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M.L.M. Ramanadan Chettiar Vs. Gundu Ayyar and ors. - Court Judgment

LegalCrystal Citation
SubjectBanking ;Civil
CourtChennai
Decided On
Reported inAIR1928Mad1238; 113Ind.Cas.456
AppellantM.L.M. Ramanadan Chettiar
RespondentGundu Ayyar and ors.
Cases ReferredSubba Narayana Vathiyar v. Ramaswami Aiyar
Excerpt:
.....course stood in no better position than his transferrer as regards the enforceability of the suit pronotes against defendant 1. the learned judge also upheld defendant 2's plea that the agreement in pursuance of which the notes were transferred to the plaintiff exonerated defendant 2 from liability to the plaintiff as endorser. 12. it is argued for the appellant that unlike a bill or a cheque, a promissory note payable on demand is regarded as a 'continuing security' especially when there is a provision for payment of interest and that the mere fact that a promissory note is left outstanding for a considerable time when it is endorsed, does not lead to the inference that it is. as to the remaining contention it is not alleged that there was any demand for payment prior to the..........for principal and interest on the said notes. defendant 1 repudiated his liability under the said pronotes when payment of the same was demanded by the plaintiff. thereupon the plaintiff gave notice of dishonour to defendant 2 and demanded payment of the amount of the notes from him. he also repudiated his liability though as endorser of the notes to the plaintiff and under the covenants entered into by him in his agreement transferring the suit notes to the plaintiff, he is also liable for the amount due on the notes.5. both the defendants contested the suit. defendant 1's pleas were as follows:(1) though the three promissory notes were executed for the aggregate amount of rs. 5,500 defendant 2, actually gave not more than rs. 400, in all the three notes and he gave that amount in.....
Judgment:

Phillips, J.

1. The appellant sued upon three promissory notes executed by defendant 1 in favour of defendant 2 for Rs. 3000, Rs. 2000 and Rs. 500 respectively. The first two notes were executed on succeeding days 7th July 1920 and 8th July 1920 and the third one on 15th March 1921. The learned Judge has found that the consideration did not really pass and that whatever consideration did pass was of an unlawful nature being given for immoral purposes. This finding has been impeached by Mr. Somayya on behalf of defendant 2 but the circumstances of the case are so glaring that we must accept the finding of the learned Judge. Out of the Rs. 3000 under the first note only Rs. 1000 purports to have been paid and Rs. 2000 was left with the payee to be drawn as required. Notwithstanding this fact, the very next day the second note for Rs. 2000 was executed. This fact cannot be explained away and the evidence clearly establishes the finding as indicated. Under Section 58, Negotiable Instruments Act when a negotiable instrument has been obtained from any maker by fraud or for an unlawful consideration, the ordinary presumption that the holder is a holder in due course is rebutted and the case comes under the proviso to Section 118 (g) and the burden of proving that the holder is a holder in due course lies upon the holder.

2. In the present case defendant 2 was largely indebted to the plaintiff and was being pressed by him for payment in the early part of 1921. On 17th May 1921, defendant 2 executed a promissory note for Rs. 19,000 odd in plaintiff's favour and pledged with him these promissory notes and other notes and bonds. These promissory notes were at that time endorsed in blank. It is contended for the plaintiff that this endorsement constituted him a holder in due course and that he possessed full proprietary rights in the notes. The endorsement being in blank, the plaintiff was not the endorsee until the endorsement had been filled up in his name and, therefore, the rights given by Section 50 of the Act would not accrue to him. When the notes were handed over defendant 2 executed Ex. L which shows clearly that he did not intend to transfer the ownership of the notes to the plaintiff but only left them with him as security and this may be shown under Section 46, Negotiable Instruments Act. On 5th January 1922, this deed, Ex. L, was cancelled and an out-and-out assignment of the notes was made to the plaintiff. In the seven months which intervened it is in evidence that defendant 2's agent, D. W. 4 demanded payment of the notes from defendant 1 but could not obtain the money. The plaintiff's agent, P.W. 1 admits that when he asked defendant 2 why he could not pay the money in the space of seven months, 'he said he was not able to collect and he would collect and send'. In view of the fact that none other of the promissory notes assigned to plaintiff was for a greater amount than Rs. 600 it is clear that the plaintiff or his agent must have been anxious that defendant 2 should collect the amount under the suit notes, especially when he was informed of the status of the makers of the various notes, defendant 1 being the son of a rich and influential landowner. When therefore the plaintiff's agent was told that the money could not be collected notice can certainly be imputed to him that the notes had been dishonoured by non-payment. It is also clear that he knew that a demand for payment had been made and if a demand for payment ' had been made the notes became overdue. Under Section 59 therefore whether we take it that the notes had been dishonoured or that they had matured, the plaintiff can only obtain the rights therein of his transferrer, defendant 2. As found above defendant 2 having obtained the notes by fraud and for an unlawful consideration, has no rights at all against defendant and consequently the plaintiff also has no right. The suit was dismissed also as against defendant 2, but inasmuch as he guaranteed in Ex. L and also in the subsequent assignment deed, Ex. J, that the notes transferred were valid and good notes and agreed to indemnify the plaintiff against loss in respect thereof, the plaintiff is entitled to a decree against him in respect of these notes by way of damages. To that extent the decree must be modified but as defendant 2 is dead the plaintiff will have a decree as prayed for against defendant 2's estate in the hands of respondents 3-5 with costs throughout.

