2 put their
signatures on a blank piece of paper, which was forged into the pronote. It was averred that the sum of Rs.
9,240/- had been repaid to the plaintiff.
After trial, the learned Subordinate Judge has decreed the suit with costs.
The first submission of the learned Counsel for the appellants, is that Ext. A/i is not a promissory note but a
bond. Ext. A/I was executed by defendant No. 1 on behalf of defendant No. 3. It is in the following terms:
‘We have received the sum of Rs. 9,240/- (nine thousand two Hundred and forty only) from R of Thanga
Bazar, Imphal. The above amount will be repaid on demand. We have received Rs. 9,240/- in cash today.”
The above writing was followed by four 10 P. revenue stamps on which defendant No. 1 put his
signature followed by the expression, “For Bharat Hardware Stores, Manipur”. Below it there is an
endorsement by defendant No. 4 guaranteeing the repayment of the money. It was submitted that in view of
the acknowledgement of the receipt of the amount in Ext. A/i and of the guarantor’s endorsement. Ext. A/I
was
not
a
promissory
note
within
the
definition.
The material portion of the definition of promissory note as defined under Section 4 of the
Negotiable Instruments Act, 1881, together with illustration (b) may be quoted
“A ‘promissory note’ is an instrument in writing containing an unconditional undertaking, signed by the
maker, to pay a certain sum of money, only to, or to the order of, a certain person, or to the bearer of the
instrument.”
Illustration (b) “1 acknowledge myself to be indebted to B in Rs. 1,000/- to be paid on demand, for
value received.”
The essential ingredients of a promissory note are: (i) that the promise to pay must be
unconditional, (ii) that the note must be in writing and signed by the manner, (iii) that the promise to pay
must be of a certain sum of money, and (iv) that the promise to pay must be to, or to the order of, a certain
person or to the bearer of the instrument. The present document Ext. A/i has fulfilled all the above
conditions. Illustration (b) to the definition shows that an acknowledgement of a receipt of the amountdoes
not take away the document from the cateory of a promissory note. The document in question is a
promissory note.
The true import of the words “on demand” is that the debt is due and payable immediately.
Therefore, the instrument involved in this case satisfied this test, even read alongwith the endorsement. The
endorsement does not mean that It Is not payable immediately or without any demand. Even the words on
demand is not necessary to make it on demand because under Section 19 (a) of the Negotiable Instruments
Act a pronote in which no time for payment is specified is one payable on demand. In order to make a
promissory note “on demand” it must be payable at once, “forthwith” or “immediately”. On the other hand,
if any time limit is fixed for payment could be demanded and the amount becomes payable only after that
period and in such a case, the instrument is only one payable otherwise than on demand even though the
words on demand are there.2
It would not be proper to go into the nature of the transaction, in view of the agreement. The
agreement does not suggest by itself that this was a money-lending transaction. The agreement is out and
out a lending transaction. However, whether this was a money-lending transaction at all, could not be
decided on the basis of the available material and in the absence of any proper evidence. The transaction as
reflected from the agreement does not prirrtafczcie seem to be a money-lending transaction. The execution
of the promissory note by itself would not make this to be a money-lending transaction because the
promissory note could be viewed as a collateral security for ensuring the regular payment of instalments
also. In short, In the absence of proper evidence, it could not be straight- way held to be a money- lending
transaction. This defence will, therefore, have to be rejected.3
The trial Court pointed out that in the promissory note, the words “on demand” are not found.
Therefore, It is a promissory note otherwise payable on demand. Therefore, the trial Court held that the
stamp duty is payable according to Article 49 (b) of the Stamp Act. That is not the subject-matter In the
present revision.
The promissory note in question is correctly stamped according to the provisions containing In
Article 49 (a) of the Stamp Act. In the decision In Sreenjvasajj v. Subbarama Sastrikal,4 It was held that a
promissory note payable on demand Is one payable without any demand and time limit. The true Import of
the words on demand Is that the debt is due and payable immediately. Therefore, the instrument involved in
this case satisfied this test even read alongwlth the endorsement. The endorsement does not mean that it is
not payable immediately or without any demand. Even the words on demand is not necessary to make it on
demand because under Section 19 (1) of the Negotiable Instruments Act pronote in which no time for
payment is specified is one payable on demand. In order to make a promissory note on demand it must be
payable at once forthwith or immediately. On the other hand if any time limit is fixed for payment then
payment could be demanded and the amount becomes payable only after that period and in such a case the
instrument is only one payable otherwise than on demand even though the words “on demand are there”. 1
1.
2.
3.
SurJltsthghv. RcirnRatczn Sharma, AIR 1975 Gau 14 at pp. 15, 16.
Sree Vlsalarn Chit Funds Ltd. v. T.V. Kuniar, 11 (1997) BC 259 at p. 261.
Jalgaon Re-rolling Industries Ltd. v. The Jayabharat Credit Ltd.. 11 (1997) BC
328 at p. 339.
4.
AIRl9S8Içerl12.
It is not pleaded in the plaint that the suit documents are promissory notes. Likewise, nowhere In the
written statement it is pleaded by the petitioner that they are promissory notes. On the other hand, it is his specific
plea that they are not negotiable instruments. As discussed above, a promissory note which is not intended to be
negotiable instrument cannot be construed as a promissory note even though it contains an unconditional
undertaking to pay, unless it falls within the inclusive definition of Section 2 (22) of the Stamp Act. Admittedly, the
suit documents do not come under that category.
The suit documents cannot be construed as promissory notes since they were not intended to be negotiable
instruments.2
Where the endorsement and writing below the stamp was admittedly in the hand-writing of the
executant, it was a negotiable instrument.—
The finding of the Court of appeal below that the hand note (Ext. 1) is not valid, nor It Is for
consideration, also stands vitiated on account of the fact that it has wrongly placed the onus on the
plaintiffs. Before starting with the consideration of the evidence on the point it has observed, “Under such
circumstances It Is for the plaintiffs to prove that the handnote was executed by the defendants and that It
was for consideration and for family necessity.” After discussing the plaintiffs’ evidence It says. “It was
necessary for the plaintiffs to establish that the handnote (Ext. 1) was really scribed and executed by
defendant Nos. 1 and 2 In the maimer alleged in the plaint. But they have not done so, and it has not been
established that the hand-note (Ext. 1) was really executed for consideration.” Then after referring to the
evidence of D.W. 2, one of the defendants, that he did not receive any consideration for the handnote it
concludes, “Considering the evidence adduced on the side of the plaintiffs. This Court finds that they have
really failed to show that the hand-note (Ext. i) was executed for consideration by defendant Nos. 1 and 2.”
It Is obvious from these observations that It Is not a case where the Court of appeal below has considered
the evidence of both the parties irrespective of the question of onus and come to a finding. The onus in this
case was on the defendants to prove that the hand-note was not executed for consideration. This Court
examined the hand-note itself and the endorsement portion of the hand-note below the stamp and up to the
date, which is admitted to be In the pen of defendant (respondent) No, 2 Is by Itself a negotiable instrument
and In the circumstances even if the body portfon is not in the pen of respondent No. 2, that does not make
any difference. Of course, the name of the lender is not mentioned in that execution portion, but It could be
supplied by the holder In due course as provided in Section 20 of the Negotiable Instruments Act. 1
1. Sree Vtsal am Chit Funds Ltd. v. T.V. Kuinar, 11(1997) BC 113 at pp. 115, 116.
2. Dokk Joganna v. Upadrasta Chayadevi I (1998) BC 186 at p. 192.
Bond and promissory note.—
Admlttedly, the instrument is attested by witnesses and it is not payable to order or bearer. The
document in question Is a bond and not a promissory note. The learned Judge was perfectly right in holding
that the document Is a bond.2
4.1.2
WHEN A DOCUMENT IS A PROMISSORY NOTE
Promissory note does not change its nature by making endorsements regarding time-limit for
payment, interest and jurisdiction of Courts.—
In R. Kannusamy v. V. V. K. Samy arid Co., Singapore,3 the Court stated : Apart from the fact that
there Is a difference In the number of executants and the amount, the recitals in both, the instruments are
practically the same. No doubt, the preamble portion of the instruments sued upon refers to the goods sold
and delivered to the executants by the respondent and the amount. However, what is important is the recital
to the effect that the executarits or the executant, as the case may be, have or has undertaken and promised
to pay the respondent the amounts of 88072 Dollars and 94941.39 Dollars’ respectively. Thus, the
petitioner has unconditionally undertaken to pay the respondent the amounts mentioned therein, which are
certain. There Is no dispute that these instruments have been signed by the petitioner in these civil revision
petitions. Thus, the Instruments in question are in writing and do contain an unconditional undertaking to
pay the respondent a certain sum of money and have also been signed by the executants. However, there is
a recital In the instruments to the effect that it was subject to certain terms and conditions. They are, that
the amounts mentioned in the instruments should be paid on or before 30-10-1984, and 30-6-1984,
respectively, with Interest on the amounts mentioned In the instruments, at 12 per cent per annum payable
from 30- 10-1982 and 1-11-1982, till the date of payment and that the Courts of the Republic of Seychelles,
Singapore and India shall have jurisdiction for actions taken on the promissory notes.
Whether the aforesaid terms and conditions would in any manner affect the unconditional
undertaking to pay, found in the Instruments, may now be considered. The first so-called condition fixes a
time for payment as 30- 10-1984 in one case and 30-6-1984 in the other. This does not in any manner affect
the undertaking contained in the instruments to pay the amount. The provision regarding the payment of
interest also does not have any bearing upon the undertaking as well as the promise to pay the amounts
mentioned in the instruments. The further provision regarding the jurisdiction of the Courts, cannot also in
any manner detract from the unconditional nature of the undertaking contained in the instruments to pay an
ascertained certain sum of money to the respondent. Though from the recitals found in the instruments sued
upon, it may appear as if the undertaking and promise to pay found therein, is subject to certain other terms
and conditions, it is not really so for the other terms do not really In any manner affect the undertaking as
well as the promise to pay embodied in the instruments, but only provide for a time-limit for payment,
payment of interest and the jurisdiction of the Courts, where actions may be commenced. They do not in
any manner affect the clear undertaking and promise found incorporated in the instrument in the words ‘I
hereby undertake and promise to pay to V, the sum of Dollars. The preamble portion referred to already
merely sets out the basis for arriving at the amount mentioned In the instruments and even if the preamble
portion of the instruments sued upon can be construed as an acknowledgment of indebtedness by the
executants in favour of the respondent, yet, ‘when taken alongwith the other recitals found in the
instrument it is clearly seen that the instruments purport to acknowledge the Indebtedness by the executants
and at the same time contain a clear undertaking as well as a promise to pay the respondent the amount
mentioned therein. To such a situation, in view of this Court Illustration
(b) to Section 4 of the Act would apply and the Instruments sued upon would nevertheless be promissory
notes, despite the preamble portion setting out not only the basis on which the amounts have been arrived
at, but also containing an acknowledgment thereof, for there is a clear undertaking and promise to pay the
amounts mentioned, and that undertaking or promise Is not In any manner made conditional upon anything’
else. The so-called conditions mentioned, as noticed already, relate only to the time of payment, payment of
Interest and the place of suing and they do not affect the undertaking as well as the promise embodied In
the instruments. The circumstances that time for payment has been fixed as 30-10-1984 and 30-6-1984 also
would not in any manner render the unconditional undertaking in the instruments anytheless unconditional.
• By the terms incorporated in the instruments the time for payment of the amounts had been expressed to
be before the lapse of a certain period and that period was certain to expire in the course of ordinary
expectation and thus, the fixation of time for payment. would not render the instruments sued upon
anytheless promissory notes, as defined in Section 4 of the Act. It will also be useful in this connection to
refer to the decision in Theriappa Chettiar v. Andiappa Chettiar,1 where the question arose whether a
provision in a promissory note expressed to be payable on the lapse of a certain period, would make the
promise as well as the undertaking to pay conditional within the meaning of Section 4 of the Act. In that
case under the terms of the instrument sued upon, the promisor agreed to repay the amount after two years
and the question arose whether an instrument containing such a provision, would be a promissory note, and
if so whether it would be payable otherwise than on demand. While holding that despite the stipulation
regarding time for payment, the Instrument would be a promissory note, though payable otherwise than on
demand, even within the extended definition of a promissory note under Section 2(22) of the Stamp Act,
the Division Bench pointed out that It would be so, both under Section 4 of the Act as well as under Section
2(22) of the Stamp Act. The Division Bench after referring to Section 2(22) of the Stamp Act and Sections
4
and
5
of
the
Negotiable
Instruments
Act,
observed
as
follows
1. BhagwattPrasadBhagatv. Pahil Sundart, AIR 1969 Pat215 at pp. 217, 218.
2. NookalaRameshReddyv. GudtpudiRangaro.o, 1(1997) BC 363 at p.364 (AP).
3. A1R1988Mad336.
‘Though the amount is payable only after two years, It cannot be said that payment is conditional within the
meaning of Section 4. The document contains an unconditional undertaking. Therefore, it is a promissory note
within the definition of the Negotiable Instruments Act. Therefore, it Is also a promissory note under Section 2(22)
of the Stamp Act.”
Referring to Section 19 of the Act, the Division Bench pointed out that It will follow by necessary
implication that, If time for payment is specified, It cannot be said to be payable on demand and, therefore, the
Instrument may require to be stamped in accordance with Article 49(b) of the Stamp Act, as one payable otherwise
than on demand. The first contention of the learned Counsel for the petitioner that the instruments sued upon are not
promissory notes cannot, therefore, be accepted.
Illustration (d) of Section 4 of the Act mentioned that the amount should be definite In the pronote. In that
illustration the wording was “and for other sums”. It is to be noted that the first defendant is an Advocate and
pronotes are In the handwriting of the maker of the pronotes. Pronotes are valid and that the plaintiff is entitled to
get the amount due under those pronotes as a holder In due course. 1
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 endorsee thereof, If payable to order, before the
amount mentioned in It became payable and without having sufficient cause to believe that any detect existed In the
title of the person from whom he derived his title.
In the light of the evidence of PW 1 and DW 2, it is conclusively proved that the plaintiff Is a holder In due
course. Thus, he is entitled to claim the amount due under pronotes. 2
The suit is based on the promissory note for the value of Rs. 15,000/- out of which Rs. 11,400/- was
claimed to have been paid by the defendant. Decree for the balance was sought for in the suit.
It is now significant to point out that the defendant’s statement tally with the claim made by the plaintiff.
The defendant says that he had paid Rs. 11,400/- which amount has been given credit, to by the plaintiff in the suit.
It is the further case of the defendant that he was demanding to return the promissory note, but that never came to be
done. In this view of the admission, the Courts below ought to have granted decree as prayed for.1
The name of the payee may appear in any part of the instrument.—
The other ground urged that the documents do not show the name of the payee and, therefore, cannot be
treated as promissory notes does not appear to be correct. Section 4 of the Negotiable Instruments Act only requires
that the document must show that the amount is to be paid to or to the order of “a certain person”. If a document
clearly states that it is so payable to a certain person specifically described therein as such in the body of the
document, the matter Is clearly beyond controversy. The question of interpretation arises only where a document Is
not so clearly expressed. It Is true that Exts. Al, A2 and A37, the body of the documents do not specifically say that
the amount is payable to a particular person. But in these documents the recitals start after mentioning the name of
plaintiff (in O.S. No. 159/7 1 Le. P.W. 1 in the case of Al and A2) and the name of 4th defendant (in OS. No. 252/72
in the case of Ext. A37). In other words, the documents are, so to say, addressed to the respective promisees that is
followed by a promise to pay though the word “you” is not present. A reading of each of the documents as a whole
would show that the person whose name is written at the top was intended to be indicated as the payee under the
document. In each of the documents, the payee is ascertained by name and the name is given at the top. The
instruments definitely and with certainty point out the persons whu are to receive the money. As pointed out by
Bhagwatl, J. (as he then was) in Jagjivandas v. Gumanbhr.zi,2 that:
“Section 4 does not say that the name of the payee must appear in the words of the promise nor does It say
that the payee must be specified In any particular part of the Instrument. The name of the payee may be set out in
any part of the Instrument and so long as it appears clearly on a reading of the instrument taken as a whole that the
instrument specifies the payee with certainty, the instrument must be held to be a promissory note if the other
ingredients of the definitions are satisfied.”3
1. J. Ranjanna Setty v. Patel Thfmniegowda. AIR 1998 Kant 86 at p. 87.
2. AIR1967Guj1.
3. K. A. I.ona v. MIs. Dada Haji Ibrahlin Hil art & Co., AIR 1981 Ker 86 at p. 89
Pronote—On the back of pronote there was an endorsement that no interest was to be paid in case
payment was made within one month —It does not change the nature of the document— It Is still
payable on demand.—
In this case the whole difficulty arose because after execution of the promissory note, on the
reverse side of it, on the same day it was recorded under the signatures of both the parties that If the amount
is paid within one month it was decided that interest need not be paid. It was for this reason alone that the
trial Court held the promissory note to be one payable otherwise than on demand. The learned Advocate for
the respondent/defendant would put this as a contemporaneous agreement postponing the time for payment
by one month and as such an alteration of the terms of the Instrument as held in Joharmal Bekarilal V.
Chettiyar.Firm.1 The decision is not applicable to the facts of the case. The endorsement is independent of
the promissory note and it was executed after execution of the pronote. Even If that was Included and
executed as part of the promissory note itself, it would not have in any way changed the nature of the
pronote as one payable otherwise than on demand. What is given by the endorsement is only a concession
that if the defendant chooses to make the payment within a month he need not pay the interest. That does
not In any way affect the right of the plaintiff to make a demand for payment even before the expiry of
concessional period of one month or the liability to pay immediately without demand. One month is not an
extended period but only a concession period within which at any time (immediately or forthwith) the
amount is payable without interest. That concession does not affect any other agreement In the pronote. On
the other hand it only reiterates and affirms liability for immediate payment with an added inducement for
the same. In order to constitute an instrument a pronote payable on demand or otherwise than on demand
liability of the maker to pay interest is not an integral part. Time for payment is not In any way postponed
for a period of one month by the endorsement. That concession was not availed of and the agreement has
already run out its period and It does not survive for any purpose. Tjiat agreement does not in any way
affect the terms of the pronote as matters now stand. Further It is an independent transaction signed by the
maker and payee whereas the pronote is signed only by the maker.
If the promissory note is payable on demand stamp duty payable is under Article 49(a) of
Schedule Ito the Indian Stamp Act and if it is payable otherwise than on demand, duty under Article 49(b)
Is the same as a Bill of Exchange (No. 13). In order to make a promissory note ‘on demand’, it must be
payable ‘at once’, ‘forthwith’ or ‘immediately’. The expression ‘on demand’, unlike in ordinary parlance,
has, a technical connotation In the law of negotiable instruments. If any time Is fixed for payment then
payment could be demanded and the amount becomes payable only after that period and in such a case the
instrument is only one payable otherwise than on demand even though the words ‘on demand’ are there.
