1. The questions in this appeal have relation to three promissory notes (Exhibits A, B, C) executed by defendant on the 1st November 1876, the 5th September 1877, and the 21st September 1877, respectively. The notes Exhibits A and C were executed in favour of Alfred Arathoon; but the note, Exhibit B was executed in favour of Augustus Arathoon and by him on the same day endorsed to Alfred Arathoon. The notes were all endorsed to the plaintiff long after their execution.
2. The defence was that on the 21st February 1878 defendant had sold his business; carried on under the style of Taylor and Co., to Augustus Arathoon and Willoughby Van Ingen for and on behalf of themselves and of Alfred and Samuel Arathoon, and that it was one of the terms of the said sale that defendant should be discharged from the debts and liabilities then due from him in respect of the said business, and that these liabilities included the said promissory notes, which were then in the hands of Alfred and Augustus Arathoon respectively; that notwithstanding this arrangement, the notes were endorsed to the plaintiff and without consideration, and that plaintiff had notice of the facts mentioned in the defence.
3. We have to say in this appeal whether the learned Judge was right in deciding that defendant was not released from liability on the promissory notes by the circumstances set out in the written statement.
4. It is urged in appeal--
That the notes, having been endorsed when over-due, were subject in the plaintiff's hands to the equities affecting the same when so endorsed.
5. That prior to such endorsement the defendant was in equity discharged from liability on the said notes.
6. That the notes were endorsed to the plaintiff by way of security by the said Alfred Arathoon; and the plaintiff was entitled, if at all, to recover only the amount due to him as mortgagee, with interest thereon.
7. It appears to me impossible upon the evidence to arrive at any other conclusion than that Alfred Arathoon became a partner in the new firm of Taylor and Co. on the sale of the good-will of the old firm by the defendant to Augustus Arathoon and Willoughby Van Ingen. No doubt he was not a party to the deed of sale (Exhibit No. 1), but, if simultaneously with the execution of Exhibit No.l he became a partner in the new firm he would be bound by the obligations which the new firm had entered into with defendant.
8. We find that Alfred was at the date of Exhibit No. 1 in possession of a document, the promissory note A, which was collateral security for 10,000 rupees on defendant's stock in trade.
9. Alfred was unquestionably fully cognizant of the execution of Exhibit No. 1 and of its terms. Of this I entertain not the smallest shadow of a doubt. Exhibit No. 1 assigns the stock in trade to Augustus Arathoon and Willoughby Van Ingen. This could not, of course, legally interfere with the incumbrance of the property in favour of Alfred, but, on the assumption that Alfred was not a partner in the new firm, it would be only natural to expect that well aware as he was of what was taking place, he would, on the transfer of the property to others, have asserted his claims on it. The evidence is that he allowed Exhibit No. 1 to be executed without taking any notice of the assignment of the stock in trade. I cannot explain his quiescence except on the assumption that he was a partner. The new firm drew in his favour a note for Rs. 40,000, which he immediately endorsed in favour of defendant. It was drawn for the purpose of securing 40,000 out of the Rs. 50,000 payable to defendant under Exhibit No. 1. Why should he render himself liable to the extent of 40,000 rupees if he was not a member of the firm? His explanation that he did it simply to help his brother is altogether inadequate to explain his laying himself under this obligation. When sued for the Rs. 40,000 by defendant, he said nothing of the three notes now in question. He held these notes at that time, and if not a partner, and, therefore, not bound by the stipulations of Exhibit No. 1 to undertake the liabilities of the old firm, why was it that he did not offer to set off the amounts of these notes ?
10. The note B was drawn by defendant in favour of Augustus Arathoon, and the same day endorsed to Alfred. Alfred then negotiated it with plaintiff's father, but, after making some payments, retained it and substituted for it a fresh note drawn by the new firm of Taylor and Co. in Alfred's favour, which he endorsed to plaintiff's father.
11. The note, therefore, was paid off by Taylor and Co. Why, then, did it remain with Alfred ?
12. The only explanation that can be given is that Alfred was himself a member of the new firm. The letter (Exhibit 5) further supports this view, as does also the evidence of Agarchund.
