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PETITIONER: U. PONNAPPA MOOTHAN SONS, PALGHAT

       Vs.

RESPONDENT: CATHOLIC SYRIAN BANK LTD. AND OTHERS

DATE OF JUDGMENT18/09/1990

BENCH: REDDY, K. JAYACHANDRA (J) BENCH: REDDY, K. JAYACHANDRA (J) VERMA, JAGDISH SARAN (J)

CITATION:  1991 AIR  441            1990 SCR  Supl. (1) 542  1991 SCC  (1) 113        JT 1990 (4)    94  1990 SCALE  (2)579

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

HEADNOTE:     What  is  the true meaning and scope of  the  expression ’holder in due course’ as defined in Section 9 of the  Nego- tiable  Instruments Act, 1881, was the question  that  arose for consideration in this appeal.     Consequent  upon  the pleading of  promissory  note  and other title deeds relating to her property by Defendant  No. 5, (mother of Defendants 2 to 4) in favour of the respondent Bank  as security, thereby creating an  equitable  mortgage, the respondent Bank allowed credit facilities like  accommo- dation  by way of Hundi discount, Key loan and  cheque  pur- chases  upto a limit of Rs.35,00,000 to Defendant No.  1,  a firm  consisting of defendants Nos. 2 to 4 as partners.  The first  defendant firm had business dealings with the  appel- lant defendant No. 6. In course of business it was supplying goods  consisting of hill products and used to receive  pay- ment by way of cheques from defendant No. 6. Defendant No. 6 issued two cheques drawn on the Union Bank of India,  Palgh- at,  in favour of the first defendant payable to  the  first defendant  firm on order. The cheques were purchased by  the Respondent-bank  and proceeds thereof were credited  by  the bank to the account of first defendant, on valid  considera- tion.  The  first defendant withdrew the amount  at  various dates. When the respondent-bank sent the cheques for collec- tion, the Union Bank of India returned the cheques with  the endorsement  "full  cover not received". Defendants 2  to  5 agreed to pay the amounts to the Bank but could not pay  the full  amount,  with  the result the Bank filed  a  suit  for recovery of the balance amount from Defendant No. 6 also who had issued the cheques in question. At the trial,  Defendant No.  6 contended that since the firm (defendant No.  1)  did not  supply  the goods, it could not pay the  money  in  the bank.  According to Defendant No. 6, the appellant, did  not admit  the  purchase of cheques by the  respondent-bank  for valid  consideration  and  hence denied that  the  bank  was ’holder  in due course’. The trial court held that  the  re-

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spondent-bank is a ’holder in due course’ and as such  enti- tled to enforce the liability against the  appellant-defend- ant No. 6. 543 The  trial  court  also held defendants 2  to  4  personally liable for the plaint claim. Against the order of the  trial court  the appellant-defendant No. 6 alone appealed  to  the High  Court.  The High Court affirmed the  findings  of  the trial court but modified the decree holding that the immova- ble properties mentioned in the schedule to the plaint would first be proceeded against and in case the entire amount  of decree is not realised by the sale of those properties,  the Bank would proceed against the assets of the firm--defendant No.  1 and for the balance, if any, the  decreeholder  would proceed against the defendants Nos. 2-4 and 6. Aggrieved  by the  said  order of the High Court, the  6th  defendant  has preferred this appeal. Dismissing the appeal, this Court,     HELD:  Indian  Law  is stricter, and  is  not  satisfied merely with the honesty of the person taking the instrument, but requires the person to exercise due diligence, and  goes a  step further than English Law in scrutinising the  causes which go to make up the belief in the mind of the  transfer- ee. [359B]     In  the instant case, the holder namely defendant No.  1 made the necessary endorsements in the two cheques in favour of  the plaintiff Bank and the Bank endorsed "payee  account credited".  The  defendant No. 1 withdrew  this  amount  and there is no dispute about it. It must also be noted in  this context  that there is no endorsement on the cheque made  by the  drawer namely the appellant that cheques are not  nego- tiable.  In  the absence of the cheques being  crossed  "not negotiable" nothing prevented the plaintiff Bank to purchase the cheques for a valuable consideration and the presumption under  Section  118(g) comes to his rescue and there  is  no material  whatsoever to show that the cheques were  obtained in  any unlawful manner or for any  unlawful  consideration. [358E-G]     In a given case it is left to the court to decide wheth- er  the  negligence on part of the holder is  so  gross  and extraordinary as to presume that he had sufficient cause  to believe that such title was defective. [370A]     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  re- quirement invariably depends upon the facts and cir- 544 cumstances  in each case. The words "without  having  suffi- cient cause to believe" have to be understood in this  back- ground. [370B-C]     In  the instant case, 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 defendants No. 1 and 6. Even  if defendant  No.  1 has not supplied the goods in  respect  of which the cheques in question were issued by defendant No. 6 there  was  no cause at any rate sufficient  cause  for  the plaintiff  to doubt the title of defendant No. 1 nor can  it be  said that the plaintiff acted negligently.  Viewed  from this background it cannot be said that there was  sufficient