That is because payment need be made only on or after that period. AiyapPaflkUtty v. Mathni,1 Thertappa
v. Andiyappa,2 Devassqa v. Shams uddin, and other decisions relied on were concerning Instruments where
periods were fixed for payment. When time for payment is fixed a promissory note cannot be payable ‘on
demand’ whatever be the wording. In the case in hand the pronote, taken by itself or read alongwith the
endorsement, Is payable on demand because It was payable immediately without any time-limit at all. A
promissory note payable ‘on demand’ is one payable without any demand and time-limit. The true import
of the words ‘on demand’ is that the debt is due and payable immediately. The instrument involved In this
case satisfied this test even read aiongwith the endorsement. The endorsement does not mean that it is not
payable immediately or without any demand. Even the words ‘on demand’ is not necessary to make it on
demand because under Section 19 of the Negotiable Instruments Act a pronote in which no time for
payment is specified is one payable on demand.4
1. 1954 Ker LT 785 AIR 1955 Tray-Co. 65.
2. AIR 1971 Mad 290.
3. 1976KerLT24.
4. Sreenivasan v. Subbarwrur &istrikul, AIR 1988 Ker 112 at pp. 113, 114.
PromissorY note and agreement—Sections 2-A and 4.—
An agreement is not, as such, defined in the Act. But, Article 5 of the Schedule of the Act
indicates that an instrument may fall in the category of agreements as distinguished from bonds. Article 5
consists of three clauses. First clause pertains to agreement for sale of a bill of exchange. Second clause
relates to sale of Government Security etc. The last clause is worded in such a manner that it has a wide
sweep as though it is a residuary clause. When a document cannot be put under any other article it can be
brought under the aforesaid category since It says “if not otherwise provided for”. But the document must
have the feature of an agreement. What is meant by an agreement. The definition of the word “agreement”
given in the Indian Contract Act, 1872 is the following, “Every promise and every set of promises forming
the consideration for each other is an agreement.” Though all agreements are not contracts, every contract
would contain an agreement because an agreement which is enforceable In law is a contract. For every
agreement, there must be a promisor and a promisee. When a promise is made and accepted, an agreement
is created. It is immaterial whether the promise relates to any pre-existing liability or obligation. In the
absence of any other definition In the Act, an agreement can be understood as one envisaged in the
Contract Act, Thus a bond can be distinguished from an agreement on the aforesaid promise.2
Material alteration in the promissory note.—
Crossing of the stamps should have been made at the very time the process takes place and if
stamps are subsequently affixed and cancelled by drawing lines, the promisee cannot get any advantage of
the same because he will be, by such an act, illegally trying to show an insufficiently stamped promissory
note as sufficiently stamped. In other words, he cannot by such an act convert the promissory note not
admissible in evidence into that which is admissible. It will amount to a material alteration in the
promissory note.3
MaintainabilitY of the suit based on promissory note.—
The case of the respondent throughout had been that loan amount Ps. 4,15,000/-. The Kalandra
was registered by the Police. Kalandra was recorded as whose Instance has not come on record what was
stated in the Kalandra not placed on record nor averred. Hence, the order of the SDM wherein loan amount
has been mentioned as R. 4,50,0001- cannot be. used as an admission of this amount by the present
respondent. That by itself does not raise any triable Issue. Nor it can be inferred that respondent herein
furnished the figure of Ps. 4,50,000/- as appearing In the order the SDM.
1.
2.
3.
KA Lona V. M/s. Dada HaJUbraiiiifl Hil oil & C0, 98 lKer86 at p 89
Mathai Mathew V. Kochukutiy Thwnpi, II (1994) BC 313 at p. 315 (Ker TIC).
Narajan StngfLv. Gurdev Sfrzgh 1(1997) BC 45 at p. 47 (P&U).
These are separate transactions having different cause of action. Pronote did not merge in the
agreement and, therfore, the suit based on promissory note was maintainable under Order XXXVII, C.P.C.
In fact petitioners failed to raise any triable issue, hence the trial Court was right In rejecting their
application.1
Plaintiff has no burden when the execution of the promissory note was admitted.—
The lower appellate Court assumed that even If there Is a presumption under Section 118 of the
Negotiable Instruments Act, it Is only regarding execution and the same will not be available to prove the
quantum of consideration. The said approach by the lower appellate Court is patently incorrect. The
plaintiff has no inconsistent case regarding the passing of consideration. The plaintiff has no case that the
consideration paid in the promissory note is different from the real facts. Only In such cases the question
regarding the quantum of consideration merits consideration. The defendant has also only one case,
namely, that the document is not supported by consideration, and not that the quantum mentioned therein is
Incorrect. If that be so, the case of the plaintiff cannot be disbelieved and under Section 118 of the
Negotiable Instruments Act cannot be found as being disproved. The approach made by the lower appellate
Court Is Illegal. The burden of proof was wrongly cast on the plaintiff for non-suiting him. In fact, the
plaintiff had no burden at all when the execution of the promissory note was admitted and the defendant
had not let in any evidence to rebut the said presumption. The question of law raised in the memorandum of
appeal are answered in favour of the appellant. The judgment of the lower appellate Court is. set aside and
that of the trial Court Is restored.2
4.1.3
WHEN A DOCUMENT IS NOT A PROMISSORY NOTE
To make a document pronote, unconditional undertaking to pay a certain sum is essential—A
promise to pay after irrigation of a field was done—Does not create a promissory note.—
Section 4 of the Negotiable Instruments Act, 1881 defines “promissory note” as an instrument in
writing (not being a Bank-note or a currency note) containing an unconditional undertaking, signed by the
maker, to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the
instrument. The essential requisite of a promissory note Is certainly as to the person to make the payment,
the person to receive it, the time and place of payment, the conditions of liability and also as to the amount
to be paid. No particular form of words Is essential to constitute a promissory note. It may be In the form of
a letter or In any other form of words which satIsfy the requirements of Section 4 of the Act and from
which the Intention to make a promissory note can be discerned. A mere receipt with no such promise to
pay Is not a promissory note. The question whether an instrument is a promissory note or not has to be
ascertained by the words used in the document. It cannot be said that the absence of the word “promise” is
sufficient to declare that the document is not a promissory note. Any form of expression or recitals in the
concerned document from which it can be deducted that there was an undertaking to pay a certain sum is
sufficient to construe the document as a promissory note. It has to be ascertained whether the words used in
an instrument import an unconditional undertaking to pay the amount, It is not enough that the substantial
effect of the instrument is to make the executant liable to pay money. For instance, a letter containing a
confirmation of an undertaking to pay unconditionally a specified sum to a person will not be a promissory
note. A document which contains a promise to pay on demand a certain sum to a specified person is a
promissory note though there may be no words of negotiability. The unconditional undertaking to pay a
specified amount Is the sine qua non in a promissory note. It is essential that the note must be payable at all
events. The promise to pay must not be dependent upon a contingency. If the payment is dependent upon a
contingency it would definitely amount to uncertainty and the document cannot be construed as a
promissory note.
1.
2.
Mohd. Hatderv. Abdul Khaltq, I (1997) BC 186 at pp. 190, 191 (Del).
Meenaksht Sw-ujram v. N. Rangaswwni, I (1997) BC 168 at p. 174 (Mad).
To consider whether a given document is a promissory note or not the following tests are helpful
(i)
(ii)
(iii)
(iv)
(v)
Is the sum to be paid a sum of money and is that sum certain?
Is the payment to be made to or to order of a person who is certain or to the bearer of the
instrument?
Has the maker signed the document?
Is the promise to pay made in the instrument the substance of the instrument? and
did the parties intend that the document should be a promissory note?
In Ext. Al Rs. 6,000/- is stated to be payable on 30th Makaram. The recitals in Ext. Al would show
that the plaintiff had agreed to carry out the work of dewatering and watering of the paddy field and that
there was no unconditional undertaking by the executants to pay the amount. It is apparent that the payment
promised could be enforced by the plaintiff only if he had performed his part of the agreement. As there
was no unconditional undertaking of the payment of the amount by the executants of Ext. Al it is not
possible to hold that it Is a promissory note. Both the Courts have rightly rejected the appellant’s contention
that Ext. Al is a promis sory note. As the recitals In Ext. Al would show that the parties have intended to
construe Ext. Al only as a letter and as that intention is patently obvious from the document it is indeed
difficult to treat Ext. Al as a promissory note. 1
Mere Implied undertaking to pay by use of the word “debt” or promote, the document does not
become a promote.—
In Section 4 of the Negotiable Instruments Act, a promote is defined as follows
‘4. ‘Promissory note’.—A ‘promissory note’ Is an Instrument in writing (not being a Bank note or a
currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of
money only to, or to the order of, a certain person, or to the bearer of the instrument.”
In Bachan Singh v. Ram Awaci.h) a Division Bench laid down as follows
“In order to find out whether an Instrument is a promissory note or not, Its terms must be examined.
There must be an express undertaking to pay the amount mentioned in the instrument before it can
be held to be a promissory note. A mere Implied undetaking, by the use of the word ‘debt’ or ‘pronote’ in
the instrument is not sufficient.”
This Division Bench Is a clear answer to the contention which has been raised by the learned
Counsel for the defendant-appellant who has placed a great deal of reliance on the fact that In the body of
the document, the expression ‘hand note’ has been used. Counsel’s contention In short is that coupled with
the fact that the executant of the document says that he has borrowed the sum of Rs. 2,000/- and has used
the expression ‘hand note’, make the document a pronote. The instruments which considered in2 were in
these words:
“(1)
1 had borrowed a sum of Rs. 42 bearing Interest at the rate of annas four per cent from B on 29th
March. 1939 and have, therefore, executed this pronote.”
“(2)
I of my own free will and accord approached M and borrowed from him the sum of Rs. 100/bearing interest at the rate of annas eight per cent per mensem for the purpose of purchasing
builocks. I have, therefore, executed these few presents by way of a promissory note.”
The Division Bench held that the documents were merely acknowledgments of the debts
coupled with an agreement to pay Interest but they were not promissory notes. The document In
suit stands on a lower pedestal than those which were considered by the Division Bench In AIR
1949 All 431 (supra).3
1 AIR 1949A11431.
2. AiR 1940 All 431 (supra).
3. BIIJ KtshoreRajv. LakhanTewczri, AIR 1978 All314 at pp. 316, 317.
4.2
CONSIDERATION—PRESUMPTION
Burden is on the defendant to prove that no consideration passed—Section 118, Negotiable
Instruments Act.—
Provislon of Section 118, Negotiable Instruments Act raises a presumption that the negotiable
instrument is made for the consideration mentioned therein. Section 118 of the Negotiable Instruments Act
raises a statutory presumption that there was consideration for every negotiable instrument. The
presumption continues until it is rebutted and only where it can be rebutted by proving the contrary i.e.,
negotiable instrument was without consideration. So the onus of proving that there was no consideration
was on the defendant Needless to mention that in a case based on pronotes, the initial burden lies on the
plaintiffs to prove execution of the pronotes and when this burden Is discharged then the Court shall raise a
presumption in favour of the plaintiffs for holding that the pronotes were for consideration and it will be for
the defendant to rebut that presumption.1
Raises presumption that when execution of pronote is admitted the burden of proof that
Consideration did not pass is on the executants section 118, Negotiable Instruments Act. —
The plaintiffs case is that he is the sole proprietor of the firm “Bhagwan Ram Ramrajaram” and he caies on
business in steel furniture, asbestos etc. The defendant was serving as-a salesman under him and was in charge of
cash and stock. The plaintiff while checking the accounts of the firm detected shortage of cash to the tune of Rs.
4,500/- and the defendant admitted to have misappropriated the same and voluntarily executed the suit promissory
note In his own hand on 4-10-1966 agreeIng to repay the Same Ofl demand with interest at the rate of 12 p.c. p.a.
During the period from 5-6-1968 to 5-4-1969 the defendant paid a sum of Ps. 550/- by instalments and endorsed the
total amount of payment on the back of the Promissory note on 5-4-1969. He also adjusted a sum of Ps. 830.65 out
of his pay from 5-5-1969 to 29-10-1970, leaving a balance of Ps. 3,119.35.
The defendant admitted execution of the promissory note but contended that it was forcibly obtained from
him under threat and coercion. He denied having aclmowledged his liability undef the promissory note.
Section 118 of the Negotiable Instruments Act is Imperative and the Court is bound to draw the initial
presumption that the negotiable Instrument was made for consideration when its execution is proved. it throws the
burden of proof of want of consideration on the defendant. Similarly Section 102 of the Evidence Act throws the
burden of proving want of consideration on the defendant for if no evidence was produced by either side and the
execution of the document being admitted, the plaintiffs claim would be decreed. When the Court below decided
that the defendant had failed to prove that the Promissory note was obtained from him under threat and coercion it
was unnecessary to consider whether the plaintiff had proved Passing of consideration or not. The execution of the
hand-note having been admitted, it was not necessary for the plaintiff to prove passing of consideration. The
presumption under section 118 of the Negotiable Instruments Act, continued in all its rigour until the contrary was
proved.1
PromIssory note—If signatures are admitted, the burden is on the defendant to show that he signed
on a blank paper—Section 118, Negotiable Instruments Act.—
Correct principle is that in a case where defendant takes the plea of signature or thumb-impression
on a blank paper, burden lies on plaintiff to prove execution of promissory note by the defendant
whereafter onus shifts to the defendant to prove that there was no consideration for such document in view
of presumption of law under Section 118(a) of the Negotiable Instruments Act. Defendant can rebut such
presumption either by direct evidence or by circumstantial evidence as has been held in Mahanta Shri Ram
Dayaiu
Das
Babaji
v.
Dukha Jerta.2
Where signature on pronote is admitted there is presumption of consideration having passed.—
Sectlon 118(a) of the Negotiable Instruments Act provides that every negotiable instrument was
made for consideration. A promissory note is a negotiable instrument. When execution of the promissory
note is admitted or duly proved, the presumption arising under Section 118(a) of the Negotiable
Instruments Act is that the hand-note is fully supçorted by the consideration mentioned therein.3 As it is
proved that the defendant had duly executed the suit promissory note Ext. 1, so there is a presumption
under Section 118(a) that the same is fully supported by conscideration. According to the defendant, none
else was present when he borrowed the amount under the suit promissory note. Apart from the presumption
under Section 118(a) of the Negotiable Instruments Act available to the plaintiff, the evidence of the
plaintiff that on 20-4- 1975 he had advanced Ps. 10,000/- to the defendant, on the defendant executing the
suit promissory note, Ext. 1 in his favour, has not been shaken in cross-examination and sounds quite
convincing.4
Payment through Hundies which were accepted but later refused—Transaction behind Hundies
could not be gone into.—
As mentioned above all the Hundies in question in these suits were drawn in favour of the State
Bank of India and were endorsed to the respondents by the Bank. Moreover, the respondents have based
their claims on the Hundies and have not alternatively claimed the prices of the goods. which obviously
they could not have done as in the present cases, the option to fall back on the original contracts was not
reserved. The ratio of the decision in Dhiraj Lat v. Sir Jacob Behreris & Sons,5 is, therefore, clearly
applicable to the facts of the present case.
1. Ram Raja Ram v. Dhruba Charart .Jeriu. AIR 1982 Oil 264 at p. 265.
2. ILR 1965 Cut 445; Sri Khetram.ohan Ray v. Udayanarayczn Panda, AIR 1991 On 25 at p. 28.
3. See Macian Mohan Jena v. Srlnath Sanal, AIR 1973 On 22.
4. Mani CftaranPari1grahv. Radhamadhcth Pande, AIR 1991 On 248 at p. 250.
5. AIR I933A1174.
In the ultimate analysis the learned Judge spelt out their view of the case as follows.
“The draft was drawn in favour of the Chartered Bank, and it was the Chartered Bank who had in the first
instance a right to recover the sum due on the draft from the acceptor. Had the Bank sued on the acceptance, clearly
the acceptors could not have pleaded that under an agreement between themselves and a third party, namely, the
sellers of the goods, they had a right to refer the matter to arbitration. No question as to the nature of the goods arose
between the present appellants and the Chartered Bank, and there was no agreement between them containing any
clause authorising a reference to arbitration. The Chartered Bank endorsed the bills of exchange to the plaintiffs and
the plaintiffs in bringing this suit on the basis of the bills of exchange are in the position of the Chartered Bank, and,
therefore, entitled to frame their suit accordingly. Their position in this respect is the same as that of a total stranger
to whom the Bank might endorse the bills. A suit brought by them for the price of the goods will bring into
operation the arbitration clause of the agreement between themselves as sellers and the defendants as buyers. But
there is no arbitration clause which can come into force as between the plaintiffs as holders and the defendants as
acceptors of the bills of exchange.”
Presumption of payment Section 118, Negotiable Instruments Act.—
In this connection learned Counsel for appellant has cited the decision In Kunclan Lal Ballaram v.
Custodian. Evacuee Property.2 The Supreme Court held that the presumption under Section 118 of the Negotiable
Instruments Act Is one of law and there under a Court shall presume inter alia that the negotiable Instrument or the
endorsement was made or endorsed for consideration, The burden of proof of failure of consideration is thrown on
the maker of the note or the endorser, as the case may be. The evidence required to shift this burden need not
necessarily be direct evidence i.e. oral or documentary evidence or admissions made by opposite-party. It may
comprise circumstantial evidence or presumption of law or fact. In the case before the Supreme Court the plaintiff
sued on a promissory note, the consideration of which represented the price of goods sold to the defendant. Plaintiff
was in possession of the relevant account books regarding the sale of goods. The Supreme Court observed that the
burden was on the plaintiff to produce the said account books and if those books are withheld, the Court can draw a
presumption under Section 114 of the Evidence Act to the effect that, if produced, the documents would be
unfavorable to plaintiff. The Supreme Court observed that this presumption, ii raised by a Court, can under certain.
Circumstances rebut the presumption of law raised under Section 118 of the Negotiable Instruments Act. The
principle laid down by the Supreme Court in the aforesaid decision is not applicable to the present case. 1
1.
2.
MIs. Klshan Swaroop, Ashok Kwnnrv. Podar Mills LtcL, 1986 (3) Born CR 1 at p. 10.
AIR 1961 SC 1316.
Law does not require that the pronote should recite the consideration_Section 118, Negotiable
Instruments Act.—
A ‘promissory note’ is, therefore, an unconditioual undertaking and a ‘bill of exchange’ is on
unconditional order to pay a certain sum of money. The law required that both should be signed by the
maker. But the law does not require that a negotiable instrument should recite the consideration for which it
is made or drawn. The law does not also require the person suing on the instrument to allege the
consideration for which it was made or drawn.2
“Until contrary is proved”—Meaning of_Section 118, Negotiable Instruments Act.—
Wanchoo, C.J. In Heerachand v. Jeevraj.3 (supra) after referring to the definition of the words ‘proved’
and ‘disproved’ observed (at page 4, para 19):
“Applying this definition to the principle behind the presumption in Section 111(a) the principle comes to
this. The Court shall presume a negotiable Instrument to be for consideration unless and until after considering the
matters before it, it either believes that the consideration does not exist or considers the non-existence of the
consideration so probable that a prudent man ought, under the circumstances of the particular case, to act upon the
supposition that the consideration does not exist.” (Italics supplied).