13. It was urged by Mr. Branson in the course of the argument on the appeal that the notes A and B are notes on demand and cannot be deemed to have been over-due when endorsed to plaintiff. No doubt uncertainty may exist, as to notes on demand, as to whether they are over-due at a considerable period of time after their execution. One test is to see whether payment has been demanded and refused. If it has, then the note is over-due. Alfred Arathoon says such a demand was made between 1876 and 1878, but his statement is quite inadequate to establish that the notes were over-due, and defendant says in his written statement that no demand was made upon him in respect of them. I observe that the three notes were endorsed to plaintiff on 23rd September 1879 and his plaint is dated 6th October following. In his plaint he speaks of the notes as then over-due, but this expression I take to mean no more than that they were mature, and that a cause of action against the defendant had arisen upon them. Had the plaintiff intended to admit that he took them over-due in the sense of being subject to any equities attaching to them as between the original maker and the payee, the third issue might have been dispensed with.
14. For the reasons given in my judgment in Commundun Mohideen Saib v. Oree Meerah Saib 7 M.H.C.R. 275 I am of opinion that the note A cannot be regarded as over-due on the date on which it was endorsed to plaintiff. But the note C was undoubtedly over-due when endorsed to plaintiff.
15. As to the note A it appears to me that the judgment of the learned Judge was right. Plaintiff' took it unaffected with any equities between the original parties to it, and the note not having been discharged, the maker is liable.
16. With regard to the note B, although it is not over-due the plaintiff, I think, is not entitled to recover the amount of it from the defendant.
17. I have said already that Alfred Arathoon is shown by the evidence to have been a member of the firm of Taylor and Co., which firm retained the note B and substituted another note for B in favour of Alfred, which he endorsed to plaintiff's father.
18. Now the firm of Taylor and Co. had undertaken to discharge this among other debts of defendant, and what they did must be regarded as a discharge of this note made by defendant, by substituting for it a note made by themselves. They discharged the note on behalf of the defendant, as by their covenant they were bound to do.
19. The obligation arising out of it was thereby extinguished, and Alfred Arathoon had no power, by re-endorsing it, to bring into existence again the liability of defendant : Bartrum v. Caddy 9 A. & E. 275. His re-issue of the note was a fraud.
20. Document C was an over-due note, and plaintiff took it subject to all the objections it was liable to in the hands of the endorser. This is sometimes expressed by saying that the taker in such a case takes it on the credit of the endorser and subject to all the equities with which it may be encumbered. An endorsee of an over-due note is, however, liable to such equities only as attach on the bill or note itself and not to claims arising out of collateral matters. Therefore, the endorsee of an over-due note is not liable to a set-off due by the payee to the maker: Burrough v. Moss 10 B. & C. 558. An equity attaching is some right arising out of the conditions upon which the note was made and delivered. No right arising out of any subsequent agreements between the maker and the payee as to the discharge of the note is an equity attaching to the note to affect a subsequent endorsee.
21. But in the case of the note now under consideration, there is nothing to show that there was any equity attaching to it at the time it was made and delivered which would be a defence to it on a claim by Alfred Arathoon, were he the holder. If the note had been discharged by Van Ingen, Alfred Arathoon could not have endorsed it to plaintiff so as to revive the liability of the defendant: Harmer v. Steele 4 Exch. 1. But the note has not been discharged as between Van Ingen and Alfred Arathoon.
22. No doubt the subsequent agreement on the 21st February 1878 by the new firm to take up and discharge the debts of the old firm might operate as a transfer from defendant to the new firm of the obligation to pay Alfred Arathoon, but, so long as the negotiable instrument remained undischarged in the hands of the holder, Alfred Arathoon, he was in a position to negotiate it by endorsement for value to plaintiff. Had Alfred Arathoon, at the date at which he took the note, constituted the entire new firm, the concurrence of the right to receive payment and the duty to pay in one person would have discharged the obligation on the note, and in that case Alfred Arathoon could not have endorsed it to plaintiff so as to revive the liability of defendant. But the fact that he afterwards became one of several members of the new firm does not carry with it this consequence.
23. It appears to me that the note C is still due and unpaid, and, although the new firm may be bound to pay all the debts of the old firm, that circumstance does not destroy plaintiff's right on the undischarged negotiable instrument, by the terms of which the defendant warrants payment to the payee or endorsee. I would reverse the decree, therefore, as to the note B and declare defendant not liable to payment of any portion of it, and I would confirm the decree of the learned Judge as to the notes A and C.
24. The decree should be thus modified. The costs in both Courts should be proportioned to the amounts respectively allowed and disallowed.
Muttusami Ayyar, J.
25. I concur.