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cause  to doubt the title nor there is scope to infer  gross negligence on the part of the plaintiff. [370E-G]     Nelson v. Larhold, [1948] 1 K.B. 339; Baker v.  Barclays Bank  Ltd.,  [1955] 2 All E.R. 571; Gill v.  Cubitt  English Reports,  107 Kings’ Bench 806; Durg Shah Mohan Lal  Bankers v. Governor General in Council and Others, AIR 1952  Allaha- bad  590; Sunderdas Sobhraj, a firm v. Liberty  Pictures,  a firm,  AIR 1956 Bombay 618; A.L. Underwood Ltd. v.  Bank  of Liverpool  and  Martins; Same v. Barclays Bank,  [1924]  All E.R. 230 at page 241, referred to.     Raghavji  Vizpal v Narandas Parmanandas Bombay  Law  Re- porter, Vol. VIII (1906) 921, Overruled.     Chitty  on Contracts, 26th Edn. Paragraphs 2778 &  2781; Chalmers on Bills of Exchange, 13th Edn. at p. 283; Paratha- sarathy  on  Cheques in Law and Practice, 4th  Edn.  p.  74; Halsbury’s Laws of England, 4th Edn. paragraph 221 page  186 and paragraph 222, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 183 of 1984.     From  the  Judgment and Order dated  23.10.1982  of  the Kerala High Court in A.S. No. 309 of 1977.     Dr.  Y.S.  Chitale, Aseem Mehrotra, Mukul  Mudgal,  R.K. Aggarwal, S.K. Aggarwal and Sudhir Gopi for the Appellant. 545 G. Viswanatha Iyer and P.K. Pillai for the Respondents. The Judgment of the Court was delivered by     K.  JAYACHANDRA  REDDY, J. In this appeal  an  important question  touching upon the interpretation of Section  9  of The  Negotiable  Instruments  Act, 1881  (’Act’  for  short) defining ’holder in due course’ falls for consideration. The appeal is directed against the judgment of the High Court of Kerala  confirming  the judgment of the  Subordinate  Judge, Tellicherry  in Original Suit No. 74 of 1975. To  appreciate the  question  involved it becomes necessary  to  state  the relevant  facts and while stating so we shall refer  to  the parties as arrayed in the suit for convenience sake.     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  Telli- cherry in hill produces and they were allowed credit facili- ties  by  the plaintiff Bank, like accommodation by  way  of Hundi  discount, key loan and cheque purchases upto a  limit of  Rs.35,00,000. A promissory note was executed by  defend- ants Nos. 2 to 4 in favour of their mother, the 5th  defend- ant for an amount of Rs.35,00,000 and the same was  endorsed in  favour of the plaintiff as security for  the  facilities granted  to the first defendant firm. The 5th defendant  had also  deposited the title deeds of her properties  shown  in the  plaint  schedule  to create an  equitable  mortgage  to secure  the repayment of the amounts due from first  defend- ant. The first defendant firm had dealings with 6th  defend- ant as well as others. The first defendant firm was  supply- ing  goods consisting of hill products and used  to  receive payments by way of cheques. On 26.10.74, 6th defendant  drew a  cheque  on  the Union Bank of India,  Palghat  Branch  in 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