Wanchoo, C.J. pointed out that If the preponderance of probabilities was to be assessed, the entire
‘circumstances of the particular case’ had to be considered and the evidence of the plaintiff and of the defendant
could not be considered in separate ‘water-tight’ compartments. It is not permissible to merely reject the plaintiffs
case on one side and then separately reject the defendant’s case, and again come back to Section 118(a). Thus for the
purpose of the words ‘unless the contrary is proved’, It Is permissible to look into the preponderance of probabilities
and the entire ‘circumstances of the particular case4
1.
2.
3.
V.0. Devassy v. Perlyar Credits, AIR 1994 Ker 405 at p. 411.
Manyam Janakal aks hint v. Manyam MadJiva Rao, AIR 1973 AP 103 at p. 110.
AIR1959RaJ1(FB).
Once the plaintiff pleads consideration different from the one found In negotiable Instrument, the statutory
presumption does not arise. Under Section 118(a) of the Act, until the contrary is proved, presumption shall be made
that every negotiable instrument was made for consideration. Once there is admission of the execution of the
promissory or the same is proved to have been executed, the presumption under Section l18(a) is raised that it is
supported by consideration. That initial presumption will not be available to the plaintiff in this case.
Since the respondent had delivered possession of 3 acres 44 cents of land and the building to the appellant
which is In addition to the lands covered under agreement of sale, the possession of land having been passed Into the
hands of the appellant and since in consideration thereof he had executed promissory note, it is supported by legally
enforceable consideration. Therefore, the decree granted by both the Courts below in that behalf is not beset with
illegality warranting Interference,1
“Payment in due course’-Section 85 and 118, Negotiable Instruments Act.—
In regard to Section 85 of the Negotiable Instruments Act, 1881 (26 of 1881) and the decision of
Jayjiva JJamnajo, v. Nagar Central Bank Ltd,,2 which is founded on that section upon which reliance was
placed before the High Court, it is sufficient to say that before the provisions of Section 85 can assist the
Bank, It had to be established that payment had In fact been made to the firm or to a person on behalf of the
firm. Payment to a person who had nothing to do with the firm or a payment to an agent of the Bank would
not be a payment to the firm. Section 118 of the Negotiable Instruments Act on which also reliance was
placed before us does not have any bearing upon the case at all. 3
Burden of proof—Sectjo 118, NegotIable Instruments Act. —
Section 118, N.I. Act lays down a special rule of evidence applicable to negotiable instruments.
The presumption is one of law and thereunder a Court shall presume, inter alia, that the negotiable
instrument or the endorsement was made or endorsed for consideration. In effect it throws the burden of
proof of failure of consideration on the maker of the note or the endorser, as the case may be. The question
is, how the burden can be discharged ? The rules of evidence pertaining to burden of proof are embodied In
Chapter VII of the Evidence Act, The phrase “burden of proof’ has two meanings_one the burden of proof
as a matter of law and pleading and the other the burden of establishing a case; the former is fixed as a
question of law on the basis of the pleadings and is unchanged during the entire trial, whereas the latter is
not constant but shifts as soon as a party adduces sufficient evidence to raise a presumption in his favour.
The evidence required to shift the burden need not necessarily be direct evidence, Le., oral or documeny
evidence or admissions made by opposite-party; it may comprise circumstantial evidence or presumptions
of law or fact. Under Section 114 of the Evidence Act, “The Court may presume the existence of any fact
which it thinks likely to have happened, regard being had to the common course of natural events, human
conduct and public and private business, in their relation to the facts of the particular case.” Illustration (g)
to that section shows that the Court may presume that evidence which could be and is not produced would,
if produced be unfavourable to the person who withholds it. A plaintiff, who says that he had sold certain
goods to the defendant and that a promissory note was executed as consideration for the goods and that he
is in possession of the relevant account books to show that he was in possession of the goods sold and that
the sale was effected for a particular consideration, should produce the said account books, for he is in
possession of the same and the defendant certainly cannot be expected to produce his documents. In those
circumstances, if such a relevant evidence is withheld by the plaintiff, Section 114 enables the Court to
draw a presumption to the effect that, if produced, the said accounts would be unfavourable to the plaintiff.
This presumption, if raised by a Court, can under certain circumstances rebut the presumption of law raised
under Section 118 of the Negotiable Instruments Act. Briefly stated, the burden of proof may be shifted by
presumptions of law or fact, and presumptions of law or presumptions of fact may be rebutted not only by
direct or circumstantial evidence but also by presumptions of law or fact. This Court is not concerned here
with irrebuttable presumptions of law.1
Payment by Bundles—Basis of Hundies (contract) not to be looked into.—
The decision of the Allahabad High Court in Dirty Lat v. Sfr Jacob Behrerts & Sorts,2 is more to
the point. In that case the parties had entered into an agreement known as ‘C.l.F.’ contract in terms of
which the defendant-appellants purchased cloth from the plaintiffs. Several orders were placed by the
defendant-appellants with the respondents and the respondents despatched goods after the bills of
exchange. drawn by the respondents directing the appellants to pay to the Chartered Bank of Cawnpore a
sum representing the cost of goods, freight and insurance etc. were accepted by the appellants but when the
time came for honouring the accepted bills and taking delivery of the goods the appellants refused to do so
and hence the respondents instituted a suit for recovery of the amount due on bills of exchange accepted by
the appellants. The appellants relying on a clause in the agreement applied under Section 19 of the
Arbitration Act for stay of the suit. The trial Judge rejected the application on various grounds, one of
which was that the suit was based on accepted bills of exchange and was not a suit for price of goods
delivered, under the contract which contained the arbitration clause.
1.
2.
Kundan Lal v. Custodian, Evacwe Property, AIR 1961 SC 1316 at pp. 1318, 1319; HIralal V.
Badkulal, AIR 1953 SC 225; NarayanaRo.ov. VenJcatapayya. AIR 1937 Mad 182—Relied on.
AIR 1933A1174.
As mentioned above all the Hundies In question in these suits were drawn in favour of the State
Bank of India and were endorsed to the respondents by the Bank. Moreover the respondents have based
their claims on the Hundies and have not alternatively claimed the price of the goods, which obviously they
could not have done as in the present cases, the option to fall lack on the original contracts was not
reserved. The ratio of the decision in DhiraJ Lal v. Sir Jacob Behrens & Sons,1 is, therefore, clearly
applicable to the facts of the present case.2
The plaintiffs point is that by virtue of the separate registered sale deed he came to be the holder of
the suit promissory note and, therefore, entitled to a decree. There appears to be some misconception In the
mind of the Courts below that endorsement is the only means by which a negotiable instrument can be
transferred. Indeed Chapter 4 of the Negotiable Instruments Act deals with the manner of the negotiation of
these instruments. In the ordinary way under Section 48 of the Act, a hand-note would be negotiated by
endorsement and delivery thereof; a promissory note endorsed in blank or a promissory note to the holder
or bearer, Is negotiated in simpter fashion, but the Negotiable Instruments Act Itself does recognise that
negotiable Instruments may be transferred and for consideration otherwise than by negotiation. A transfer
of a promissory note by means of a registered instrument is valid. Thus, where the holder of a promissory
note sells his right, title and Interest in the note to another but without endorsing it, the assignee Is within
the definition of ‘holder’ in Section 8 of the Negotiable Instruments Act quoted above. He can, sue in his
own name and he is entitled In his own name to possession, and to receive or recover the amount due on
the hand-note from the parties thereto. The difference between transfer by assignment, and a transfer by
endorsement and delivery Is, that In former case the transfer is subject to all the equities, whereas in the
latter It is not.3
Consideration was passed on the promissory note—Presumption of.—
In order to prove execution apart from the evidence of the plaintiff as P.W. 2, the scribe was
examined as P.W. 1 and he would state that the consideration was passed and the defendants subscribed
their signatures on the promissory note. P.W. 3 attestor was also examined. The trial Court has correctly
appreciated that due to misunderstanding between the brother and the sister D.W. 2 deposed against his
own brother. Having got the promissory note from the defendants and assigned In favour of the plaintiff
now D.W. 2 has come forward to say that It was not supported by consideration. Since the execution is
proved by all means, the legal presumption that consideration was passed on the promissoly note when
execution is proved.1
1.
2.
A1R1933A1174.
MIs. Klshan Swaroop Ashok Kumar v. Podar Mills Ltd., AIR 1987 Born 198 at pp. 203, 204, 205
; Commissioner of Income Tax, Bombay v. Ogale Glass Works, AIR 1954 Sc 429; Ruin Lal
Onkarmnl Finn v. Mohwi LaL Rice & Atta Mills, AIR 1965 Sc 1679—Followed ; Pench Velly
Coal v. Ihdlan Cable Co., AIR 1975 Cal 284—Dissented from.
3.
Ghanashyain Das v. Ragho Sahu, AIR 1937 Pat 100 (FB) ; Surath Cho,ndra Saha v. Krlpanath
Choudhury, AIR 1934 Cal 549; Naraslngha Panda v. N. NarustrnM Murty, AIR 1966 On 194 at
p. 195.
There is a statutory preswnptiOfl of consideration in respect of promissory note.—
Courts agree with the finding of the Trial Court that the pronote, dated August 26, 1971, was
executed with full consideration. The defendants knowingly and with full knowledge had executed the
pronote. In the facts and circumstances of the case, there was no necessity of going Into the question of
novation of contract as contemplated under Section 62 of the Indian Contract Act. The defendants had
executed the pronote and also created an equitable mortgage in favour of the Bank and the pronote itself
contained the endorsement ‘for value received’.
There is also a statutory presumption of consideration in respect of the promissory note under
Section 118 of the Negotiable Instruments Act, 1881.2
Once there is admission of execution of the promissory note, the presumption will be of consideration
–
Once the plaintiff pleads consideration different from the one found in negotiable instrument, the
statutory presurpptioflS does not arise. Under Section 118 (a) of the Negotiable Instruments Act until the
contrary is proved, presumption shall be made that every negotiable instrument was made for
consideration. Once there Is admission of the execution of the promissory or the same is proved to have
been executed, the presumption under Section 118 (a) is raised that it Is supported by consideration. That
initial presumption will not be available to the plaintiff in this case.
As seen, the findings of the trial Court as well as the appellate Court is that valid consideration
was passed for a sum of Rs. 1.50/- lakhs. Since the respondents had delivered possession of 3 acres 44
cents of land and the building to the appellant which is in addition to the lands the possession of land
having been passed into the hands of the appellant and since in consideration thereof he had executed
promissory note, it is supported by legally enforceable consideration. Therefore, the decree granted by both
the Courts below in that behalf is not set aside with illegality warranting interference 3
Once It is admitted that the defendant has signed the promissory note, his liability cannot be
denied. In Chici.o.rnbram v. P.T. PonnusWTtY,4 this Court has held that:
“from a reading of the above
section, it is clear that Section 20
of the Negotiable Instruments Act is itself authority to the holder of inchoate stamped and signed
instrument to nil up the blanks and to the negotiable instrument, The instrument may be wholly blank or
incomplete in particular and in either case the holder has the authority to make or complete the Instrument
as a negotiable one”.
The defendant having admitted in clear categorical terms both in the written statement and in the
evidence that he only signed the promissory note the suit must have been decreed by the Court below. 1
1.
2.
3.
4.
N. Abdul Azeez v. S. MohwneCI Hanifa, AIR 1997 Mad 1 at pp. 2, 3.
Indian Bank V. K. Nato.rajCl Pttla{, 11(1995) BC 299 at p. 304 (SC).
K.P.O. MoideertkUttY Hajee v. Pappu Mar!jooran. AIR 1996 SC 3356 at pp. 3359, 3360.
1995 (2) Law Weekly at page 719.
Sections 44 and 45 of the Negotiable Instruments Act deal with partial absence or failure of money
consideration –
Section 92 of the Evidence Act excludes evidence of oral agreement. The section bars adducing of
any evidence, either oral or documentary, which contradicts, varies, adds or substracts from the terms of the
written instrument. But, Proviso Ito that section enables a party to the document to prove and fact which
may invalidate the document, and one such circumstances is, failure of consideration for the contract or
agreement. A reading of Section 92 also makes it clear that the evidence is a bar only if it is in the nature of
any oral agreement or statement which contradicts, varies, adds or substracts the terms of the written
instrument. If the defendant pleads that a particular statement in the document is not correct, that is not a
piece of any oral agreement or statement. Alongwlth Section 92, two sections of the Negotiable Instruments
Act are also relevant in this case. They are SectIons 44 and 45 of the Act. Section 44 deals with partial
absence or failure of money consideration.
There is also an explanation to that section which deals with who are immediately parties to the
document. In the case of a promissory note, bill of exchange or cheque, the maker stands in immediate
relation with the payee. Section 45 deals with partial failure of consideration not consisting of money. In
this case, Courts are not concerned with Section 45, and hence the same is not dealt with. In view of the
statutory recognition that there can be partial absence or failure of money consideration in a promissory
note and the further recognition that a decree will be granted only for the actual amount received, it
necessarily follows that the defendant will be entitled to plead and prove that the promissory note, though
executed for a larger amount, is not supported by consideration to the full extent and, therefore, there is a
failure of consideration. He can further contend that the plaintiff is entitled to receive only the actual
amount paid. The question whether that contention could be accepted or not is a matter for appreciation of
evidence.
Defendant has no case that the promissory note was executed under compelling circumstances. In
the pleadings, the only statement made is that though he executed the promissory note for Rs. 15,000/- he
received only Rs. 5,000/-. He has not even stated that he was asked by the plaintiff to execute such a
document. Even in the acknowledgement he is not challenging the correctness of his statement In the
promissory note. When the suit notice was issued, even that was not replied. When he was examined as
DW- 1 his only statement was that the promissory note was executed for Rs. 15,000/- taking into
consideration the future interest payable and also according to local custom (few words in regional script).
Even at the time he was examined, he has no case that there was no transaction between him and the
plaintiff and his relationship is that of a borrower and a professional money-lender. If the promissory note
was executed by him voluntarily under Section 118 of the Negotiable Instrurnents Act, taken alongwith the
admission in the promissory note that he has received Rs. 15,000/- it will have to be accepted, unless the
admission is found to be withdrawn by proper evidence. The burden on the defendant is very heavy. That
burden has not been discharged by any evidence. The evidence of DWs 2 and 3 is of no use in so far as that
part of the case of the case of the defendant is concerned,. They cannot have a better case than the
defendant himself and, in fact, they are incompetent to prove the factum of consideration. No other
circumstance has also been pleaded In the this case to invalidate the case of the plaintiff. The lower
appellate Court has strained itself to come to the conclusion that the amount of Rs. 15,000/- might have
been Incorporated taking into consideration the interest payable at 24% per annum.
The case was developed only at the time he was examined, by deposing that the amount was
arrived include interest and also according to local custom. To prove the local custom, no attempt was
made. DW-2 and DW-3 are persons claiming under the defendant, and DW-2 is really a person employed
by defendant. The lower appellate Court fully believed their evidence, when the same has not even been
placed by the defendant. If a circumstance invalidating the document is brought out, it must have been
pleaded initially. Without pleading, such evidence should not have been let in, In this case. The lower
appellate Court acted illegally in, accepting that part of the evidence.
The decree of the lower appellate Court is liable to be set aside and that of the trial Court is to be
restored.1
4.2.2
CONSIDERATION—PRESUMPTION IS REBUTIABLE
Where execution proved or admitted, burden to prove lack of consideration Is on the executant,
which can be discharged by preponderance of circumstances—Section 118, Negotiable Instruments
Act.—
Section 118 of the Negotiable Instruments Act is mandatory in nature, though it deals with a
presumption. A presumption has always a limitation In the sense that only in very exceptional cases, there
will be an Irrebuttable presumption. It is difficult to say that the presumption in Section 118 of the
Negotiable Instruments Act is a presumption against which no evidence can be adduced in order to take
away the rigour of the presumption. In other words, it is a rebuttable presumption but imperative in its
terms and so, the presumption under it continues with all its rigour until the contrary is proved. The reason
for the presumption is that a negotiable instrument passes from hand to hand on endorsement and it would
make trading very difficult and the negotiability of the instrument impossible, unless such a presumption
was made. Passing of consideration must be presumed in a negotiable instrument then alone the instrument
can earn the hall-mark of negotiability. Such a presumption has, therefore, to be made. So the principle Is
embedded as a rule of equity, justice and good conscience and it Is said so by Courts even where a
presumption under the Act as such was not available.
When once the Court finds that the defendant has executed the promissory note, then the burden is
on the defendant to prove that there is no consideration. True, the initial burden rests on the plaintiff, who
has to prove that the promissory note is executed by the defendant. If there is an admission by the
defendant, certainly there is no burden on the plaintiff to prove the execution of the promissory note. But, if
the plaintiff discharges his burden in regard to the execution of the promissory note, then the plaintiff is in
the same position where the defendant has admitted the execution of the promissory note and the effect and
result Is that the burden to prove lack of consideration is then with the defendant,’
Presumption of payment of consideration rebuttable__Defen.. dant has only to prove preponderance
of probabilities that consideration did not pass—flu then presumption Continued “until the contrary
Is proved” explaIned__Section 118, Negotiable Instruments Act.—
In the present case, the plaintiff pleaded that the defendant borrowed a sum of Rs. 10,000/- under
one promissory note dt. 1-8-1972 (Ex. A-i) and another sum of Rs. 5,000/- (Ex. A-3) on the same day
under another promissory note. The plaintiff claimed likewise in the suit notice, Ex, A-5, dt. 10-10-1973
claiming the above sums and another sum of Rs. 1,500/- said to have been borrowed earlier. The defence
was that no amounts were borrowed as stated above but that the plaintiff was a pauper and had no means to
lend the amounts. It was further contended that the plaintiff and defendant were close friends having joint
business, that the defendant was the financial investor and plaintiff was paid monthly remuneration, that the
plaintiffs parents did not approve of the job and, therefore, the plaintiff represented to his parents that his
monies were invested with the defendant and that, therefore, the plaintiff obtained these promissory notes
from the defendant. These notes were not supported by any consideration.
Section 118 of the Negotiable Instruments Act insofar as it is material for this discussion states
that “until the contrary is proved’ a presumption shall be made that every negotiable instrument was made
or drawn for consideration and that every such instrument, when it has been accepted, endorsed, negotiated
or transferred for consideration.
1. Martmuthu Kouji4erv. Radhakrjsjijtaz AIR 1991 Ker 39 at pp. 40, 41.
In Jarraka Lakshmfs case,1 (supra) the learned Judges came to the conclusion that the appellant’s case of
her signatures being taken on blank papers was not true but, at the same time, It was established that the appellant
was not in need of money and the plaintiffs case of cash consideration for the pronotes was not true. But the learned
Judges Chinnappa Reddi, J., (as he then was) and A.D.V. Reddy. J., held following the Bombay ruling in Tar
Mohammects case,2 (supra) decided by Chagla, C.J. and Bhagwati, J., that ‘until it was proved that there was no
consideration’ the presumption under Section 118 operated and that unless that was done, it could not be said that
the ‘contrary was proved’ by the defendant. As the presumption under the section is in favour of there being
consideration for the promissory note and not that it was supported by any particular type of consideration, they held
that the presumption prevailed-notwithstanding the rejection of the defendant’s story and of the plaintiffs story as
well as the suit was liable to be decreed. It was observed that the burden of proving that there was still, ‘no
consideration’ continued to be on the shoulders of the defendant.