3. As against defendant 1 the suit is dismissed with costs throughout.

Thiruvenkatachariar, J.

4. This appeal is preferred by the plaintiff in C.S. 786 of 1922 against the decree of Coutts-Trotter, J., (as he then was) dismissing the suit against both the defendants. The suit was brought by the plaintiff as endorsee from defendant 2 of three promissory notes executed in his (defendant 2's) favour by defendant 1 on 7th July 1920, 8th July 1920 and 15th March 1921, for the recovery of the amounts due for principal and interest on the said notes. Defendant 1 repudiated his liability under the said pronotes when payment of the same was demanded by the plaintiff. Thereupon the plaintiff gave notice of dishonour to defendant 2 and demanded payment of the amount of the notes from him. He also repudiated his liability though as endorser of the notes to the plaintiff and under the covenants entered into by him in his agreement transferring the suit notes to the plaintiff, he is also liable for the amount due on the notes.

5. Both the defendants contested the suit. Defendant 1's pleas were as follows:

(1) Though the three promissory notes were executed for the aggregate amount of Rs. 5,500 defendant 2, actually gave not more than Rs. 400, in all the three notes and he gave that amount in small sums on several occasions knowing that they were to be spent by defendant 1, for immoral purposes. Defendant 1, who was the only son of a wealthy man and had just then attained majority was under the evil influence of bad companions and in connivance with them defendant 2, induced defendant 1, to execute the suit promissory notes by giving him only small sums for indulging in his vicious habits. The promissory notes are therefore vitiated by fraud and the consideration therefor was also unlawful and hence they are not enforceable.

(2) The plaintiff is not a holder in due course.

6. Defendant 2 contended that the suit notes were fully supported by consideration. He denied that the suit notes are vitiated by fraud or that they were executed in furtherance of immoral purposes as alleged by defendant 1. Defendant 2 also contended that the transfer of the notes to the plaintiff was subject to an express condition that defendant 2 as endorser was to be completely exonerated from any liability to the plaintiff in respect of the notes transferred to him and hence the claim against him is not sustainable.

7. The learned trial Judge has on the evidence upheld defendant 1's pleas as to the pronotes having been obtained from him by defendant 2 by fraud and that the consideration for the said notes was also unlawful, as the moneys were knowingly given for immoral purposes.

8. As regards the plaintiff's claim, the learned Judge held that he was a holder for value of the three promissory notes but he was not a holder in due course because at the time he became the endorsee of the suit notes viz., on 5th January 1922, they were either overdue or he was put on enquiry as to the infirmity of the title of his transferred defendant 2, and if he had made any enquiry he would have found out that the notes were vitiated by fraud.

9. Then as regards another contention put forward by the plaintiff viz., that he was a holder in due course of the notes in virtue of their having been delivered to him on 18th May 1921, with defendant 2's endorsements in blank, as security for a debt owed to him by defendant 2, the learned Judge held that under the terms of the agreement pursuant to which the three notes were delivered to the plaintiff with the endorsements in blank, the plaintiff was not even a holder of the said notes. The plaintiff not being a holder in due course stood in no better position than his transferrer as regards the enforceability of the suit pronotes against defendant 1. The learned Judge also upheld defendant 2's plea that the agreement in pursuance of which the notes were transferred to the plaintiff exonerated defendant 2 from liability to the plaintiff as endorser. Upon those findings the suit was dismissed ' against both the defendants.

10. The appellant contests the finding that he is not a holder in due course of the suit pronotes either under the endorsement to him of 5th January 1922 or as possessor thereof under the agreement of 18th May 1921. He contends also that if the learned trial Judge's finding as to the invalidity of the suit notes is upheld, he is entitled to a decree' against defendant 2, on the covenant entered into by the latter in his agreement of 5th January 1922, that his title to the notes was indisputable. Defendant 2, who is impleaded as respondent 2, contests the finding as to the invalidity of the suit notes. As regards the last question, which is one of fact the finding of the learned trial Judge that the suit notes were obtained by fraud and that the consideration therefor was unlawful is amply' supported by the evidence and cannot be successfully assailed. The other questions argued before us are either questions of law or of mixed law and fact.