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Bank to the account of the first defendant. Similarly anoth- er  cheque was drawn on 31.10.1974 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 plaintiff Bank 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  sepa- rate agreements offered to pay 546 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 12,3 13.35 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  defendant No. 6 who is the appellant  herein,  con- tended  that the cheques-were issued to the first  defendant on  their  representation  that they would  supply  a  large consignment of pepper, dry ginger etc. and the understanding was  that  the  cheques would be presented  only  after  the consignment was despatched. Since the first defendant failed to  despatch the goods, the 6th defendant could not pay  the money  in  the Bank and therefore the cheques were  not  ho- noured. He also pleaded that he would not admit the purchase of  cheques by the plaintiff and that plaintiff was  only  a collection agent and there was no consideration for purchase and therefore the plaintiff was not a holder in due  course. It  was also contended that plaintiff acted negligently  and in  disregard of the provisions of law, therefore there  was no  valid cause of action against the defendant. It may  not be necessary for us to refer to the stand taken by the other defendants.  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 6th defendant alone filed an appeal in the  High Court and the others figured as respondents. The High  Court confirmed  the findings of the trial court but modified  the decree  holding that immovable properties described  in  the Schedule  to  the plaint would be proceeded against  in  the first  instance  and if the entire decree amount  cannot  be realised by the sale of those properties, the plaintiff-Bank would proceed against the assets of the first defendantfirm, and for the balance, if any, the decree-holder would proceed against  defendants Nos. 2 to 4 and 6 and the  liability  of the  5th defendant is restricted to the extent of  immovable properties mortgaged by her. Aggrieved by the said  judgment and decree, the 6th defendant has preferred this appeal.     Dr. Chitale, learned counsel appearing for the appellant submitted   that   respondent  No.  1  herein   namely   the plaintiff-Bank is not a ’holder in due course’ and therefore cannot maintain any legal action 547 against the appellant i.e. defendant No. 6 who had drawn the cheques.  His  main submission is that  the  plaintiff  Bank acted  negligently and did not act in good faith  in  paying the  amounts  due under the cheques to  the  defendant  firm without  making any enquiries regarding the "title"  of  the person  namely defendant No. 1 from whom the Bank claims  to

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have purchased the cheques for consideration. It is  submit- ted  that  the cheques were issued by defendant No.  6,  the appellant,  with the understanding that the goods  would  be supplied and the plaintiff Bank without making any enquiries whether  the  goods  were supplied or not  and  without  any verification  from the Union Bank of India paid the  amounts to  the  payee namely defendant No. 1 within few days  in  a hasty  and  negligent manner. Therefore,  according  to  the learned counsel, the necessary ingredients of the definition of  ’holder in due course’ in the case of plaintiff are  not satisfied and consequently the plaintiff Bank can not  main- tain any claim against the appellant.     Section  9  of  the Act which  defines  ’holder  in  due course’ reads as under: "Holder  in due course" means any person who for  considera- tion  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  with- out  having  sufficient  cause to believe  that  any  defect existed in the title of the person from whom he derived  his title." The  definition makes it clear that to be a ’holder  in  due course’ a person must be a holder for consideration and  the instrument  must  have  been transferred to  him  before  it becomes  overdue and he must be a transferee ’in good  faith and  another  important  condition is  that  the  transferee namely the person who for consideration became the possessor of  the  cheque should not have any reason to  believe  that there was any defect in the title of the transferor.     It  is beyond dispute that the plaintiff  bank  credited the proceeds to the account of the first defendant who  also withdrew the amount on various dates. Therefore it has  been rightly  held that the plaintiff purchased the  cheques  for valid  consideration after the necessary endorsement by  the bearer before they became overdue. In this con- 548 text,  the  learned  counsel. however,  contended  that  the plaintiff was only a holder and was only a collection  agent as per the endorsement made by the defendant No. 1.  Section 8  defines ’holder’ as a person entitled in his own name  to the possession of a cheque or bill of exchange or a  promis- sory  note and to receive or recover the amount due  thereon from the parties thereto. Section 118 of the Act which deals with the presumptions as to negotiable instruments  provides in  clause  (g) that the holder of a  negotiable  instrument shall be presumed as a holder in due course. Section  118(g) reads as under: "118.  Until the contrary is proved, the following  presump- tions shall be made: XX                          XX                     XX XX                          XX                     XX (g)  that the holder of a negotiable instrument is a  holder in due course; provided that, where the instrument has  been obtained from its lawful owner, or from any person in lawful custody  thereof,  by means of an offence or fraud,  or  has been  obtained from the maker or accept or thereof by  means of  an offence or fraud, or for unlawful consideration,  the burden of proving that the holder is a holder in due  course lies upon him." 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