Following the reasoning given by Wanchoo, C.J. and Varadachariar, J., and Lord Diplock in the above
cases as to the meaning of the words ‘until the contrary is proved’ used in Section 118 of the Negotiable Instruments
Act, this Court holds, on a consideration of Sections 3, 4, 101 to 104 of the Evidence Act that the Court, while
dealing with the question as to whether the contrary, namely the absence of consideration, has been proved by the
defendant shall have to consider not only whether, it believes that consideration does not exist, but also whether it
considers the nonexistence of consideration so probable that a reasonable man ought, under the circumstances of the
particular case, to act upon the supposition that the consideration does not exist. That is the conclusion which this
Court comes to on a consideration of the relevant statutory provisions.
The decision of the Supreme Court in Kundan Lal v. Custodian Evacuee Property,3 is clear authority for
the proposition that once the defendant shows either by direct evidence or circumstantial evidence or by use of other
presumptions of law or fact that the promissory note is not supported by consideration, in the manner stated in the
promissory note or in the manner stated in the suit notice or in the pleading, the evidential burden shifts to the
plaintiff and the legal burden of the plaintiff is revived, Le., to prove that the promissory note is supported by
consideration and at that stage, the presumption of law covered by Section 118 ‘disappears’ and no longer subsists.
This is because the presumption under Section 1 18 raised by the statute initially in favour of the plaintiff steps, as it
were, into the witness-box and acts as a substitute for the plaintiffs evidence. Once such rebuttal evidence is given
by
the
defendant
1.
2.
3.
AIR1973AP1O3.
AIR l949Bom257.
AIR 1961 Sc 1316.
to the satisfaction of the Court, the Court acting on a preponderance of probabilities and not requiring an absolute
proof of a negative i.e., absence of all conceivable forms of consideration, the effect of the presumption shifting the
initial evidential burden to the defendant ‘disappears.’
From the aforesaid authorities, it may be concluded once the defendant adduces evidence to the satisfaction
of the Court that on a preponderance of probabilities there is no consideration in the manner pleaded in the plaint or
suit notice or the plaintiffs evidence, the burden shifts to the plaintiff and the presumption ‘disappears’ and does not
haunt the defendant any longer.
Having referred to the method and manner in which the presumption under Section 118 is to be rebutted
and as to how, it thereafter ‘disappears’ reference may be made to three principles which are relevant in the context.
The first one is connected with the practical difficulties that beset the defendant for proving a negative, namely that
no other conceivable consideration exists, Negative evidence is always in some sort circumstantial or indirect, and
the difficulty of proving a negative lies In discovering a fact or series of facts inconsistent with the fact which this
Court seeks to disprove (Gulson, Philosophy of Proof, 2nd Edition, p. 153 quoted In Cross on Evidence, 3rd Edn.,
page 78 Fn).
In such situations, a lesser amount of proof than is usually required may avail. In fact, such evidence as
renders the existence of the negative probable may shift the burden on to the other party (Jones, quoted In A Sarkar
on Evidence, 12th Edition, p. 870). The second principle which is relevant in the context is the one stated in Section
106 of the Evidence Act. That section states that when any fact is especially within the know!edge of any person, the
burden of proving that fact is upon him, It is very generally stated that, where the party who does not have the
evidential burden, such as the plaintiff in this case, possesses positive and complete knowledge concerning the
existence of fact which the party having the evidential burden, such as the defendant in this case, is called upon the
negative or has peculiar knowledge or control of evidence as to such matters, the burden rests on him to produce the
evidence, the negative averment being taken as true unless disproved by the party having such knowledge or control.
The difficulty of proving a negative only relieves the party having the evidential burden from the necessity of
creating a positive conviction entirely by his own evidence so that, when he produces such evidence as It is in his
power to produce, its probative effect is enhanced by the silence of the opponent (Corpus Juris, Vol. 31. para 113).
The third principle that has to be borne In mind is the one that when both parties have led evidence, the onus of
proof loses all importance and becomes purely academic. Referring to this principle, the Supreme Court stated In
Narayan v. Gopal.’ as follows:
1.
AIR 1960 SC 100.
“The burden of proof Is of importance only where by reason of not discharging the burden which was put
upon It, a party must eventually fail. Where, however, parties have joined issue and have led evidence and the
conflicting evidence can be weighed to determine which way the issue can be decided, the abstract question of
burden of proof becomes academic.”
These three principles are Important and have to be borne in mind by the Court while deciding whether the
initial ‘evidential burden’ under Section 118 of the Negotiable Instruments Act has been discharged by the
defendant and the presumption ‘disappeared’ and whether the burden has shifted and later whether the plaintiff has
discharged
the
‘legal
burden’
after
the
same
was
restored.
Where in a suit on a promissory note, the case of the defendant as to the circumstances under which the
promissory note was executed is not accepted, it is open to the defendant to prove that the case set up by the plaintiff
on the basis of the recitals In the promissory note, or the case set up In suit notice or in the plaint is not true and
rebut the presumption under Section 118 by showing a preponderance of probabilities in his favour and against the
plaintiff. He need not lead evidence on all conceivable modes of consideration for establishing that the promissory
note
is
not
supported
by
any
consideration
whatsoever.
The words ‘until the contrary is proved’ In Section 118 do not mean that the defendant must necessarily show that
the document Is not supported by any form of consideration but the defendant has the option to ask the Court to
consider the non-existence of consideration so probable that a prudent mnought, under the circumstances of the case,
to act upon the supposition that consideration did not exist. Though the evidential burden is Initially placed on the
defendant by virtue of Section 118 It can be rebutted by the defendant by showing a preponderance of probabilities
that such consideration as stated in the pronote, or in the suit notice or In the plafnt does not exist and once the
presumption is so rebutted, the said presumption ‘disappears’. For the purpose of rebutting the Initial evidential
burden, the defendant can rely on direct evidence or circumstantial evidence or on presumptions of law or fact. Once
such convincing rebuttal evidence is adduced and accepted by the Court, having regard to all the circumstances of
the case and the preponderance of probabilities, the evidential burden shifts back to the plaintiff who has also the
legal burden. Thereafter, the presumption under Section 118 does not again come to the plaintiffs rescue. Once both
parties have adduced evidence, the Court has to consider the same and the burden of proof loses all its importance. 1
Presumption under the Negotiable Instruments Act.—
When once, the execution are either admitted or proved then the presumption arises under the
Negotiable Instruments Act the promissory notes are supported by consideration, the burden shifts on to the
defendants to prove that the promissory notes are not supported by consideration.1
1.
G. Vasuv. SydYaseenSatfuddtnQuadrLAlR 1987AP 139 at pp. 141, 142, 146, 147, 148, 149.
STAMPS
Cancellation of stamps can be by any means In an effectual manner—Section 12 of Stamps Act. —
The learned Counsel for the 2nd respondent strenuously contended that drawing two lines across
the stamps is not sufficient cancellation according to law. Section 12 of the Stamp Act deals with
cancellation. Section 12(3) of the Stamp Act reads thus:
“(3) The person required by sub-section (1) to cancel an adhesive stamp may cancel it by writing
on or across the stamp his name or initials or the name or initials of his firm with the true date of his so
writing or in any other effectual manner.”
Even according to this provision cancellation by writing the signature or initials is not the only
way of cancelling the stamp. Cancellation must be done in an effectual manner. Writing the name or initials
is one such effectual manner Indicated in Section 12(3) of the Act. There could be other effectual ways In
which stamps could be cancelled. The purpose of cancellation is to see that the stamps are not used again as
is mentioned In Section 12, clauses (1)(a) and (b) of the Stamp Act, where it is stated ‘cancel the same so
that it cannot be used again”. Learned Counsel for the second respondent pointed out that where one or two
parallel lines are drawn across the stamps, it is still possible for somebody to put his signature above the
line to make it appear that the stamp was being cancelled for the first time and in such case it cannot be said
to be an effectual cancellation and, therefore, drawing a line or two In that fashion cannot be said to be
effective cancellation. It is difficult to agree with this submission. The expression “so that it cannot be used
again” only means that it cannot be used again in the normal course without realising that the stamp has
already been cancelled. The expression does not imply that the cancellation must be made in such a way as
to make it impossible for any dishonest person to use the same once again fraudulently. The test to see if a
stamp has been effectually cancelled is to see whether an ordinary, honest, law-abiding citizen would on
seeing the stamp believe that it Is already cancelled and, therefore, refrain from using it or would believe
that it has not already been used and, therefore, would proceed to use it once again in the view of the
authorities collected at pages 196 and 197 of the Indian Stamp Act by K. Krishnamurthy and R.
Mathrubutham 1980, Edn. The learned authors refer to various decisions in the following manner:
‘On the other hand, it has been held that the words “so that It cannot be used again” do not imply
such a degree of cancellation as would make it impossible for any dishonest person to make thereafter a
fraudulent use of stamp. The criterion for determining whether a stamp has been effectually cancelled is
whether the ordinary conscientious man would, on seeing the stamp come to the conclusion that it has been
already used. The question Is one that depends on the facts of each case. Thus cancellation of the stamp by
drawing diagonal lines across It, their ends extending to the paper, would be sufficient. Drawing lines
across an adhesive stamp Is a good cancellation provided an intention to cancel Is clear from what has been
done. So also the drawing of two lines crossing each other across the face of the stamp. Also the drawing of
two parallel lines on the three stamps affixed to a promissory note where a perusal of the note showed that
the intention to cancel was clear.
Promissory note and question of correctly stamped.—
The lower Court held that the suit promissory note should be stamped as a bond and being a
pronote payable otherwise on demand and not having been properly stamped, cannot be admitted in
evidence. On that view, the petition was allowed. Aggrieved by the said order, the present civil revision
petition has been filed before this Court.
A bare reading of the promissory note would clearly show that the suit promissory note Is only
payable on demand and that it will not come under the definition of Article 49 (2) of the Indian Stamp Act
and as contended by the revision petitioner, for determining the issue whether suit promissory note Is one
payable on demand or otherwise the contents of the promissory note alone have to be looked into and
extraneous evidence cannot be let into determine the character of the promissory note.
Under Section 4 of the Negotiable Instruments Act, a promissory note is an Instrument in writing
(not being a Bank note or a currency note), containing an unconditional undertaking, signed by the maker,
to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
In the present case, no period for demand was fixed under the promissory note. Therefore, the decisions
relied on and referred to by the Court below are not applicable to the facts of the present case. The
promissory note in question Is correctly stamped according to the provisions contained In Article 49 (a) of
the Stamp Act.2
K.A. Lona v. MIs. Dada Haji Ibrahim Hi! an & Co.. AIR 1981 Ker 86 at pp. 95,96.
1.
Sree Visalam Chit Funds Ltd. v. TV. Kuinar, 11(1997) BC 259 at pp. 260, 261.
Unstamped pronote Is admissible.—
The document is a pronote and when the pronote is unstamped, it is Inadmissible In evidence
under Section 35 of the Indian Stamp Act.
When the document is not a promissory note, then such a document can be admissible in evidence.
Therefore, the trial Court has acted illegally and with material Irregularity In treating the document
inadmissible in evidence for want of sufficient stamp and the finding regarding the nature of the document
to be pronote is set aside.3
1.
2.
3.
4.
AIR 1969SC 1238.
Alert Co-operative Bo.rLk LtCL v. R. H. Windsor (I) Ud., AIR 1988 Born 352 at p.353.
ManglZal
v.
L.R’s
of
L1
Cho.nd,
AIR
1995
Raj
189
at
p.
192.
Choodo.no.tha Setty v. Gopalachetty, 1(1996) BC 238 at p. 241 (Kant).
A promissory note otherwise not admissible in evidence for want of sufficient stamps cannot be
subsequently altered to make It appear to be admissible In evidence by adding stamps.—
It can be said to have been established that a promissory note otherwise not admissible in evidence
for want of sufficient stamps cannot be subsequently altered to make it appear to be admissible in evidence
by adding stamps and cancelling by drawing lines. The question, therefore, will be how and when the lines
are drawn and if the lines are drawn for cancellation at the time of execution of the promissory note, there
can be nothing against the plaintiff to hold that the promissory note is not admissible because of the same.
The execution of the pronote itself beëomes doubtful in view of this suspicious circumstances.
The promissory note is only marked and it is not exhibited and. therefore, it cannot be said to have
been admitted in evidence.1
The learned Counsel for the revision petitioner submits that he did not dispute that the promissory
note is insufficiently stamped. However, once the document is marked as exhibit and tendered in evidence
it is not open to the parties to raise any objections. He relied upon the decision of this Court in PIUa
Nomsimha Swamy Patrudu v. Bank of Baroda,2 to support his contention. There cannot be any doubt on
the
proposition
of
law set out in the above decision. This ratio is relevant in support of other document. But in the present
case the document in question being a promissory note, the reasoning given in the above decision is not
applicable. The lower Court held that it is not disputed that loan is advanced simultaneously with the
execution of a promissory note and the transact tion forms part of the same action and the plaintiff can sue
only
on
the
promissory
note.
The learned Counsel for the defendant relied on the decision in Bollam Vertkataiah v. V.V.R. Reddy,3
which has a direct bearing upon the facts of the instant case. In this decision the judgment of the Full Bench
of this Court in Lothamasu Sarnbasiva Rao v. Thadwarthi Balakotiah,4 is followed. The learned Principal
District Munsif by relying on the judgment in Bollam Venkataishv. VV.R. Reddy wherein it was held that a
suit based on not duly stamped pronote is not maintainable and dismissed the suit. It is well settled that
when the promissory note is sufficiently stamped it could not be looked into for any purpose. The Full
Bench held.
“A plaintiff can lay an action for recovery of the amount advanced by him basing on the original
cause of action where the suit negotiable instrument becomes.inadmissible in evidence under Section 35. of
the Stamp Act provided there is an allegation in the plaintiff and proof in evidence about the fact that the
promissory note did not incorporate all the terms of the contact of loan and that it was executed as a
conditional payment or a collateral security. If the instrument embodies all the terms of the contract and the
instrument is improperly stamped no suit on the debt will lie. It will be barred by Section 91. Evidence Act
and Section 35 of the Stamp Act. In such a case where there is an express contract and the document is hit
by the provision of Section 35, Stamp Act and Section 91, Evidence Act, Section 70 of the Contract Act
cannot be invoked on the theories of implied promise money had and received, quasi contract and just and
reasonable or unjust enrichment or any other equitable doctrine”.
1. Naranjan Slngh v. Gurdev Sirtgh. 1(1997) BC 45 at pp. 47. 48 (P&H).
2. AIR 1982AP249.
3. AIR 1985AP26.
4. AIR 1973 AP 342.
That being so, the lower Court was right In not agreeing with the plaintiff on this point.’
There is absolutely no dispute that proviso to Section 35 of the Indian Stamp Act 1899 totally prohibits admission of
an unstamped or insufficiently stamped promissory note in evidence even on payment of requisite duty together with
penalty thereon.2
1. Kunduru Setthamrna v. Namana Nageswara Rao, I (1998) BC 176 at p. 177.
2. Dokka Joganna v. Upacl.rasta Chayadevi, I (1998) BC 186 at p. 189.
4.3.
HOLDER IN DUE COURSE
3.
GuntupalU Basavaiczhv. Nalamothu Venkamma, AIR 1967 AP 275 at p. 276.
4.
AIR 1968 Mad 260.
4.3.1
Holder in due course and holder for collection—Difference— Section 9, Negotiable Instruments
Act.—
A holder in due course will be entitled to claim better rights than the transferor ce., any defect in
title of the transferor will not affect the rights of the holder In due course. It is only where the transferee
wants to claim higher rights than the transferor that he must satisfy the requirements of a holder in due
course as laid down in Section 9 of the Negotiable Instruments Act, Le., for consideration he became the
possessor of the instrument from the payee or endorsee before the amount mentioned In It became payable,
and without having sufficient cause to believe that any defect in the title of the transferor existed.
In the instant case, It is not the defendant’s contention that the suit amount or any part of it was
paid to the transferor. Therefore, the transferor herself was entitled to recover the amount due under the
promissory note that being so, the plaintiff-transferee, even though be had not parted with consideration, is
equally entitled to recover that amount. If the endorsement is only for collection, and not for consideration,
there was no need for the plaintiff to have proved that he parted with consideration. 3
Legal representatives of the endorsee can sue—Sections 8 and 50, Negotiable Instruments Act.—
In Karupiah Palukki (died) v. Periasamt4 the Court said: It was contended in defence that as the
note did not pass to V for consideration and Vs authority ceased on Ms death, he could not recover the
money without having obtained Letters of Administration or a succession certificate. The learned Judge
repelling such a contention held, that the note being negotiable, its indorsement followed by delivery
passed the property In it to V and he became holder of it and that, therefore, the payment had to be made to
him. To a similar effect is the ratio in the decision in Mothireddy v. Pothi ReddL1 There, Chandra Reddy,
C.J., held a similar view and expressed In these terms:
“10. Thus, payment to the holder of the Instrument, which Includes an endorsee for collection,
gives discharge to the maker of the promissory note. That being the real position, in my view, the right
based on the endorsement survives notwithstanding the death of the endorser and the endorsee could
continue the suit. The endorsement having been made for a specific purpose, namely, collec tion of the
amount, it will be valid till that purpose is served.”
Even otherwise, the sections In the Negotiable Instruments Act which relate to the subject-matter
under consideration, are too clear to sustain the contention of the learned Counsel for the contesting
petitioners that the original petitioner in this civil revision petition did have cause of action to file the suit,
as he. did notwithstanding the death of the original payee or endorsee. Section 8 of the Negotiable
Instruments Act defines a holder of a negotiable instrument as follows:
“The holder of a promissory note, bill of exchange or cheque means any person entitled to his own
name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such
loss or destruction.”
From the definition itself, it is clear that any person, who is holding a note In his name and in his
cust.ody, or possession thereof is a ‘holder’ of such an instrument. Section 50 dealing with the effect of
indorsement provides as follows:
“50. The endorsement of a negotiable instrument followed by delivery transfers to the indorsee the
property therein with the right of further negotiation but the indorsement may, by express words, restrict or
exclude such right, or may merely constitute the endorsee an agent to indorse the instrument, or to receive
its contents for the indorsee or for some other specified person.”
This section itself contemplates that the endorsement may, by express words constitute the
endorsee as an agent to receive its contents. Therefore, the original special provisions of the Negotiable
Instruments Act, which enables an endorsee to sue on the instrument on the foot of such an endorsement,
create an exception to the ordinary law of agency and the principle adumbrated In the Indian Contract Act
insofar as agency, in general Is concerned and In particular Section 201 thereto, cannot be telescoped Into
this enactment so as to interpret its lntendment.
1.
4.3.2.
AIR1963AP343.