11. The plaintiff is no doubt a holder for value of the pronotes in virtue of the endorsements made to him on 5th January 1922. Under Section 118, Negotiable Instruments Act, the holder of a negotiable instrument shall be presumed to be a holder in due course; but where the instrument has been obtained from the maker by means of fraud or for unlawful consideration the burden of proving that he is a holder in due course lies on him. In this case therefore on the finding that the pronotes were obtained from defendant 1 by fraud and for unlawful consideration the plaintiff has to make out affirmatively that he is a holder in due course. Turning to the definition of 'holder in due course' given in Section 9, the plaintiff though he has proved that he is a 'holder for value of the three notes, has yet to prove that he became the endorsee of the notes before they 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.

12. It is argued for the appellant that unlike a bill or a cheque, a promissory note payable on demand is regarded as a 'continuing security' especially when there is a provision for payment of interest and that the mere fact that a promissory note is left outstanding for a considerable time when it is endorsed, does not lead to the inference that it is. overdue. In this respect a promissory note which is expressed to be payable on demand differs from a promissory note which is made payable a stated number of months or days after the date of execution. In the case of instruments of the kind last mentioned the date on which they are at maturity can be fixed from the tenor of the instruments themselves, and any person to whom such notes are offered to be negotiated has before taking them up, definite information from the tenor of the instruments themselves whether or not they are at maturity. If he takes them over after they have become payable he does so with his eyes open. In the case of promissory notes payable on demand the amount due on it does not become payable and the instrument therefore cannot be said to be overdue until there is a demand. This was the view taken as regards such instruments before the Negotiable Instruments Act was passed: see Commundun Mohideen Sahib v. Oree Meerah Sahib 7 M.H.C.R. 271, Van Ingen v. Dhunna Lal [1882] 5 Mad. 108. These oases were followed in Sivaramakrishna Pattar v. Moideen Musalliar [1910] 33 Mad. 34, a ease which arose after the Act came into force. The learned Judges in overruling the contention that the promissory note was overdue at the date of endorsement observed as follows:

As to the remaining contention it is not alleged that there was any demand for payment prior to the endorsement or that there is any other circumstance to show that the promissory note was overdue when endorsed to the plaintiff. This being so, we think that the endorsement to the plaintiff was made before the amount of the promissory note became payable.

13. The endorsee of such a note is not in a position to know whether prior to the negotiation of the notes to him, it had become payable and been dishonoured. He therefore takes it at his risk, no matter when the negotiation to him took place or that acting in good faith he gave full value for the note unless it is held that he will not be prejudicially affected by any dishonour of which he had no notice. The view that a bona fide holder for value of a pronote payable on demand, cannot be affected by any previous demand for payment of which he had no notice seems to me to be warranted by Section 59 of the Act.

14. In Glasscock v. Balls [1890] 24 Q.B.D. 13 which was also an action by the endorsee of a promissory note-payable on demand it was held by Lord Esher, M.R. and Lindley and Lopus, Lord Justices, that the fact that the pronotes had been paid off prior to the endorsement to the plaintiff cannot be set up against a bona fide purchaser for value without notice of that fact. Lord. Esher, M.R. says:

If a negotiable instrument remains current even 'though it has been paid, there is nothing to prevent a person to whom it has been endorsed for value without knowledge that it has been paid from suing; see Glasscock v. Balls [1890] 24 Q.B.D. 13.

15. If the actual payment in discharge of the note cannot be set up against such a holder much less can a demand for payment which was not honoured, be set up.

16. If the promissory note is not tainted with the illegality as it is in this case, the transferee would also have the benefit of the presumption raised in Section 118 Clause (d) that every transfer of a negotiable instrument was made before its maturity.