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context  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 show that the cheques  were obtained in any unlawful manner or for any unlawful  consid- eration.     Now the question is whether the other requirement of the definition i.e. "without having sufficient cause t9  believe that any defect existed in the title of the person from whom he  derived  his title" is  satisfied.  It is  contended  on behalf of the appellant that the cheques were issued on  the representation that the defendant No. 1 would 549 supply  the  goods and that the cheques would  be  presented after  the despatch and delivery of the goods but  defendant No. 1 failed to despatch the goods and that plaintiff  with- out  any  enquiries about the title of the payee  could  not have  purchased  the cheques because  there  was  sufficient cause  to believe that the title of the bearer was not  free from  defects. According to the learned counsel, the  Indian Law is stricter, and is not satisfied merely with the hones- ty  of  the person taking the instrument, but  requires  the person  to exercise due diligence. and goes a  step  further then English Law in scrutinising the causes which go to make up the belief in the mind of the transferee.     To  appreciate the submission of the learned counsel  it becomes necessary to refer to the various authorities  cited by  him including the text books, in the first  instance  an English  law and then on Indian Law on the subject. In  Eng- lish  Law,  Section 29 of the Bills of  Exchange  Act,  1882 defines ’holder in due course’. The relevant part of Section 29(1)(b) reads thus: "29.  Holder in due course--(a) A holder in due course is  a holder  who  has taken a bill, complete and regular  on  the face of it, under the following conditions. namely: (a) xx                     xx                     xx (b)  that he took the bill in good faith and for value,  and that  at the time the bill was negotiated to him he  had  no notice of any defect in the title of the person who  negoti- ated 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 and negligence will not affect his title.     In  Byles  of Bills of Exchange, 25th Edn.  Page  206  a passage reads thus: 550 "A wilful and fradulent absence of inquiry into the  circum- stances,  when  they are known to be such as to  invite  in- quiry,  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  Nelson v. Larholt, [1948] 1 K.B. 339 the  defendant  re- ceived  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