Pronote—Endorsement in favour of A for consideration—Executor and original creditor cannot
deny execution and endorsement—Sections 120, 121 and 122, Negotiable Instruments Act.—
According to the plainiff Ext. Al pronote was executed by first defendant in favour of the second
defendant on 1-3-1978 and the second defendant on 16-10-1979 endorsed it in favour of the plaintiff after
accepting consideration. Both the defendants disputed the genuineness of Ext. Al pronote. But, it is
pertinent to note that the second defendant who allegedly endorsed the pronote in favour of the plaintiff did
not adduce any evidence In support of his contention. He filed a written statement denying the alleged
endorsement in favour of the plaintiff. He contended that Ext. Al pronote was concocted by the plaintiff In
collusion with the first defendant. The proceedings in this case show that the second defendant after filing
the written statement did not participate in the trial of the suit. The plaintiff examined two writnesses. The
plaintiff as PW 1 deposed that he paid valid consideration to the second defendant and got endorsed Ext. Al
pronote. PW 2 deposed that he wrote Ext. Al(a) and, thus, Ext. A1(a) is proved. Both PWs 1 and 2 were not
cross-examined by the second defendant. So, the evidence of these two witnesses regarding Ext. A1(a)
endorsement Is unchallenged. The lower appellate Court found fault with the plaintiff for not examining
second defendant as a witness of the plaintiff. It is true that in a case where the indorser supported the
indorsee regarding the execution of the pronote, his evidence would be material. But, this is a case where
the Indorser specifically alleged that the pronote is a concocted document and that he did not endorse it in
favour of the plaintiff. Therefore, the non- examination of the second defendant, the indorser, Is of no
significance.1
Holder in due course—Holder should act in good faith but need not enquire into the transactions
which resulted in the issuance of negotiable instrument—Sections 9 and 118(g), Negotiable
Instruments Act.—
The plaintiff Catholic 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
products and they were allowed credit facilities by the plaintiff-Bank, like accommodation by way of
Hundi discount, key loan and cheque purchases up to a limit of Rs. 35.00,000/-. A promissory note was
executed by defendant 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 desposited 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- 1974, 6th defendant drew a cheque on the Union Bank of India, Paighat 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 the first defendant on 30-10-1974 on valid consideration and proceeds were
credited by the Bank to the account of the first defendant, Similarly another cheque was drawn on 31-101974 and the first defendant endorsed the same to the plaintiff for valid consideration and the proceeds
were credited to the account of the first defendant who withdrew the amount at various dates. The plaintiffBank sent the cheques for collection but the Union Bank of India returned the same with the endorsement
“full cover not received”. The defendant Nos. 2 to 5 by two separate agreements offered to pay the amounts
to the plaintiff-Bank and as per the terms therein they 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
Rs. 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 cheques.
The trial Court held 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 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 definition makes it clear that to be a ‘holder in due course’ a 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 become the possessor of the cheque should not have any reason to believe that there was
any defect In the title of the transferor.
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 êontext
that there is no endorsement on the cheque 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 any unlawful consideration.
Now the question is whether the other requirement of the definition i.e., “Without having
sufficient cause to believe that any defect existed in the title of the person from whom he derived his title is
satisfied.
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 on 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(l)(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) ** ** **
(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 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 any negligence will not affect his
title,
In Byles on Bills of Exchange, 25th Edn., page 206 a passage reads thus:
“A wilful and fraudulent 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 Nelsonv. Lo.rholt,1 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 LtcL,2 the expression “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 EcIn., the learned author states the requirement that must be fulfilled
before a person may be considered a holder In due course as under:
1. (1948)1KB339.
2. (1955)2A11ER571.
“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 such was the fact. Knowledge
that a bill Is bound to be dishonoured may also be relevant. Thus, a Canadian authority suggests that a
hokfer, 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 the
person who negotiates the bill to him. In particular the title of the person who 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 circumstances amounting to fraud.
Lastly, a holder in due course 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 appears on a bill is prima facie
deemed to have become a party thereto for value. Every holder of a bill is prima fade, 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.”
This 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 his 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 ated in good faith whether it is negligently or not.
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 soon that the Indian
Legislature has adopted the older English law as laid down by Abbott, C.J., (later Lord Tenterden) in Gill v.
Cubitt.1 Relying on this passage the learned Counsel proceeded to submit that the Indian law is stricter than
English law arid requires the person to exercise due diligence 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 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 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 circumstances which ought to have excited the
suspicion of a prudent and 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 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 thwom he makes no enquiry at all, It appears to me
that such a decision would be more injurious to commerce than convenient 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 boriaJIrfe and real holders of bills, known to be such 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 enquiry.”
Bayley, J., agreeing with Abbott, C.J., however, added:
“I admit that has been generally the case but I consider it was parcel of the bona Jides 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 boriaJides, 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 bonaJIde involves in it the question whether it
has been taken 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 bortafIde 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. This Court thinks 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 up by the acceptor. 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 commission and Interest.
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:
“Test of bona fitdes
The test of borta ficies 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 (Abbott, C.J., In Gill v. Cubittj
due care and caution was made the test, and this principle seems to be adopted by Section 9 of the Indian
Negotiable Iristrwnents Act.”
The learned author Parathasarathy in his book ‘Cheques In Law and PractIce’. 4th Edn., has also
noted this aspect. At page 74. a passage reads thus:
“The Indian definition Imposes a more stringent condition on the holder In due course than does
the English definition. Under 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 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.
Cubitt.1”
In Raghrwji Vizpal v. Narandas Parmanandas.2 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:
1.
2.
1824(3)B&C466
(1906)8BomLR92l.
“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.”
It may be mentioned here that there is no reference to Gtlrs 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 Raghavjf s
case1 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 Mohrin Lal Bankers v. Governor General in CounciL2 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 bonaJIde”.
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 bonaJides or absence of negligence, it would not negative his claim. There must be evidence of
positive circumstances on account of which he ought to have believed that some defect existed.”
In this case also there is no reference to Gill’s case. The learned Counsel for the appellant submitted that
the decision In Raghvajis case is in favour of the appellant. He, however, conceded that the Durga Shah’s case is in
favour of the respondent Le.. the plaintiff-Bank. This Court may, however, note another judgment of the learned
single Judge of the Bombay High Court in Sunderdas Sobhraj, a fIrm v. Liberty Pictures, afirm,3 wherein the scope
of
Section
9
is
considered
and
it
is
held
thus:
“The rule as laid down in Section 9 of the Negotiable Instruments Act which defines “holder In due course” is
stricter than 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 instrument only if he obtained the same without having
1. 1906(8)B0mLR921.
2. A1R1952A11590.
3. AIR 1956Bom618.
sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
A borta ficle holder for value without notice is, of course, as already observed, in a different position.”
The learned single Judge has not, however, referred to the Raghavfts case. We have already noted that In
Raghavfts case reliance was placed on English decisions later to the decision in GUts case. The authors Chalmers,
Bhashyam and Adiga and Parathasarathy have uniformly stated that Section 9 of the Act is based on the ratio In
GUts 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 Gills case.
However, with regard to the legal importance of negligence in appreciating the principle of “sufficient
cause to believe” a passage from Chalmers’ book “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.”
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.”
This Court, therefore, modifies the view taken by the Allahabad High Court in Durga Shah’s case1 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 cannot negligently disregard a “Red Flag”
which arouses suspicion regarding the title. In this view of the matter this Court holds that the decision in Raghrrvjls
case2 does not lay down correct law. This Court agrees with the view taken by the Allahabad High Court with above
modification.
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 Gilfs case.1
Under the Indian law, a holder, to be a holder in due course, must not only have acquired the bill, note or cheque for
valiç.l 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 bonaJlde 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 then the burden of proving that he is a holder in due course’ lies upon him. In a
given case, the Court, while 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.
It should, therefore, necessarily be inferred that there is also an implied contract to credit the proceeds of
the cheques in favour of defendant No. 1 to his account before actually 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 defendant Nos. 1 and 6. Even if defendant No. 1
has not 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. 1 nor can it be 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 scope to infer gross negligence on the part of the
plaintiff.
There is no material which amounts to rebuttal of the presumption in his favour as provided under Section
118(g). On the other haild, the plaintiff has discharged the necessary burden to the extent on him and has proved that
he Is a holder in due course for valid consideration. Therefore, this Court holds that he could validly maintain an
action against all the defendants including defendant No. 6. 2
Cheque—Holder In due course—Proof of.—
The first defendant started a metal rolling mill at Bangalore. The second defendant Is a trader in
metal scraps. The plaintiffs and second defendant had several business transactions. Financial
accommodation was also being provided between them in the matter of providing stock and arranging
finances. According to the plaintiffs, the first defendant issued two cheques dated 16-4-1981, one forRs.
20,000/- and another forRs. 52,041/- in favour of the second defendant. These cheques were endorsed by
the second defendant in favour of the plaintiffs for valuable consideration, the consideration being the
adjustment of the amounts due from the second defendant to the plaintiffs under the respective accounts.
However, when the plaintiffs presented these cheques, they were returned by the Bank. According to the
plaintiffs they are the holders in due course and, therefore, entitled to claim the amounts payable under the
two cheques. One cheque for Rs. 52,041/- was endorsed in favour of the first plaintiff and the other cheque
for Rs. 20,000/- was endorsed in favour of the second plaintiff. The plaint also stated that the second
defendant had sold brass sheet cutting scrap to the first defendant, value of which was Rs. 72.041. The two
cheques were issued by the first defendant towards this amount representing the value of the scrap
purchased by the first defendant from the second defendant.
It is unnecessary to refer to the cheques signed by the first defendant, the name of the payee and
the amount in the cheques were found in different writings. This should have created suspicion in the mind
of the plaintiffs and the plaintiffs should have held an appropriate enquiry: this having been not done by the
plaintiffs, it cannot be held that they were holders in due course falling within Section 9 of the Negotiable
Instruments Act. The trial Court held that S. employed by the first defendant had no authority to issue the
cheques and blank cheque leaves were entrusted to him to meet the electricity and other office
establishment bills, including the demands of the Commercial Tax Department. According to the trial
Court, the plaintiffs should have called upon the second defendant to produce the invoice books to prove
that goods were supplied by the second defendant to the first defendant. The substance of the reasoning of
the trial Court was that the first defendant was the victim of the fraud played upon by his employee and,
therefore, there was no consideration for the cheques Exs. P4 and P5.
The question to be considered by this Court in this appeal is whether the plaintiffs were the
holders In due course.
So long as there is nothing to evoke suspicion in the mind of an indorsee about the genuineness of
a cheque, he will be its holder In due course, provided that there was a consideration for the indorsement.
Section 9 of the Negotiable Instruments Act reads thus:
“Holder in due course.—”H older 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.”
If, In the instant case, the plaintiffs became the possessors of the cheques for consideration, before
the amount mentioned in the cheques became payable, the plaintiffs could be considered as holders in due
course provided they became the possessors of the cheques without having sufficient cause to believe that
any defect existed in the title of the second defendant. Therefore, the first question Is to find out whether
any consideration went to the 2nd defendant from the plaintiffs for the cheques endorsed in their favour and
the second question is whether there was any sufficient cause which should have made the plaintiffs to
veriir as to the genuineness of the title of the second defendant to the cheques.
On the first question even the trial Court has held in favour of the plaintiffs. The relevant accounts
maintained by the plaintiffs in due course of their business were marked in evidence and spoken to by P.W.
1. It is clear from Ex. P-6 that there were prior dealings between the plaintiffs and the second defendant.
Amounts were being adjusted in the accounts either by receipt of cash or cheques. When Exs. P-4 and P-5
were Indorsed in favour of the plaintiffs by the second defendant, in the accounts of the plaintiffs some
amounts were due to them by the second defendant. The cheques indorsed in favour of the plaintiffs were
accordingly adjusted towards this amount. However, subsequentiy the cheques were not honoured by the
Bank. The fact remains that there were dealings between the plaintiffs and the second defendant and the
outstanding due to the plaintiffs by the second defendant were adjusted by virtue of the cheques being
indorsed In favour of the plaintiffs: Therefore, it cannot be denied that there was a valid consideration for
the endorsement in other words the plaintiffs became the holders in due course of the cheques because they
came to possess the cheques for valid consideration.1
Transfer of pronote by registered document—Sectlon 8.—
The plaintiffs point is that by virtue of the separate registered sale-deed he came to be the holder
of the suit promissory note and, therefore, entitled to a decree. There appears to be some misconception in
the mind of the Courts below that endorsement is the only means by which a negotiable Instrument can be
transferred. Indeed Chapter 4 of the Negotiable Instruments Act deals with the maimer of the negotiation of
these instruments. In the ordinary way under Section 48 of the Act, a hand-note would be negotiated by
endorsement and delivery thereof: a promissory note endorsed In blank or a promissory note to the holder
or bearer, is negotiated In simpler fashion, but the Negotiable Instruments Act itself doc, i ecognisc that
negotiable instruments may be transferred and for consideration otherwise than by negotiation. A transfer
of a promissory note by means of a registered instrument is valid. Thus, where the holder of a promissory
note sells his right, title and Interest in the note to another but without endorsing it, the assignee is within
the definition of ‘holder’ in’Section 8 of the Negotiable Instruments Act quoted above. He can, sue in his
own name and he is entitled in his own name to possession, nd to receive or recover the amount due on the
hand-note from the parties thereto. The difference between transfer by assignment, and a transfer by
endorsement and delivery is, that in former case the transfer is subject to all the equities, whereas in the
latter it is not.1
“Holder in due course” and holder for collection—Section 9, Negotiable Instruments Act.
The trial Court had not understood the difference between a holder for collection and a holder in
due course, which is well-established in law. A holder in due course will be entitled to claim better rights
than the transferor i.e., any defect in title of the transferor will not affect the rights of the holder in due
course. It is only where the transferee wants to claim higher rights than the transferor that he must satisfy
the requirements of a holder in due course as laid down in Section 9 of the Negotiable Instruments Act, i.e.,
for consideration he became the possessor of the instrument from the payee or endorsee before the amount
mentioned in it became payable, and without having sufficient cause to believe that any defect in the title of
the transferor existed.2
Pronote and bond—DistinctIon—-Section 4, Negotiable Instruments Act.—
It only makes every promissory note coming under SectIon 4 of the Negotiable Instruments Act a
negotiable Instrument for the purposes of that Act, unless It contains words prohibiting transfer or
indicating an intention that It shall not be transferable. But if a promissory note falling under Section 4 of
the Negotiable Instruments Act, 1881, and, therefore, under Section 2(22) of the Indian Stamp Act, 1899, Is
attested and not made payable to order or bearer It would fall under Section 2(5)(b) of the Indian Stamp
Act, 1899 and would, therefore, amount to ‘bond’ for the purpose of that Act. For the purposes of the
Indian Stamp Act, 1899, a document as it appears on the face of it, has got to be considered. I, therefore,
hold that the document, Ex. L Is a bond falling under Section 2(5)(b) of the Indian Stamp Act, 1899, and
not a promissory note under Section 2(22) of that Act. 1
“Bond”—Pronflssory note—Sections 2 (5) and (23), NegotIable Instruments Act.—
If one looks to Section 13 of the Negotiable Instruments Act, one finds that in the main part of
sub-section (1) a promissory note, bill of exchange or a cheque payable either to order or to bearer is
described as a negotiable Instrument. So far as the promissory note and the bill of exchange are concerned,
the definitions themselves require that they should be payable to order of the person in whose favour they
are drawn. The expression “payable either to order or to bearer” In the main part of sub-section (1) of
Section 13 cannot, therefore, legitimately refer to a promissory note or a bill or exchange. That expression
refers only to the last document, namely, the cheque, which is not necessarily payable either to order or to
bearer. If this is so, It appears that the purpose of the Explanation is to treat all prQmissory notes and bills
of exchange as negotiable instruments irrespective of the fact whether the recital to that effect is present on
the face of the document or not unless there are words prohibiting transfer. 2
4.4.2
SUITS
PromIssory note—Liability of the maker—Section 35, Stamps Act
Promissory notes are of three categories
(i)
(ii)
(iii)
Promissory notes executed to evidence antecedent debts.
Promissory notes executed for money lent under it, where the amount lent and the promissory note
form part and parcel of the same transaction.
Promissory notes executed as collateral security.
In the first category of cases, where a promissory note is executed to evidence an
antecedent debt, the legal position is well-settled that dehors the promissory note the creditor can
sue on the original consideration.
In the second category, of cases, where the promissory note is executed for money lent
under it, no further evidence can be let in if the promissory note is hit by Section 35, Stamp Act. If
it is the intention of the parties that the debt should be discharged by execution of the promissory
note and the promissory note alone should be treated as constituting the contract between the
parties, in other words, if there is accord and satisfaction of the debt and the liability is based on
the promissory note, it is clear that the terms of the contract are reduced to a document within the
meaning of Section 91, Evidence Act. In such cases, it is not permissible to prove the terms of the
contract by any other evidence except the promissory note and if the promissory note is
inadmissible under Section 35, Stamp Act, the suit is bound to fall.
With regard to the third of the categories, the promissory note Is independent of and distinct from, the oral
agreement and the inadmissibility of the document will not affect the oral contract which may be proved aliunde. In
such cases, it is well-settled that if the promissory note cannot be proved on account of the bar under Section 35 of
the Stamp Act and Section 91 of the Evidence Act, the creditor can fall back on the original debt and the passing of
the consideration thereunder, because though the security falls, the debt remains and Section 91 of the Evidence Act
does not come in the way. Even where the pronote Is executed simultaneously with the advance of loan it Is open to
the party to prove that the promissory note was not regarded as substituting the contract, but only taken by way of
collateral security. The question whether it was intended by the parties to reduce the terms of the contract into the
form of a promissory note or whether the promissory note was taken by way of collateral security has to be decided
with regard to the pleading and proof in each case.
In Chitty on Contracts (Twenty-third Edition), Volume I dealing with “payment by negotiable instrument’,
it Is pointed out in para 1184 at page 560 that “apart from express agreement, a creditor Is not bound to accept
payment in any way except cash, Le., legal tender. If, however, he accepts a negotiable instrument, such as a bill of
exchange, promissory note or cheque, it is a question’ of fact depending on the intention of the parties, whether it is
taken in absolute satisfaction of the debt or only in conditional satisfaction.”
This Court will now deal with the development of case-law in the various High Courts on this topic.
The earliest case, which has been frequently referred to in the later decisions, is Sheikh Akbar v. Sheikh
Khan,1 Garth C.J. enunciated two propositions
“(1)
When a cause of action for money is once complete in itself, whether for goods sold or for money lent, or
for any other claim, and the debtor, then gives a bill or note to the creditor for payment of the money at
future time, the creditor, if the bill or note is not paid at maturity, may always, as a rule, sue for the original
consideration, provided that he has not endorsed or lost or parted with the bill or note. under such
circumstances as to make the debtor liable upon it to some third person. In such cases the bill or note is sai
to be taken by the creditor on account of the debt and if it is not paid at maturity, the creditor may disregard
the bill or note and sue for the original consideration.