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the executor’s want of authority. In Baker v. Barclays  Bank Ltd., [1955] 2 All E.R.’ 571 the expression "notice"  occur- ring  in Section 2(1)(b) of the Bills of Exchange Act,  1882 is  interpreted to mean actual notice and there is no  ques- tion of constructive notice.     In  Chitty  on Contracts, 26th Edn. the  learned  author states  the  requirement  that must be  fulfilled  before  a person may be considered a holder in due course as under: "First, he must take the bill when it is complete and  regu- lar  on  its face. Secondly, he must take it  before  it  is overdue  and  without notice that it was  previously  disho- noured, 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 holder, who has taken  a  cheque with the knowledge of its having been countermanded, is  not a  holder in due course. Thirdly, he must -take it  in  good faith  and without having notice of any defect in the  title of 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  circum- stances  amounting  to fraud. Last, 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 551 party  thereto  for value. Every holder of a bill  is  prima facie  deemed to be a holder in due course; but if  the  ac- ceptance,  issue or subsequent negotiation of the  bill  was affected  with  fraud, duress or illegality, the  burden  of proof is shifted, and the holder must prove that. subsequent to the alleged fraud or illegality, value was in good  faith given for the bill. Thus, once a fraud is proved. the burden of  proof  is shifted to the holder who must then  show  not only  that value has been given for the bill. but also  that he  took  the bill in good faith and without notice  of  the fraud.  If the holder can discharge this onus he is,  again, in the position of a holder in due course."                                        (emphasis supplied) The learned author Chitty in paragraph 2778 dealing with the subject ’The Consideration for a Bill’ has stated thus: "For example, if a person whose banking account is overdrawn negotiates to this bankers a cheque. drawn by a third party, to  reduce  the overdraft, the banker becomes a  holder  for value of the cheque. The pre-existing debt of the  overdraft is  a  sufficient consideration for the negotiation  of  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  hon- estly,  he is deemed to have acted in good faith whether  it is negligently or not. With the above background of  English Law. we shall now examine the Indian law on the subject.     In  Bhashyam & Adiga on the Negotiable Instruments  Act, 15th  Edn.  at  page 171, the authors have  dealt  with  the position  in Indian law and it is observed that it would  be Seen  that  the  Indian Legislature has  adopted  the  older English law as laid down by Abbott. C.J., (later Lord  Tent- erden) in Gill v. Cubitt, English Reports 107˜ King’s Bench 806.  Relying on this passage the learned counsel  proceeded to  submit that the Indian law is stricter than English  law

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and  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 (supra) is a case where a bill of exchange was stolen during the  night.  and taken to the office of  a  discount  broker early in the following 552 morning  by  a person whose features were known,  but  whose name  was unknown to the broker and the latter being  satis- fied  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 whom 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  purloin- ing, stealing, and defrauding.persons of securities of  this sort.  The interest of commerce requires that bona fide  and real  holders of bills, known to be such by those with  whom they  are  dealing, should have no  difficulties  thrown  in their way in parting with them. But it is not for the inter- est  of  commerce that any individual should be  enabled  to dispose of bills or notes without being subject to inquiry." Bayley, J. agreeing with Abbott, C.J.. however, added:          admit  that  has  been generally the  case;  but  I consider it was parcel of the bona fides whether the  plain- tiff  had asked all those questions which, in  the  ordinary and proper manner in which trade is conducted, a party ought to  ask.  I  think from the manner in which  my  Lord  Chief Justice  presented  this case to the  consideration  of  the jury, he put it as being part and parcel of the bona  fides; and it has been so put in former cases." Holroyd.  J.,  having agreed with Abbott, C.J.  further  ob- served that: 553 "The  question  whether a bill or note has been  taken  bona fide  involves in it the question whether it has been  taken with  due  caution. It is a question of]act  for  the  jury, under all the circumstances of the case. whether a bill  has been taken bona fide or not; and whether due and  reasonable caution has been used by the person taking it. And if a bill be drawn upon parties of respectability capable of 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, I think 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

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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. I think those circumstances tend strongly  to show  that the party who discounted the bill did not  choose to  make inquiry, but supposing the questions might  not  be satisfactorily  answered,  rather than refuse  to  take  the bill, took the risk in order to get the profit arising  from commission and interest." (emphasis supplied) In Chalmers on Bills of Exchange, 13th Edn. at page 283  the learned author deals with the expression good faith’  occur- ring  in  Section  90 of the said Act and it  is  stated  as under: "Test of bona fides The  test  of bona fides as regards  bill  transactions  has varied greatly. Previous to 1820 the law was much as it  now is under the Act. But under the influence of Lord  Tenterden (Abbott,  C.J. in Gill v. Cubbitt) due care and caution  was made  the  test, and this principle seems to be  adopted  by Section 9 of the Indian Negotiable Instruments Act." (emphasis supplied) The  learned author Parathasarathy in his book  ’Cheques  in Law and 554 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  instru- ment  in  good faith. Under Indian law, there should  be  no cause to believe that any such defect existed. Hence, it  is not  sufficient if the holder acts in good faith. He  should also exercise due care and caution in taking the instrument. Perhaps,  the Indian definition is based on Gill v.  Cubbit, [1824] 3 B & C 466)". In  Raghavji  Vizpal  v. Narandas  Parmanandas,  Bombay  Law Reporter Vol. VIII (1906) 921 the Bombay High Court,  howev- er.  held  that negligence does not affect the  title  of  a person taking the instrument in good faith for value. It  is observed thus: "The test of good faith in such cases is thus: Regard to the facts  of which the taker of such instruments had notice  is most  material  whether he took in good faith. If  there  be anything  which  excites suspicion that there  is  something wrong in the transaction, the taker of the instrument is not acting  in  good  faith if he shuts his eyes  to  the  facts presented  to  him  and puts the  suspicions  aside  without further inquiry."                                       (emphasis supplied) We  may also mention it here that there is no  reference  to Gill’s  case in the above decision. In Bhashyam &  Adiga  on the  Negotiable Instruments Act, 15th Edn. at page 172.  the author having noticed the ratio in Raghavji’s case observed: "The  Bombay High Court quoted the later  English  decisions with  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  Mohan Lal Bankers v.  Governor  General  in Council  & Others, AIR 1952 Allahabad 590 a  Division  Bench examined the scope 555 of the provisions of Section 9 of the Act and held that:

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"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 bona fide".  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 bona fides 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."                                        (emphasis supplied) In this case also there is no reference to Gill’s case.  The learned  counsel for the appellant submitted that the  deci- sion  in Raghavji’s case is in favour of the appellant.  He. however. conceded that the Durga Shah’s case is in favour of the  respondent  i.e. the plaintiff Bank. We  may,  however, note  another  judgment of the learned Single Judge  of  the Bombay  High Court in Sunderdas Sobhraj, a firm  v.  Liberty Pictures,  a firm, AIR 1956 Bombay 618 wherein the scope  of Section 9 is considered and it is held thus: "The rule as laid down in S. 9 of the Negotiable Instruments Act  which defines "holder in due course" is  stricter  than the rule of English law on the subject and a payee or endor- see 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  sufficient  cause  to believe  that any defect existed in the title of the  person from whom he derived his title.           A bona fide holder for value without notice is, of course.   as  I  have  already  observed.  in  a   different position." The  learned Single Judge has not. however. referred to  the Raghavji’s  case. We have. already noted that in  Raghavji’s case  reliance was placed on English decisions later to  the decision  in Gill’s case. The authors Chalmers.  Bhashyam  & Adiga and Parathasarathy have uniformly stated that  Section 9  of the Act is based on the ratio in Gill’s case.  Learned counsel  appearing on both sides could not place  any  other decision  directly  on the question. The view taken  by  the Allahabad High Court in Durga Shah’s case is more or less in accordance 556 with the principle laid down in Gill’s case.     However,  with regard to the legal importance of  negli- gence in appreciating the principle of "sufficient cause  to believe" a passage from Chalmers’ took "The Law Relating  to Negotiable  Instruments in British India" 4th Edn. may  use- fully be noted: "All  the  circumstances  of the  transactions  whereby  the holder became possessed of the instrument have a bearing  on the  question whether he had "sufficient cause to  believe’’ that any defect existed.           It  is  left to the Court to decide, in  any  case where the holder has been negligent in taking the instrument without  close  enquiry as to the title of  his  transferor. whether  such negligence is so extraordinary as to  lead  to the  presumption that the holder had cause to  believe  that such title was defective."                                       (emphasis supplied) This  view is more sound and logical. The legal position  as explained 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."