(2)
But when the original cause of action is the bill or note itself, and does note exist independently of it, as for
instance when, in consideration of A depositing money with B. B contracts by a promissory note to repay it
with interest at six months’ date, here there is no cause of action for money lent, or otherwise than upon the
note Itself, because the deposit is made upon the terms contained in the note and no other. In such a case,
the note is the only contract between the parties, and if for want of a proper stamp or some other reason the
note
is
not
admissible
in
evidence,
the
creditor
must
lose
his
money.”
In Sri Iswar Sridiuir Jieu Thakw- v. Jahor Lal Mukhopadiuja,’ a Division Bench held as follows
In our opinion, the true position is that where A lends money to B, A can always sue B for the
money as for money lent, whether there is a promissory note executed contemporaneously with the loan or
at any time thereafter on account of It. As between an actual lender and an actual borrower, a promissory
note can never be anything but collateral security, and the lender can, therefore, always sue on the original
consideration, disregarding the security. The promissory note in such a case, containing as It does an
express promise to repay, cannot wipe out the promise to repay which is implied in the loan itself. There
can be no question of any merger of the original consideration in the promissory note so as to make the
promissory note the only available cause of action.”
The Allahabad High Court In Lakshmi Narain v. Mt. Apama Devz,2 summarises the legal position
in the following words:
“When a promissory note is not taken In discharge of an oral contract of loan but Is taken only by
way of conditional paymerit or collateral security, as It will be presumed to have been so taken unless there
Is a contract to the contrary Section 91 has no application to the case and the terms of the original contract
or loan can be proved if the promissory note is not admissible In evidence or for any other reason cannot be
proved. The facts that the promissory note was executed simultaneously with the advance of the loan or
that the loan was advanced on the basis of the promissory note or that the promissory note contained all the
tenns of the contract of loan are all Immaterial, provided only that the promissory note is not in absolute
discharge of the original contract of loan.
The view expressed by the Allahabad High Court in the case cited above was relied upon by this
Court In the case of Chandra Sekhar Mis hra v. Gobinda Cho,ndra Das) wherein 0. K. Misra, J. (as he then
was) quoted the above passage as laying down the correct law and enunciated the following proposition.
“The consideration of the promissory note may b a complete discharge or satisfaction of a loan.
This occurs when the contract between the parties Is that the debtor would not be liable if the promissory
note could not be enforced. The instrument, In that case, is taken as a substitute of the liability. If the
instrument becomes inadmissible in evidence, the liability cannot be otherwise enforced. The acceptance of
the promissory note operates as accord and satisfaction of the debt or the liability. Illustration (b) to Section
91, Evidence Act covers the case of complete discharge of satisfaction of the loan.
Promissory note might be executed in respect of a consideration which constitutes a pre-existing
debt or past liability. In such cases, it ordinarily operates as a conditional discharge or payment of the loan
or as a collateral security. Conditional discharge or payment of loan implies that the plaintiffs remedy for
recovery of loan for the time being is suspended and his right to sue is revived if the instrument turns out to
be worthless or is not discharged by payment In due course. The antecedent liability Is not extinguished on
the exclusion of the promissory note. It remains suspended and becomes actionable on the inadmissibility
of the promissory note.
Whether a promissory note given by a debtor to a creditor operates one way or the other is a
question of fact which falls to be determined on evidence In each case. Authorities agreeds that In respect
of a pronote for pre-existing loan or liability, In the absence of all evidence, the presumption is that it
operates as a conditional payment only. The same principle would apply to a case of contemporaneous
loan. In other words, if the agreement between the parties in respect of a contemporaneous loan is that the
loan would not be independently actionable, If the promissory note becomes inadmissible, no suit on the
original cause of action would lie. In other cases the claim on the original cause of action can succeed.”
In Sarjoo Pci v. SmL Rampyari DebL2 a Division Bench consisting of Ramaswamy and Sarjoo
Prasad, JJ., held as follows:
When a promissory note is given by the borrower to the lender in connection with the loan either
at the time when the loan is contracted or afterwards the promissory note may be regarded as given either
as collateral security or as conditional payment. The fact that the execution of the promissory note is
contemporaneous with the borrowing cannot exclude the possibility of the instrument having been given as
collateral securiv or by way of conditional payment. The question depends in each case on the intention of
the parties. In the former case the lender is entitled to sue upon the original consideration independently of
the security and without regard to any rights he may possess under the negotiable instrument. But if the
promissory note or other negotiable instrument Is treated as conditional payment of the loan the cause of
the action on the original consideration Is suspended during the currency of the negotiable instrument. But
the cause of action to recover the amount of the debt revives if the negotiable Instrument is dishonoured or
the rights thereunder are not enforceable. On the contrary the cause of action on the original consideration
is extinguished when the amount due under the negotiable instrument is paid or if the lender by negotiating
the instrument or by laches or otherwise has made the bill his own and thus accepted the negotiable
instrument in accord and satisfaction of the borrower’s liability on the original consideration
The matter was considered by a Full Bench of the Madras High Court in Perumal Chettiar v.
KamakshjAmmaj’ and the majority of the Judges held:
“If the promissory note embodies all the terms of the contract and the Instrument Is Improperly
stamped, no suit on the debt will lie. Section 91, Evidence Act, and Section 35, Stamp Act, bar the way.
But If it does not embody all the terms of the contract, the true nature of the transaction can be proved and
where an Instrument has been given as collateral security or by way of conditional payment, a suit on the
debt will lie. The fact that the execution of the promissory note is contemporaneous with the borrowing
cannot exclude the possibility of the instrument having been given as collateral security or by way of
conditional payment. Whethr a suit lies on the debt apart from the instrument, therefore, depends on the
circumstances under which the Instrument was executed
This decision was followed In a recent decision of the Madras High Court in the case of Ftnn of
Shoinicil and Co. v. Rajagopala Chettiar.2
A Full Bench of the Andhra Pradesh High Court consisting of seven Judges in Sambasj Rao v. T.
Balakotiak3 upheld the view expressed in AIR 1938 Mad 785 (FB).
In Anaj-’a Namjeo v. Pundaljk Tuicaram,4 a Division Bench enunciated the law as follows:
‘In every case It becomes a question of fact whether the promissory note was Intended to
constitute the contract or serve some collateral purpose. In the former case Section 91, Evidence Act would
preclude proof of the contract otherwise than by the document itself. If it is inadmissible for any reason, the
contract cannot be proved by any extraneous oral evidence In the latter case the promissory note is
independent of and distinct from the oral agreement and the inadmissibility of the document will not affect
the oral contract which may be proved aliunde.”
In Brij RaJ v. Raja Rain,1 the Court held as follows:
“The trend of authorities, therefore, leads to this principle that in a contemporaneous promissory
note with loan there is a presumption of conditional payment. The fact that the loan and the promissory
note are contemporaneous does not rule out the payee from proving the existence of an obligation to pay
the amount advanced as a loan. It may also be observed that merely because the advancing of the loan arid
the execution of the promissory note are contemporaneous this circumstances does not necessarily negative
the inference that the promissory note was executed as a collateral security or by way of conditional
payment and it is clear that If a promissory note has been given by way of collateral security or conditional
payment a suit would lie on the debt apart from the promissory note.”
In Manik Lal v Dhirend.ra Chnndra.2 It was held that unless there are circumstances or evidence
to show the contrary, a promissory note is always given as a conditional payment and hence a suit on the
debt would lie.
In Gartgarain v. Keshriva Deo.3 the Court accepted the principle of an implied contract In every
loan. In a later decision in Champalcd v. Saligram,4 the Court held that where a promissory note is not
proved to have been given in absolute discharge of a debt it can be treated as a conditional payment of the
debt and a suit on the debt would lie.
In Krishnaji Narayan v. RaJmal ManikchancL5 the Court held that there was an implied contract
In every loan which can be proved. This decision was followed in the case of Sornabhai v. KalyanbhaL6
In Narainclas v. Jassomal,7 It was held as follows:
The question whether a loan was given and taken, can In certain cases, such as those of collateral security,
be distinguished from the question of the terms of the loan and of its repayment. Where It can be so distinguished, It
has been held by the High Courts of Calcutta, Bombay and Allahabad that, even If the document embodying the
terms Is Inadmissible, the lender may fall back and sue upon the loan itself and prove it by other evidence. And in
such a case to quote the word of Patheram, C.J., There can be no doubt that an implied contract to repay money lent
always
arises
from
the
fact
that
the
money
is
lent’.”
1.
2.
3.
4.
5.
6.
7.
AIR 1957 Hyd 35.
AIR 1957Tr1 p28.
AIR 196ORaJIO.
AIR 1961 Raj 235.
(1900) ILR 24 Born 360.
AIR 1938 Born 286.
AIR 1921 Sind 8O.
It would, thus, appear that in a cateria of authorities the princi1yI has been well recognised that every loan
carries with it a contract to re-pay, and if a promissory note executed by way of collateral security cannot be
accepted in evidence for some reason or other, there Is nothing in law to prevent the plaintiff from giving other
evidence as regards the loan and that if he can satls1r the Court as regards the truth of his version, there Is no reason
why he should not be able to obtain a decree in his favour.
The day from which period has to be reckoned shall be excluded –
There Is no dispute that the suit promissory note Is dated 9-2-1976 and on the date of execution of
the pronote, Act 15/76 was in force which barred the filing of the suit from 15-1- 1976 to 14-1-1977. There
was
a
subsequent
Debt
Relief
Act
3/77
which
was
in
force
from
15-1-1977 to 14-7-1977 and it was followed by another Act 1/77 which was In force from 15-7-1977 to 141-1978. There was also another Act 2/78 which was In force from 15-1-1978 to 14-7-1978 barring the
filing of the suit for money. Therefore, it would not have been open to the plaintiff to file the suit till 14-71978 as the filing of money claim was barred till 14-7-1978. The suit was filed on 15-7-1981. The
provisions of Section 12 of the Limitation Act, 1963 postulate exclusion of certain time In legal
proceedings and it provides that in computing the period of limitation for suit, appeal or application, the
day from which such period has to be reckoned shall be excluded. There is no dispute that Section 12 of the
Limitation Act applies to the facts of the case and if Section 12 is applied, the day on which the promissory
note was executed has to be excluded and If that day is excluded, the suit flIed on 15-7- 1981 is within
time. The above position is well-settled by an earlier decision of this Court in Ganapati v. Sithararncj,2
wherein it was held that the period of limitation begins to run only from that date which must be excluded
from the computation under Section 12 of the Limitation Act (XV of 1877) (corresponding to Section 12 of
the Limitation Act, 1963).
Bombay High Court in the case of Vin.ayak v. KasabaL3 has also taken the same view that the
first day on which the pronote was executed has to be excluded for the purpose of computing the period of
limitation of three years. The above decision of this Court as well as the decision of Bombay High Court
makes It clear that the date on which the promissory note was executed has to be excluded and if that is
excluded, the suit filed on 15-7-1981 is well within the time prescribed in the Limitation Act and both the
Courts below have come to the correct conclusion in holding that the suit was in time.1
Suit on promissory note executed In lieu of previous transactlons—Promlssorynote not admissible in
evidence—Plaintiff cannot claim decree on the basis of previous transactions—Order VU, Rule 7,
C.P.C.—
There cannot be any doubt that if the transaction of loan is anterior to and Independent of the
execution of the promissory note, the creditor is entitled to fall back on the original consideration In the
event of the promissory note being found inadmissible in evidence for the reason that promissory note is
not stamped or insufficiently stamped or that there is failure to cancel stamps. This question was considered
by a Division Bench of this Court in Saffta Klmthoon v. Kunharnbu.2 This Court said:
“It is clear that the promissory note had been executed by 1St defendant only in acknowledgment
of the loan that had already been advanced to him by the plaintiff, thereby making it clear that the
transaction of loan was anterior to and independent of the execution of the promissory note. The legal
position is well established that in such cIrcuristances the creditor is entitled to maintain a suit for recovery
of the debt based on the original contract of loan in case the promissory note Is found to be defective in any
respect.”3
Endorsee
of
a
negotiable
Instrument
(promissory
note
in
this
C case) can sue one who is not a party to the instrument—Section 50, Negotiable Instruments Act. —
A executed a promissory note in favour of Ps father who endorsed it in favour of P. Father died
leaving P and his three brothers, in whose favour he made a will bequeathing all his property to them. P
them
made
an
enforcement
in
the
promissory
note
in
his
and
his three brothers’ favour. Suit was filed by P against A and his minor
sons as also against official Receiver. Plea of the sons was that since they
were not parties to the instrument and the debt was not for legal necessity,
they were not liable. Plea was also taken that the suit was not maintain abl against A as the leave of the
insolvency Court to sue A was not taken. The Court held that as the sons were not executants of the
pronote, they were not liable.
The Court said : The only question that will have to be decided is whether the debt evidenced by
Ex.
A3
can
be
enforced
by
way
of
suit
not
only against the 1st defendant, who is the sole executant, but also against
his sons who are non executants. It is useful to recapitulate as to how the
two
Courts
dealt
with
this
question.
The
trial
Court
was
of
the
opinion
that
the
original
endorsement
evidenced
by
Ex.
A3
is
merely
a
transfer
endorsement for collection of the\ debt due under the promissory note and does not transfer the original
debt incurred by the 1st defendant. By the time the re-endorsement took place under Ex. A4, the original
payee died and so there was no re-endorsement In his favour. Consequently, the trial Court felt that when
the endorsee for collection re-endorsed the promissory note to the heirs of the original payee, no suit on the
foot of the promissory note can be filed against the sons of the executant who did not join In the execution
of the promissory note. The view of the appellate Court, however, Is different. That Court appears to have
been under the Impression that the debt evidenced by A2 itself was transferred. In other words there was an
assignment of the debt by the original payee to the plaintiff. Consequently the will by the payee could not
govern this asset, because it did not form part of his estate. The re-endorsement (Ex. A-4) was only in
favour of the four Sons of the payee and was not In favour of all the heirs. Such an endorsement cannot be,
In law, an endorsement in favour of the original payee with the result that no suit can be filed against the
non-executants.
1.
2.
3.
K. Rarnakrishna Lo.nda Kathir v. Narayanswainy, AIR 1998 Mad 205 at p.206.
1977KerLT448.
‘T’. Chand.ri v. Karnbrath Kanarakutty, AIR 1990 Ker 122 at p. 123.
It Is a fundamental principle of the law relating to negotiable instruments that no one whose name
does not appear In the Instrument can be held liable thereon, and there is no privity of contract between the
endorsee arid the maker or acceptor. Therefore, the right of the endorsee of the promissory note Is limited
to his remedy against the executant of the note. However, If the endorsement is so worded as to transfer the
debt as well as the stamp law is complied with, the endorsee can sue the non- executant coparceners on the
ground of their liability under the Hindu law, If the debt Is not transferred arid the stamp law is not
complied with, an endorsee cannot sue the non-executant coparceners This is the position well-settled by
the Full Bench decision of the Madras High Court in Maruthojnuthu v. Kadir Bacisha Rowther.1
One of the heirs of holder of a pronote cannot sue alone on the ground of arrangemente0 78,
NegotIable Instruments Act,__
In Singheshwar Marwial v. Smt. Gita DeuL2 the Court said : Admittedly in this case the handnote
in question Is not indorseci in favour of the plaintiff nor does the recital in any way indicate the intention of
the creditor for the payment of the ultimate dues by the debtor to the plaintiff. The term “Holder” has been
defined in Section 8 of the negotiable Instruments Act, according to which the holder of a promissory note,
inter alio., means a person entitled in his own name to the possession thereof and to receive or recover the
amount due thereon from the parties thereto. Admittedly, therefore, the plaintiff does not answer any of the
descriptjons mentioned above and the defendant was not bound to make the payment to her of the dues in
question and as such the plaintiff has no right to institute the suit, It Is not a case either of any transfer of
this debt or claim which under the provisions of the Transfer of Property Act would be an “actionable
claim” by the father to the plaintiff. In view of the provisions of Section 130 of the Transfer of Property Act
the transfer of an actionable claim has to be effected only by the execution of an Instrument In writing
signed by the transferor or his duly authorised agent and only thereafter the rights and remedies of the
transferor is to vest In the transferee. The learned Additional Subordinate Judge, therefore, was not right in
referring to any other mode of supposed arrangement by the father of the plaintiff and the different
members of the family which did not answer this requirement of law. Reference may be made to a decision
of the Calcutta High Court in Harkishore Barua v. Gura Mia Chowdhry.’ As the provisions of the
enactments referred to above themselves are clear, It is not necessary to cite any further authority in support
of
my
views.