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We.  therefore. modify the view taken by the Allahabad  High Court  in  Durga Shah’s case to the extent that  though  the failure  to prove bona fide or absence of  negligence  would not  negative the claim of the holder to be a holder in  due course.  yet in the circumstances of a given case. if  there is  patent  gross  negligence on his part  which  by  itself indicates lack of due diligence. it can negative his  claim. for  he  can not negligently disregard a  "red  flag"  which arouses  suspicion regarding the title. In this view of  the matter  we hold that the decision in Raghav. ii’s case  does not  lay down correct law. We agree with the view  taken  by the Allahabad High Court with above modification.     Before  we  apply the above principles to the  facts  of this  case we would like to advert to another submission  of the  learned counsel Dr. Chitale. He urged that in  the  in- stant  case the plaintiff Bank has not acted in  good  faith and with due diligence in crediting the proceeds to 557 the  account of the defendant No. 1 inasmuch as there is  no authority  either  by  way of express  or  implied  contract between  them  and the defendant No. 1. In support  of  this submission he relied on certain passages in Halsbury’s  Laws of England. In Halsburv’s Law of England, 4th Edn. in  para- graph 22 1 (page 186) the author says: "Bank  as holder for value. A banker who is asked-by a  cus- tomer  to collect a cheque and who. pursuant to  a  contract express or implied to do so. credits the customer  forthwith with  the amount of the cheque before the proceeds  are  re- ceived, in fact receives the sum for himself and not for the customer;  but he has the same statutory protection in  such circumstances  as if he had received payment of  the  cheque for the customer. XX                            XX                       XX Every holder is deemed to be a holder in due course; but. if the  instrument is shown to be affected by fraud.  a  banker dealing  with it must show that he gave value in good  faith subsequent to the fraud. The status of holder for value  may be  claimed by the bank; where cash has been given  for  the cheque over the counter; where the cheque is paid in  intro- duction of an overdraft. where the cheque is paid in on  the footing  that  it may be at once drawn against,  whether  in fact  it  is drawn against or not; or where  the  cheque  is subject  to a lien. However, the mere existence of an  over- draft. though the banker’s lien in respect thereof makes him a  holder  for value to the extent of that lien,  would  not preclude the protection. XX                        XX                       XX A  banker  who gives value for. or has a lien on,  a  cheque payable to order which the holder derives to him for collec- tion without endorsing it as such, if any rights as he would have  had  if, upon delivery, the holder  has  endorsed  the cheque in blank. A banker taking such a cheque is the holder thereof  and.  if the requisite conditions  are  present,  a holder for value or in due course. It is not essential  that the cheque be credited to the account of the holder." Yet  another  important passage in paragraph  222  reads  as under: "222. Crediting as cash. The mere fact that the banker has 558 credited the cheque in his customer’s account before receiv- ing the proceeds does not deprive him of protection  against the true owner in the event of his customer having no title. or  a defective title, to the cheque. Crediting the  custom- er’s  account does not of itself alter the position  of  the banker  from that of agent for collection to that of  holder

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for  value. It is a question of fact in each case. In  order to  constitute the banker a holder for value on  his  ground there  must  be  a contract, express or  implied,  that  the customer  should be entitled to draw against the  amount  of the cheque before it is cleared.           If the banker becomes a holder for value. he  may. in the absence of a forged endorsement and unless the cheque is  crossed  ’not negotiable’ sue upon a cheque in  his  own name as a holder in due course and may debit the customer if the cheque is dishonoured., He may apparently plead that  he is a holder for value as against the person claiming as true owner, except where the endorsement is forged or the  cheque is marked ’not negotiable.’"                                       (emphasis supplied) The above two passages indicate that the Banker who is asked to collect a cheque can credit the customer with the  amount before the proceeds are received and if he has acted in good faith he has the necessary statutory protection and  credit- ing the customer account does not by itself alter his  posi- tion  but  that however is a question of fact in  each  case namely whether there was such a contract express or  implied that  the  customer should be entitled to draw  against  the amount of cheque before it is cleared.     In A.L. Underwood Ltd. v. Bank of Liverpool and Martins, Same  v.  Barclays Bank, [1924] All. E.R. 230  at  page  241 Atkin, L.J. dealing with the protection that can be  availed by a banker in such case, observed as under: "It  is sufficient to say that the mere fact that the  bank. in their books. enter the value of the cheques on the credit side  of  the account on the day on which they  receive  the cheques  for collection. does not, without more.  constitute the bank a holder for value. To constitute value there  must be  in such a case a contract between banker  and  customer. express  or implied. that the bank will, before  receipt  of the 559 proceeds.  honour cheques of the customer drawn against  the cheques.  Such  a contract can be established by  course  of business  and may be established by entry in the  customer’s pass  book, communicated to the customer and acted  upon  by him. Here there is no evidence of any such contract."                                     (emphasis supplied) To  the same effect is the ratio laid down in Baker v.  Bar- clays  Bank Ltd.. [1955] 2 All E.R. 571. After applying  the dictum  of  Atkin, L.J. in Underwood’s case it  is  observed therein that "it was not enough to show merely that the bank had  entered the value of the cheques on the credit side  of the  account  on  which the bank received  the  cheques.  To constitute  value  there must be in such a case  a  contract between  banker and customer, express or implied,  that  the bank  will before receipt of the proceeds honour cheques  of the customer drawn against the cheques."     We  find another passage in the above decision  at  page 581 which reads thus: "What is suggested is that the bank did not give value.  and the  question  arises which often arises in  cases  of  this sort.  namely, whether, when a cheque is given to a bank  in these circumstances, the bank takes the cheque giving  value for and then becoming a holder in due course, or whether the bank  takes the cheque merely to collect the amount  of  the cheque for someone else.           That is a question of fact. The true  relationship has to be inferred from the acts of the parties."                                        (emphasis supplied)     From  the  above discussion it emerges that  the  Indian

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definition imposes a more stringent condition on the  holder in due course then the English definition and as the learned authors  have noted the definition is based on Gill’s  case. Under  the  Indian  law, a holder, to be  a  holder  in  due course, must not only have acquired the bill, note or cheque for valid consideration but should have acquired the  cheque without  having sufficient cause to believe that any  defect existed in the title of the person from whom he derived  his title.  This condition requires that he should act  in  good faith and with reasonable caution. However, mere failure  to prove  bona fide or absence of negligence on his part  would not  negative his claim. But in a given case it is  left  to the 560 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 than 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.     In the instant case there is sufficient evidence  estab- lishing  the  fact that the defendants were  allowed  credit facilities upto a limit of Rs.35,00.000 by the Bank and this fact  is not in dispute. The pledging of the title  deed  by 5th defendant of her properties with the bank with an inten- tion to create an equitable mortgage to secure the repayment of  the amounts due from 1st defendant and the fact  that  a pronote for an amount of Rs.35,00,000 executed by  defendant Nos.  2 to 4 in favour of the 5th defendant was endorsed  in favour of the plaintiff Bank would establish that there  was an express contract for providing the credit facilities.  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  estab- lished  by the evidence on record. In such a  situation  the plaintiff need not make enquiries about the transactions  of supply  of goods etc. that were going on between  defendants Nos.  1 and 6. Even if defendant No. 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  negli- gence 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 hand. the plaintiff has discharged the  neces- sary burden to the extent on him and has proved that he is a holder in due course for valid consideration. Therefore,  we hold that he could validly maintain an action 561 against all the defendants including defendant No. 6. There- fore,  we affirm the judgments of the courts below and  dis-

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miss  the appeal. In the circumstances of the case,  parties are directed to bear their own costs throughout. Y. Lal                                  Appeal dismissed. 562