Promissory note—Where promissory note Is executed by sev era promissors, each one is liable even
if consideration Is given to one of them—Section 4, Negotiable Instruments Act—Sections 127 and
128, Contract Act.—
The suit was filed against defendant Nos. 1 and 2, who are no other than father and son
respectively, for the recovery of a sum of Rs. 3,08,452.74 p. The basis of the suit, as stated in the plaint,
was that the defendants are Abkarl contractors, and the first defendant 7 approached the pihintiff- Bank for
certain facilities for the purpose of the Abkarl contract. The plaintiff-Bank sanctioned and paid in the first
in stanc a sum of Rs. 1,65,000/- which is to be paid with interest at 6% per annum over the Bank rate of
interest with a minimum of 15% per annum. First defendant deposited title-deeds in respect of the
immovable property situated at Hyderabad with the laintiff-Bank on 18-9-1976 withan intention to create a
mortgage,
securing
the
payment
of
the
loan
amount. Subsequently, a memorandum stating that the title deeds were deposited with the Bank at an
anterior date was executed on 23-9-1976. It was alleged in the plaint that defendant Nos. 1 and 2 also
executed a promissory note agreeing to repay the loan amount of Rs. 1,65,000/- with
interest as mentioned above. Subsequently, 1st defendant, on his request was granted another loan amount
of Rs. 31,500/- on the same terms and conditions for which both the defendants executed another
promissory note on 29-9-1976. In spite of repeated reminders, the loan amount was
not repaid and the account was not regularised. It was held that the second defendant was also personally
liable to discharge the entire amount payable to the plaintiff-Bank In view of the fact that he executed two
promissory notes.2
Suit on Hundi maintainable against acceptor of the Hundi alone—Section 32, Negotiable Instruments
Act.—
Under provisions of the Negotiable Instruments Act, the defendants as acceptors of the suit bill of
exchange
are
liable
thereunder
as
principal
debtors
and
as
such,
the suit filed merely against the acceptors of the suit bill of exchange is maintainable In law even though a
separate suit has been filed by the plaintiffs against the drawers of the suit bill of exchange on the basis of
the suit bill of exchange alongwlth other reliefs claimed therein. 1
Where pronote Is executed subsequently to the loan being granted, If the pronote falls for some
reason_&ilt can be based on original transactlon_.Section 35, Stamps Act. —
There are sufficient averments in the plaint that the suit is based on original cause of action. As the
promissoiy note was executed by the defendant only in acknowledgment of the loan he had obtained from
the plaintiff, the Court cannot reject the claim in the suit solely on the ground that the promissory note iS
inadmissible In evidence. In paragraph i of the plaint it is stated that the defendant received the amount as
loan and the promissory note was executed only as a document in support of the loan. P.W. l’s evidence
shows that the defendant obtained the amount from the plaintiff and only at the time when they parted the
promissory note was executed. The note was executed after the defendant obtained the loan. As the note
was executed by the defendant Only In acknowledgement of the loan, it is apparent that the loan was
anterior to and Independent of the execution of the promissor note. In a case where a promissory note was
executed by the defendant only in acknowledgement of the loan he had already obtained from the plaintiff,
the suit for recovery of the debt based on the original cause of action cannot be dismissed on the ground
that the promissory note is defective and Inadmissible in evidence.2
Where defence taken was that there was failure of consideration, subsequent plea cannot be taken
that Hundi was without conslderatIon.... ecUon 43, Negotiable Instrunents Act.—
On the pleadings of defendant No. 5 and in view of the documents produced by the parties, Issue
No. 6 was restricted to the question whether Hundies Exhibits P. 24 and P. 23 are without consideration,
and If so, tà what effect. At the trial, however, defendant 5 tried to shift its defence on the ground of failure
of consideration on the plea that goods supplied by the firm were rejected and returned to It. On this
ground, learned Counsel for defendant No. 5 has contended that his client was under no obligation to pay to
the Bank any amount Claimed on the basis of the two Hunches. He has relied upon Section 43 of the
Negotiable Instruments Act, 1881, hereinafter referred t1 as the Act, and on Arnir- Chjin4 v. Krishna Charicier Bhowmjk3 and K. K. Karart v. T. Tara BaL4 It is pertinent to note that the case pleaded by defendant
No. 5 In Its written statement Is that no goods were purchased by it from the finn, that the Hundies were
drawn on and accepted by it altogether without Consideration and merely to provide financial assistance to
the Firm. In other words, defendant No. 5 has denied the initial conclusion, and even the ab initio existence,
of any contract with the firm. Indeed, It has been pleaded In clear terms that there was no commercial
transaction between the parties. This plea is obviously false. The plea of failure of consideration, which has
been raised at the hearing, presupposes the existence of a duly concluded contract with consideration, and
subsequent failure of consideration vitiating the contract. Although, Section 43 of the Act provides for a
common consequence of a negotiable Instrument made, drawn and accepted etc., if it is without
consideration, or for a consideration which falls, yet the two causes envisaged therein are different, each
arises In different circumstances, and really contradicts the other. It cannot be said in respect of any
transaction for a consideration, which fails later, that It was without consideration, Likewise, in a
transaction without consideration, there can never be failure of consideration. Therefore, the plea of failure
of consideration contradicts the defence pleaded by defendant No. 5 that the transaction was without
consideration. Such a contradictory plea cannot be raised. It has to be rejected. 1
A drew Hundles on Bank B accepted by C—Bank B presented Hundies to C for payment—Which
were dishonoured—Bank B endorsed Bundles In favour of A for value received—A presented
Hundles to C for payment—C refused to pay—In a suit by A on C, claimed to defend on merits—
Question was whether he could be permitted to plead—Section 9, Negotiable Instruments Act.—
The Court held : At the heartng, learned Counsel for the plaintiff cited a decision of the House of
Lords in Nova (Jersey) Knit Ltd. v. Kammgam Spinnerei G.M.B.H. ,2 for the proposition that a claim for
unliquidated damages could not be raised by way of defence, set off or counter-claim to an action on a bill
of exchange.
Learned Counsel for the defendant No. 1 cited Jade International Steel Stahi Und Eisen Gamb H.
& Co. K. G. v. Robert Nicholas Steels Ltd.3 In this case the plaintiff sold to the defendants a quantity of
steel to be delivered in two consignments and drew a bill of exchange payable on the defendants for the
price of the first consignment. The bill was accepted by the defendants. The plaintiff discounted the bill
with their Bank which was thereafter discounted with two other Banks. The first consignment of steel was
delivered to the defendants. The defendants did not honour the bill on the ground that the first consignment
delivered was substandard. The bill traced Its course back to the plaintiff-Bank which debited the plaintiffs
account for the amount and returned the bill to the plaintiff. The plaintiff brought an action against the
defendants and applied for a summary judgment. The defendant alleged that they had good defence by way
of a counter-claim and applied for leave to defend. In the Court of the first Instance leave was not granted
to the defendants to defend the action on the ground that in an action on a bill of exchange defence by way
of counter-claim could be put up lithe action was between immediate parties to the bill. The plaintiffs
having discounted the bill they were not immecliate parties to it and they derived their title to it through the
holders in due course. The appeal Court sustained the said order.
Section
9
of
the
Negotiable
instruments
Act,
1881
reads
as
follows:
“‘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.”
The plaintiff cannot claim to be the holder in due course of the said Hctndies under the said
section as the same are not payable to bearer and as the Bank endorsed the same in favour of the plaintiff
after the amount mentioned in the Hund ies became payable and also after the Hundjes were dishonoured In
that view the counterclaim of the defendants can be a sufficient defence to the claim of the plaintiff, it need
not express any final Opinion on the disputes raised as to the validity or sufficiency of the stamps at this
stage. in Court’s view the defendant No. 1 has raised triable issues and is entitled to defend the suit. 1
QuestIon of transfer of actionable clalms.—
There cannot be any assignment of promissory note though there can be assignment of debt. The
intention is gathered from the words actually used in the endorsement on the back of pronotes.
They indicate that the the party intended only to endorse but not assign the amounts Covered by
the promissory note. There is no question of transfer of actionable claims attracted by Section 130 of T.P.
Act.
The lower Court considered all these aspects and rightly came to the conclusion that it is only
endorsement and not assignment and the promissory notes do not require any stamp duty for the urpose of
admitting them in evidence. The revision petition is dismissed.2
SECTION 131, NEGOTIABLE INSTRUMENTS ACT
If the duty is that of the drawee-Bank to examine the instrument before making payment, why did the
plaintiff-Baa fall to do so in the instant case Is not explained by P.W. 1. What was done at a later stage by the
plaintiff-Bank in having the instrument examined under ultra violet rays could have been done before making
payment, more so in view of the fact that no advice had been received from its branch at Tinippur which issued the
draft. Besides, in view of the non-receipt of advice, the plaintiff-Bank could have contracted its branch at Tiruppur
on telephone to ascertain the genuineness of the draft1
It is a normal feature of the present day to obtain a draft when large amounts are to be paid wherever
cheques are accepted, they are drawn and issued. These are made “account payee” to ensure that payees alone
encash them. Therefore, Banks have a great responsibility while opening new accounts by unfamiliar persons.
Opening of a Bank account cannot be equated to a routine activity, even by the Bank.
If at the time of opening the account and subsequently while the account is being operated, any conduct of
the customer In relation to the account is sufficient to evoke suspicion of the account holder’s credibility or of his
activity, Bank shall have to be alert to the situation and take remedial steps immediately. The duty and care to be
taken by the Bank do not stop at the opening of the account by a person. The duty and care required of a Bank runs
through every operation affecting the said account each time, an account payee cheque or a draft is presented, the
Bank owes a duty to see whether there is any inherent defect in the Instrument or in the manner in which It is sought
to be credited for collection. Draft drawn as payable to “Ms. P.” cannot be collected for and credited to the account
of R without noticing the difference, solely on the ground that the Bank was bus in dealing with several customers
when the said instrument was given for collection or subsequently and It cannot be a valid defence for the Bank,
that, on earlier occasions also similar cheques or drafts had been accepted and amounts had been credited to R’s
account, even though, in the instruments, payee was Ms. R. In such a situation, the fact that the Bank acted In good
faith is entirely Irrelevant. Lack of good faith is not the same as being negligent; two are different concepts
altogether. An utterly negligent person, acting negligently can be said to be acting in good faith; still, he would be
answerable to the consequences of his negligence.2
SECTION 138, NEGOTIABLE INSTRUMENTS ACT
(See also Ch.6 Dishonour of Cheque)
Notice under Section 138. Negotiable Instruments Act—Regarding the first submission in Paragraph 6 of
the complaint, it is stated as follows:
“The complainant sent a notice within 15 days of the receipt of notice of dishonour to the accused
calling upon him to make the payment of the said amount. The accused deliberately evaded to receive the
notice and it was returned,”
Thus, there are necessary allegations to meet the requirement of the proviso to Section 138 of the
Negotiable Instruments Act. Simply because the date of sending of the statutory notice is not mentioned in
the com plaint, it cannot be stated that it is infirm, It cannot be quashed on that ground.’
64.
Complaint on 2nd cause of action not maintainable—Section 138, Negotiable Instruments Act.—
This Court has already pointed out that the right to present the cheque at any number of times
during the validity period is not the sole criterion to decide this question. In Kumaresan’s case the Division
Bench of this Court has never said that the cheque can be presented only once. It can, of course, he
presented on any number of times during the period of validity. But once the offence was complete with
the failure to pay the amount within the prescribed period after making demand in writing, a subsequent
presentation of the cheque for encashment is of no use so far as Section 138 of the Act is concerned. That is
precisely the ratio in Kumaresart’s decision.2
It is not in dispute that the cheque was issued by the first petitioner as Managing Partner of M/s.
K.S. Muthu Constructions for the liability to the complainant. The learned Counsel relying upon certain
decisions of the Kerala High Court, would contend that when the Court had taken cognizance of the
offence against a partner it will not affect the proceedings for the failure to ftnplead the other accused
including the Company. In Alex v. Vayan,3 the Kerala High Court has held that when the Managing Partner
of a firm were prosecuted under Section 138, Negotiable Instruments Act for the dishonour of the cheque
issued by the Managing Partner and without impleading the partnership, the partners alone was prosecuted
the complaint is maintainable against the partners alone. Following this decision, the same Court in Iqbalv.
Uthaman,4 also repeated the same view that the complaint against the partners is maintainable without
impleading the company under Section 138, Negotiable Instruments Act. In Plywood House v. Woodcraft
Products LtcL,5 the Kerala High Court has again held that when the Managing Partner was prosecuted for
the offence under Section 138, Negotiable Instruments Act without impleading the partnership, the
partnership can be impleaded subsequently also as when once the cogniznce of the offence was taken by
the Court, the subsequent impleadment of another person as accused, would not affect the judicial process
as it has already commenced by taking cognizance. But these views of the Kerala High Court have not been
accepted by this Court in a series of decisions and this Court has taken a consistent view that a complaint
under Section 138, Negotiable Instruments Act is not sustainable without complying with the mandatory
provisions viz., Section 141, Negotiable Instruments Act without impleading the company or the
partnership and when there was defect even in the initial stage in the initiationof the proceedings itself, that
cannot be cured by impleading the company or partnership subsequently. 1
65.
Plaint to disclose that dishonour of cheque was due to paucity of funds—Section 138, Negotiable
Instruments Act.—
Annexure-B, complaint does not contain an allegation to the effect that the cheque was
dishonoured due to insufficiency of fund in the account of the petitioner. The allegations therein are not
capable of bringing out such a contention even by necessary implication. Therefore, Annexure-D complaint
and the proceedings thereunder are liable to be quashed. But the learned Counsel for the second respondent
made reliance on the decision in Thomas Varghese v. Jerome,2 to contend that irrespective of the
endorsement by the Bank, the complaint is maintainable. It will be noticed that the said decision did not
deal with the question as to the necessity of allegation regarding the ingredients of the offence. The
question dealt with was whether the endorsement by the Bank is decisive in deciding whether the offence
under Section 138 of the Act is made out.3
66.
InterpretatIon — Section 138, Negotiable Instruments Act.—
The question that. arises for consideration of the Court is, in view of aforesaid scheme of the Act,
when the drawer of the cheque has sufficient notice after his attention is Invited to the dishonour of the
cheque, whether endorsement of “refer to drawer” or “insufficiency of funds” or “funds are not arranged”
or “account is closed” would make any difference ? In Court’s opinion, In the light of specific scheme of
Section 138 of the Act return of a cheque by the Banker with any of the aforesaid endorsements ultimately
connotes dishonouring of cheque on account of fault on the part of person who has issued the cheque in not
providing sufficient funds or in not arranging for the funds or in closing the account. The drawee of the
cheque himself is prima facie answerable as dishonouring of cheque is ultimately referable to insufficiency
of funds. Even if the drawer of the cheque has any other explanation to offer with respect to such
endorsement made by the Bank while returning the cheque, it once again becomes matter of evidence
which is to be adduced by the drawer of the cheque in support of his explanation to such endorsement. It
cannot, therefore, be said that in case where the cheque is returned, by the Banker with endorsement “refer
to drawer” or “insufficiency of funds” or “account closed’ the provisions of Section 138 of the Act are not
at all attracted. The words “refer to drawer” in their ordinary meaning amount to the statement by the
Bank” this Court is not saying, go back to drawer, and ask him why” or else “go back to drawer and ask
him to pay”. In Court’s opinion, therefore, the endorsement by the Banker “refer to drawer” necessarily, in
the banking parlance, mean that “the cheque has been returned for want of funds in the account of the
drawer of the cheque” or the endorsement “account closed” would also mean that “though the account was
in operation when the cheque was issued, subsequently the account Is closed”, which act prirnafacie is
referable to “intention of drawer not to make, payment”. In the scheme of the Act, the Legislature has
provided an opportunity to the drawer to explain the endorsement made by the Banker, and, therefore,
when the complaint is filed based on any such endorsement, it cannot be said that such complaint is not
maintainable or tenable under Section 138 of the Act as In Court’s opinion it is always open to the drawer
of the cheque to explain and establish that dishonouring of cheque was not referable to Insufficiency of
funds of his not making provision of necessary funds. Such a complaint is not, therefore, liable to be
quashed as one not fulfilling the ingredients of Section 138 of the Act 1.
67.
Cornpany’—Personsin..chaige of company liable—Section 138, Negotiable Instruments Act.—
Section 141 of the Act provides that if the person committing an offence under Section 138 is a
Company, every person who at the time of the offence was committed was in charge of, and was
responsible to the Company for the conduct of the business of the Company as well as the Company shall
be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.
The explanation to that section provides that the Company means and includes a firm also.2
68.
Defence—Section 138, Negotiable Instruments Act.—
There is no denial of the fact that the cheque was issued by the petitioners nor this fact has been
controverted that the cheque was dishonoured as the amount of money standing to the credit of the account
of the petitioners was Insufficient to honour the cheque. This fact is also not assailed that within 15 days of
the receipt of information by the respondent from the Bank regarding the return of the cheque was unpaid, a
notice was sent to the petitioners according to the provisions of sub- section (b) of Section 138 of the Act.
Admittedly, the amount was not paid by the petitioners on receipt of the notice wIthin 15 days. Main
contention of the learned Counsel for the petitioners was that when the cheque was Issued there was no
debt or other liability which was legally enforceable against the petitioners. In fact, the cheque was Issued
on 14th January, 1991 while the food was to be supplied by the respondent on 20th January, 1991. This
contention of the learned Counsel does not hold good. The cheque was Issued as an order was placed with
the respondent to supply food and according to the respondent this obligation was fulfilled and the amount
became due. The cheque was presented to the Bank after the function had been held and at that time the
liability was legally enforceable. Whether the food was supplied according to specifications or not is a
question to be decided after evidence is led, but at this stage it cannot be said that ingredients of the offence
were missing and the petitioners were not even prirnafacie liable.1
69.
Notice—SectIons 138 and 142, Negotiable Instruments Act.—
From a conjoined reading of Section 142 (b) and clause (c) of the proviso to Section 138 of the
Act, it would be clear that the cause of action would arise on the expiry of 15 days from the date of receipt
of the statutory notice issued as per Section 138, proviso (b). This Court will now consider the relevant
allegations made in the complaint with regard to an offence under Section 138 of the Act for which the
impugned complaint was lodged. The relevant Paragraph 6 in the complaint reads as follows:
“The complainant sent a legal notice on 1-3-1993 to the very same address as the previous notice
and the notice was returned on 12-3-1993 as “not found”. The complainant submits that the accused is still
operating at the very same address and in order to cheat the complainant the accused is not accepting the
notice.”
In A.B. Steels v. Mis. Coramartdal Steel Products,2 it is held that when the allegations in the
complaint made It clear that the accused was quite aware of the sending of the notice by the complainant
and deliberately avoided the receipt of the same, It cannot but amount to constructive service of notice. In
G. Vasudevan v. Rajammal,3 It was held that deliberate evasion to receive notice would amount to
constructive service of notice. The above rulings would apply to the facts of this case. In Paragraph 7 of the
complaint it Is stated that he is filing this complaint within the stipulated time. On the allegations made in
the complaint with regard to the cause of action which arose on the date of expiry of 15 days from the date
of constructive of service, this complaint Is filed In time.4
70.
Notice-Section 138 (c’), Negotiable Instruments Act.—
A conjoint reading of clause (c) of the proviso to Section 138 of the Act and clause (b) of Section
142 of the Act would show that the cause of action would arise on failure on the part of the payee to pay the
amount within 15 days of the receipt of the said notice. Nowhere It is contemplated that notice Issued by
the drawer of the cheques should prescribe the period of 15 days.
All that has been made obligatory Is that the payee of the holder In due course of the cheque, as
the case may be, makes a demand for the payment of the said amount of money by giving a notice is
writing to the drawer of the cheque, within fifteen days of the receipt of Information by him from the Bank
regarding the return of the cheque as unpaid. Neither clause (c) to section 138 nor clause (b) to Section 142
of the Act prescribes that the notice sent by the payee or the holder in due course must specifically state
that fifteen days time is given. So, it is clear that the first submission made by learned Counsel for the
petitioner, cannot hold good and hence this Court is not accepting the same)
71.
Trust not a juristic person—Cheque issued by Chairman of trust dishonoured—Chairman not liable
to be prosecuted—Section 138, Negotiable Instruments Act.—
Further, as rightly urged by learned Counsel for the respondent, unlike a Company registered
under the Indian Companies Act, the Trust is not a juristic person having a separate legal entity. It can act
only through its trustees. So, when the petitioners came to issue the impugned cheques and that has resulted
in his committing an offence under Section 138 of the Negotiable Instruments Act, he is liable to be
proceeded against. The failure to describe him in the relevant complaint as the trustee of Vellammal Trust
is no consequence. So I find no merit in the contention of the petitioner.2
72.
Plaint to allege that non-payment was due to paucity of fund—Section 138, Negotiable Instruments
Act.—
Complainant did not state in the complaint that dishonour of the cheque was either due to
insufficiency of amount in the account or due to want of arrangement with the Bank. Nor did the
complainant give any evidence on that aspect. The expression “refer to drawer” used by Banks While
returning cheques unpaid need not necessarily be a communication to the effect that the cheque is bounced
due to insufficiency of amount in the account. A Division Bench of this Court has held in Thornns
Varghese v, Jerome,3 that the offence under section cannot depend on the endorsement made by the
Banker while returning the cheque. The endorsement made by the Banker while returning the cheque
cannot be the decisive factor”. Complainant did not adduce even formal evidence to show that the cheque
was returned dishonoured due to insufficiency of amount in the account. 4
73.
Cause of action-Sections 138/142, Negotiable Instruments Act.—
The settled principle of law that the drawing of the cheque, handing over the same followed by the
presentation and dishonouring by the Bank do not amount to or give rise to the cause of action amounting
to an offence but, however, the non- compliance of the demand to pay the amount due, namely debt, within
the time stipulated, clearly amounts to the omission mulcted with the criminai liability, as enunciated in
Sections 138 and 142 of the Act.5
74.
Applicability of Section 5 of the Limitation Act in presenting the complaint beyond the period of one
month prescribed under Section 142 (b) of the Negotiable Instruments Act.—
From areading of Section 142 of the Negotiable Instruments Act it is abundantly clear that unless
the conditions stipulated therein are satisfied, the Magistrate cannot take cognizance of the offence. One of
the conditions stipulated is that the complaint has to be lodged within one month from the date on which
the cause of action arose under clause (c) of the proviso to Section 138. The proviso (c) to Section 138
reads thus
“The drawer of such cheque fails to make the payment of the said amount of money to the payee
or as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the
said notice”.
As soon as 15 days expire from the receipt of the notice issued by the drawee, the offence is said
to have been committed. Under those circumstances, the Legislature Intended that the complaint should be
filed within one month from the date of arising of cause of action. The object with which the time is fixed
is with a view to enhance the acceptability of the cheques in settlement of liabilities by making the drawer
liable for penalties in case of bouncing the cheques due to insufficiency of funds In the accounts or for the
reason that it exceeds the arrangements made by the drawer, with adequate safeguards to prevent
harassment of honest drawers. Chapter XVII of the Act also does not make any mention of application of
Section 5 of the Limitation Act, under those circumstances it is crear view that the Legislature intended that
the complaint should be filed within one month from the date of accrual of cause of action and the
application of Section 5 of the Limitation Act was not made applicable to this complaint. 1
75. -
Person competent to complain—Section 138, Negotiable Instruments Act.—
To consider this point, the relevant allegations in the complaint need be stated. In the first
Paragraph of the complaint, it is stated that the second accused, son of the first accused, and the first
accused are running the business that first accused is the proprietor and second accused Is the authorlsed
signatoiy of M/s. Pushpanchali. In Paragraph 2 of the complaint, it is stated, under particulars of cheques,
that cheques were drawn by the second accused. This Court will immediately refer to Section 138 of the
Act which states that where any cheque drawn by a person, on an account maintained by him with a Banker
for payment of any amount of money to another person from out of that account for the discharge, in whole
or in part, of any debt or other liability, was dishonoured for in sufficient funds or for exceeding the
arrangement, the said person shall deemed to have committed an offence. In this case, the drawer of the
cheque Is the second accused. First accused was the proprietor of the concerns for whose liability his son,
the second accused had issued the cheque and so criminal liability cannot be fastened on the first accused.
So, it Is clear that the first accused cannot be made liable for an offence under Section 138 of the Act in
anyone of the these complaints. Regarding the liability of the second accused, the submission of learned
Counsel for the petitioners was that the complaints have not been laid by the payee or the holder in due
course of the cheques and hence, the complaints are not In order. In the complaint in C.C. No. 9 of 1992 the
complainant Is described as follows:
Mr. S. sb K Manager, M/s. GD. International, Narayan Nagar, Salem 16
In first Paragraph it is stated that the complainant herein is the manufacture of high class variety of
export fabrics, that the accused had purchased high class variety of export fabrics from the complainant and
that towards part payment cheques were Issued. Similar allegations were made In other complaints. In
Paragraph 4 of the complaint It Is stated that the person who has signed and verified the complaint is duly
authorised to file the comlaint and he has got personal Imowledge about the entire transaction.
76.
AllegatIon that non-payment was due to paucity of funds to be made In the complalnt—Section 138,
Negotiable Instruments Act.—
In the instant case the complainant has specifically stated that the cheque was dishonoured as
payment was stopped by the drawer. Nowhere did the complainant say that the cheque was dishonoured
due to want of sufficient amount in the account. Learned Counsel made a bid to show that the Ingredients
can be discarded from Implications In the complaint. This Court finds it extremely difficult to deduce from
the complaint a case of dishonour of the cheque due to want of amount in the account. Averment in the
complaint are totally bereft of such a case.2
77.
Knowledge of dlshonour—Sectlon 138, Negotiable Instruments Act.—
The question is whether the averment “to the knowledge of the defendant No. 1” is sufficient
compliance with the requirements of the statute. Instead of stating that notice of dishonour was given to
defendant No. 1 It Is stated that defendant No. 1 had knowledge of the dishonour by non-payment. The
purpose of notice, however, is to make a person aware of a fact. In that view of the matter the difference in
the expressions seems to be of little consequence. Again It Is to be noted that the defendant No. 1 while
dealing with Paragraph 5 of the plaint nowhere has challenged this assertion by the plaintiff. It Is not denied
in Paragraph 10 of the written statement which deals with Paragraph 5 of the plaint that the defendant No. 1
had no knowledge of the dishonour of the non-payment. In fact it is because the averment was not traversed
that no issue was raised. D, however, was entitled to argue, if he could that in the absence of the essential
pleadings the suit was bound to fail. But what the argument amounts to is that the pleading for the
knowledge of defendant No. 1 is not the same thing as giving notice to defendant No. 1 is not the same
thing as giving notice to defendant No. 1. A suit certainly should not fail or be defeated by such narrow
technicality. The plaintiff should not be prejudiced merely because the facts are Imperfectly stated in some
respects. It may be quoted with respect the observations of Jenkins, L.J. in the case of Vine v. National
Dock Labour BoarcL1 “It would be a sad day if litigants were bound hand and foot by every ill-advised
phrase or argument or submission, that may find Its way Into their pleadings as settled by Counsel.” The
contentions of D, therefore, must fall.2
ACKNOWLEDGEMENT CONSTITUTE
78.
Whether a letter acknowledging receipt of a sum with revenue stamps affixed—A negotiable
Instrument?—Section 4 Negotiable Instruments Act.—
The plaintiff filed the present suit for recovery of a sum of Rs. 15,000/- from the defendant
alleging that there was a family settlement between the plaintiff and brothers on April 9, 1987 and in the
course of that family settlement, certain documents were executed in which one of the document Is the
disputed document. According to the plaintiff, as a result of the family settlement amongst other
documents, the defendant executed a receipt for Rupees 15,000/- acknowledging that he has received
consideration thereof. The receipt was scribed by D, brother-in-law of plaintiff and defendants and signed
by defendant. The defendant In his written statement denied the execution of the said document. He also,
pleaded that document Is a promissory note and is insufficlenly stamped. The text of said document is
reproduced below:
According to the learned Counsel the aforesaid document amounts to a receipt in the form of a
letter and nothing more. It was not intended to be a negotiable Instrument. He further contends that whether
a document was executed as a receipt of promissory note, it has to be construed in accordance with the
primary intention of the parties whether they Intended instrument to be promissory note or a receipt. He
further contends that merely because a instrument which was intended by the parties to act as a receipt also
contains a promise to pay, it does not make the document a promissory note.
On the other hand It was contended by the learned Counsel for the defendant that the aforesaid
document has all the ingredients and contents of the promissory note and, therefore, one need not look
beyond the document for Its construction. According to him, this Is a document for payment of a specific
sum of money to a certain person by a fixed date. Since it contains promise to pay a specific sum of money
to a specific person, it amounts to a promissory note within the meaning of Section 4 of the Negotiable
Instruments Act, and under Section 13 of the Act, there being no condition to the contrary in the document,
it is presumed to be negotiable also. Therefore, document if a promissory note is admittedly insufficiently
stamped cannot be taicen In the evidence even on payment of deficit stamps and penalty thereon. It may be
observed here that the document which is in the form of a letter acknowledging a receipt of Rs. 15,000/- is
affixed with 20 paisa revenue stamp as per the photo copy of it, produced by the plaintiff alongwith plaint.
Learned Counsel for the petitioners further relied on a Full Bench decision of this Court passed In
Nanga v. Dhanna LaI,1 for the proposition that a document besides fulfilling the requirements as laid down
in Section 4 of the Negotiable Instruments Act must also be intended by the parties at the time of its
execution to be a promissory note as understood by commercial world In its popular sense.
I have given my careful consideration to the rival connection raised before me.
It would be profitable to quote here the relevant provisions of the Negotiable Instruments Act.
Section 4. Promissory note.—A “promissory note” is an instrument in writing (not being a Bank-note or a
currency-note) containing an unconditional undertaking, signed by the maker to pay a certain sum of
money only to, or to the order of, a certain person, or to the bearer of the Instrument.
Section 13. Negotiable Instrument.—(l) A “negotiable instrument” means a promissory note, bill of
exchange or cheque payable either to order or to bearer.
Explanation (0.—A promissory note, bill of exchange or cheque is payable to order which Is expressed to
be so payable or which is expressed to be payable to a particular person, and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable.
(i) to (2)
On analysis, the aforesaid provisions Indicate that in order that a document should fall within the
definition of “promissory note”, it must conform to the following conditions viz.
(1) It should be In writing.
(2) It must contain an unconditional undertaking by the maker of the document.
(3) Such unconditional undertaking must be to pay certain sum of money only.
(4) that such underacting to pay certain sum of money must be to a certain person or to the order
of that person or to the bearer of the instrument.
Explanation (1) to Section 13, however, envisages that if the document conforms to the aforesaid
conditions and if the document bears no words prohibiting transfer or indicating of the intention that It will
not be transferred, the document must be deemed to be negotiable. No specific form is needed except that
the document should be In such a form that it should be ordinarily acceptable by a man of commerce to be
a
promissory
note,
intended
to
be
negotiable.
For the purposes of Stamp Act, promissory note has been defined under Section 2 (22) as under:
Promissory note 2 (22).—”Promissory note” means a promissory note as defined by the Negotiable
Instruments Act, 1881
it also includes a note promising the payment of any sum of money out of any particular fund
which may or may not be available, or upon any condition or contingency which may or may not be
performed or happen;
From the perusal of above definition, it appears that the definition of a promissory note in the
Stamp Act for the purposes of stamp duty is wider than the definition given in Section 4 of the Negotiable
Instruments Act but It Is only to the extent that in order to fall within the extended meaning a document
should be a promissory note in all respects except for the contingencies affecting the payment in the two
cases envisaged in the proviso to the ordinarily mercantile sense. The extended meaning only extends to a
document (i) which includes a promise to pay the sum named out of particular funds and such amount may
or may not be available with the fund or (ii) where promise to pay a sum depened upon happening of
condition or contingency which may or may not happen. When payment is not dependent upon any
condition envisaged above, the inclusive definition does not become operative.
In Nawab Major Sir Moharrtmad Akbar Kho.n v. Attar Singh) their Lordshlps observed as under:
“If this document is otherwise within the definition of a promissory note, It would seem that it
must be negotiable for there appear to be no words prohibiting transfer, or indicating an intention that it
should not be transferable.”
‘Their Lordshlps prefer to decide this point on the broad ground that such a document as this Is
not, and could not be. Intended to be brought within a definitIon relating to documents which are to be
negotiable instruments. Such documents must come Into existence for the purpose only of recording an
agreement to pay money and nothing more, though, of course, they may state the consideration. Receipts
and agreements generally are not intended to be negotiable, and serious embarrassment would be caused in
commerce if the negotiable net were cast too wide. This document plainly is a receipt for money,
containing the terms on which it is to be repaid. It is not without significance that the defendants who draw
it, and who were experienced moneylenders, did not draw it on paper witl{ an impressed stamp, as they
would have had to if the document were a promissory note and that they affixed a stamp which is sufficient
if the document is a simple receipt. Being primarily a receipt even if coupled with a promise to pay, it is not
a promissory note.”
From the aforesaid decision, it is apparent that notwithstanding that a document contains a
promise to pay but if It is primarily intended to be a receipt and not intended to be negotiable in the
ordinarily mercantile sense, the document does not become a promissory note within the meaning of
Negotiable Instruments Act. In the said case affixing of a stamp sufficient for a receipt by man of business
was taken to be a relevant consideration of great Importance Is gathering the intention of the parties.
Again in Lain Karam Chrind v. Firm Mian Mir Ahmad Aziz AhmacL’ the Board reiterated the
view taken in MohrL Akbar Khari’s case.2 After taking notice of the fact that a document to be quoted
hereinafter contains a promise to pay and that there is strong current of Indian Authorities to the effect that
such document comes within the mischief of Section 35 of the Stamps Act, observed as under:
Since the judgment of the Judicial Commissioner’s Court, a decision of this Board, (1936) 63 Ind
App 279 : AIR 1936 PC 171, has made it clear that the shadow resting upon these exhibits throughout the
case was unreal ; that documents of this nature which were clearly never intended to be negotiable
Instruments at all are not promissory notes and are not, therefore, for want of a stamp, inadmissible in
evidence.”
The
relevant
extract
of
document
in
question
was
reading
as
under
“Received from you this 5th day of Asuj, 1986, Sambat corresponding to 21th September, 1929 a cheque
for Rs. 10,000/- drawn by you on Messrs. Grindlay & Co., Ltd., Peshawar. The amount would be repaid
with interest thereon at the rate of Rs. 11-4-0 p.c. Time ten months. The principal amount will be paid with
Interest after ten months from this date.
Received from you this 23rd of Asuj, 1986, Sambat corresponding to 8th October, 1929, cheque
No. 50284, dated 8th October for Rs. 10,000/- drawn on the Imperial Bank of India, Limited, Peshawar.
The amount to be paid back with Interest at the rate of Rs. 11.4.0. p.c. after ten months.
This principal amount with interest thereon to be repaid after ten months from this date.”
The Court held that the document not to be a promissory note but merely receipt.
Without
multiplying
the
number
of
decisions
on
the
point,
it
will
be
relevant
to
refer
to
the
two
decisions
of
this
Court
enunciating
the
general
F
principles
in
this
regard
after
detailed
review
of
earlier
decision
of
the
Courts
in
England
as
well
as
in
India
including
the
two
decisions
referred
to above.
A Division Bench of this Court In Gorcthansingh v. Suwalal and Katyanbux’ with reference to Section 4 of
the Negotiable Instruments Act, held as under
“It will be seen that in order that a document may fall within the definition of “promissory note” contained
in the Negotiable Instru ment Act, it is necessary that there should be
(i)
(ii)
(iii)
(iv)
an unconditional undertaking to pay;
the sum should be a sum of money and should be certain;
the payment should be to or to the order of a person who i certain, or to the bearer of the instrument, and
the maker should sign it.” The Court further went on to observe as under with reference to the
requirements under Stamps Act: But besides fulfilling the terms of the definition, the
instrument must pass three further tests—
(1)
(2)
(3)
the promise to pay must be the substance of the instrument.
there must be nothing else inconstant with the character of the instrument as substantially
a promise to pay, and
the instrument must be intended by the parties to be a promissory note.” To this
conclusion,
the
Court
had
arrived
at
after
review of
a
large
number of decisions including the Privy Council decisions in MohrL Akbar Khan’s
case.2
The question again cropped up before a Full Bench of this Court in Nangav. Dho.nnaLal,3 Justice
Bhargava, with whom the other two learned Judges concurred in their separate judgment stated the law as
under (at p. 77 of AIR)
“I, am, therefore, of the view that a promissory note besides fulfilling the requirements as laid
down in Section 4 of the Negotiable Instruments Act must also be intended by the parties at the time of its
execution to be a promissory note as understood by commercial persons in its popular sense which means
that unless, it falls within the exception provided in the wider definition of the Stamp Act, or is otherwise
expressly or by implication made not transferable instrument, if the Instrument does not fall within the
abovementioned exceptions and does not stand the test of negotiability, It will not be a promissory note
even though it contains an unconditional undertaking to pay money.”
From the above, it Is clear that In order to find out whether a particular document is a promissory
note or not, the intention of the parties at the time of execution of the document is to be looked into with
reference to the substance of the document, the surrounding circumstances in which the document has been
executed and its negotiability in the popular sense, whether the document was intended to be a promissory
note or was intended to be a mere acknowledgment of a debt or receipt of consideration.
Thus, it is the question of fact in each case whether a particular document is primarily an
acknowledgement of debt or receipt of a promise to pay the certain amount.
If the document in question is to be read in the light of the principal enunciated above, it will be
seen that it is in a form of a letter which opens with acknowledging receipt of Rs. 15,000/- on April 9, 1987
by the defendant. The recipient further states that the amount shall be paid by him on May 9, 1987 and will
not be kept beyond that date. It was affixed with a stamp of 20 paise as was payable on a receipt. The
surrounding circumstances in which the document was alleged to have been executed is that as a result of
certain family settlements between the parties concerning the family properties on April 9, 1987, the
document was written in acknowledgement of receipt of consideration containing an agreement to repay
the amount within the time stated in the document by the executant. The document was kept in the custody
of parties father because the formalities have not been completed In respect of family settlement that has
taken place on April 9, 1987. The receIpt was kept with the father of the parties until the completion of
such formalities and it is because of this reason the plaintiff alleges that main receipt is not in his
possession and It has either been destroyed or has come in possession of the defendant. He was in
possession of only the photo-copy of the document which has been produced. The defendant has not denied
the factum ol family settlement on April 9, 1987. He merely states that exact date of settlement he does not
remember. He has denied the execution of document by him. In these circumstances, for the present
purposes, it has to be assumed, that if the document is proved to be executed by defendant, it was executed
as a part of process of family settlement. The parties in these circumstances could not have intended to
bring Into existence a negotiable Instrument in commercial sense. Nor it is the document in the form in
which a document ordinarily intended to be a negotiable in the popular commercial sense by a common
mercantile man is written. Moreover, though affixing of a particular stamp Is not a conclusive proof of
nature of document, but Is a relevant consideration about the intention of the parties as to what the parties
intended the document to be. Tue parties are members of a business community. The document bears a
stamp of 20 palse which is requisite for a receipt. By affixing a stamp of 20 palse in a document which
starts with recital of receipt of consideration with a promise to pay Rs. 15,000/- by May 9, 1987, promise
which is otherwise Inherent in every receipt of amount as a loan or deposits, gives a strong clue to the
Intention of the parties that the parties were aware with the stamp law and their primary intention was to
execute the document as an evidence of receipt of Rs. 15,000/- only by the executant with an agreement to
pay the amount within the stipulated time, and not beyond, by the executant and was not intended to be
negotiable
instrument.
In Mohd.. Akbar Khun’s case,1 the Privy Council has also laid great stress on the fact of affIxIng
stamp sufficient for receipt on the document by the executañt Is a strong circumstance to draw inference
that the person writing the document Intended it to be as a receipt and not as a promissory note though It
may incidentally contained a promise to pay. The Court of Appeal applied the principle enunciated in
Mohd. Akbar’s case,2 In Claydon v. Bradley,3 to a document which reads as “received from Mr. and Mrs.
T. Claydan the sum of 10,000 (Ten thousand pounds) as a loan to be paid back In full by 1st July, 1983
with interest at the rate of 20% (twenty per cent) per annum “by holding the document to be merely a
receipt which was not Intended to be negotiable.
In the totality of circumstances, this Court is of the opinion, that the document In question quoted
above, cannot be treated as a promissory note, but has been written by the executant primarily as a receipt
of consIderation with an agreement to repay the same by a fix date and not later. Applying the test of
primary intention of the parties as to substance of document, It must be held to be a receipt with an
agreement to pay the amount within the stipulated time. 4