17. It is argued for the appellant that he is not deprived of the benefit of the presumption in Clause (d) by reason that under Clause (g) he has to prove that he is a holder in due course. I am unable to accept that contention as correct. The transferee who takes over a tainted bill has to make out affirmatively all the facts which would entitle him to be treated as a holder in due course, one of them being whether he became the holder before the note became payable. If nothing more appears than that the instrument has been left outstanding for a pretty long period, it cannot be concluded from,, that alone that the instrument had become payable when it was endorsed over to the holder as a promissory note payable on demand is according to custom and practice treated as a ' continuing security. For the same reason it cannot be held from that circumstance alone, that the endorsee had sufficient cause to suspect any defect in the title of the endorser. But in this case further facts. were proved which are referred to in the judgment of the learned trial Judge from which he came to the conclusion adverse to the appellant on both the points viz., that at the date of the endorsement of the notes to the plaintiff they were either overdue, or the plaintiff had sufficient cause to suspect that 'the title of defendant 2 his transferrer, was defective. The question is substantially one of fact and the learned Judge's finding on the point is fully justified by the circumstances which are proved in ' the case. The plaintiff's claim therefore in so far as it is based upon the endorsement made to him on 5th January 1922, has been rightly disallowed. It is next contended for the appellant that if the endorsement of 5th January 1922 does not confer on him the rights of a holder in due course, he can fall back upon the transfer to him of the pronotes under' the agreement of 18th May 1921 accompanied by delivery of the notes to him endorsed in blank by defendant 2. It is contended that as possessor of the notes with the blank endorsements, he will be a holder thereof and his rights will have to be adjudged as if the transfer had been made to him on that date. In that case what took place subsequently and upon which his claim as holder in due course under the subsequent endorsement of 5th January 1922 has been disallowed will become irrelevant to this further question and if all that evidence goes out the plaintiff should be held to be a holder in due course in virtue of the transfer for value made to him on 18th May 1921. Defendant 1 opposes this contention on the grounds, firstly, that the plaintiff cannot fall back on the agreement of 18th May 1921, under which the suit pronotes were deposited with him as security with the blank endorsements as that agreement was expressly cancelled by the later agreement between the parties of 5th January 1922 as shown by the endorsements made on it: See endorsement on Ex. L. Secondly, that the plaintiff is not a holder of the promissory notes (within the meaning of Section 8) as the notes which were payable to order were not endorsed to him; and thirdly, that the delivery of the promissory notes to the plaintiff must be held to have been made subject to the terms set out in the agreement, Ex. L, and under those terms the legal title to the notes did not pass to the plaintiff.

18. As regards the first objection, I am of opinion that it is open to the plaintiff to fall back upon his right as possessor of the pronotes under the agreement of 18th May 1921 if the later agreement in which that agreement merged proves infructuous. If the later agreement by which the absolute rights in the pronotes was intended to be transferred to the plaintiff, proves ineffectual, the rights which the plaintiff had under, the earlier agreement to hold them as security for the debts due to him from defendant 2 will not merge in the later agreement. The cancellation of the earlier agreement must therefore be held to have proceeded on the assumption that the later agreement was effectual and valid to clothe the plaintiff with the full rights of an absolute owner of the notes and not to deprive him of the rights he already possessed under the earlier agreement, should the later agreement turn out to be worthless.

19. In support of the 2nd objection, reliance is placed on Section 8, Negotiable Instruments Act, which defines a

holder to mean any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.

20. Stress is laid on the words 'entitled' in his own name.' It is argued that the suit pronotes having been endorsed in blank and not to the plaintiff in his name, the terms of Section 8 are not satisfied. Reference is also made to the definition of 'holder in due course' in Section 9 as supporting the contention that if the promissory note is payable to order and not to bearer it is only the payee or the indorsee thereof who can be the holder of it whereas if the instrument was originally payable to bearer the possessor thereof can be a holder in due course. As regards this contention it will be sufficient to say that it overlooks Expln. 2, to Sub-section 1, Section 13 and Section 54 of the Act The purport of both is the same viz. that a promissory note is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. The effect of the blank endorsements of the suit pronote is to invest the notes with the same effect as if they were payable to bearer, and then it becomes negotiable by mere delivery and the possessor thereof is a ' holder' though his name does not appear on the note. As regards the words ' entitled in his own name' occurring in Section 8, a Full Bench of this Court in the case reported in Subba Narayana Vathiyar v. Ramaswami Aiyar [1907] 30 Mad. 88, considered that they were inserted by the legislature for the purpose of preventing any one from claiming the rights of a holder under the Act, on the ground that the ostensible' holder was a mere benamidar, or in other words, a plea that the endorsee of a note-is a mere benamidar cannot be put forward as a defence to a suit brought by him on the note. This objection also is, therefore, untenable. The 3rd objection, however, seems to me to be valid. If the ease of the plaintiff rested merely on his having become the possessor of the promissory notes by way of security. I think he would be a holder of the notes and as such entitled to, sue for the recovery of the amounts due thereon. But even according to the plaintiff's case in the plaint the assignment of the promissory notes by way of security was made under the agreement of 18th May 1921: see para. 3 of the plaint. The terms of the said agreement have, therefore, to be referred to in order to ascertain what interest the plaintiff had in the said notes under the assignment then made to him. Those terms make it clear that the plaintiff was to have no right to sue on them or even to collect the amounts of the pronotes from defendant 1 direct. Defendant 2 alone was to collect the amount and if any suit had to be filed the plaintiff should return the promissory notes to him. In view of these terms in the agreement subject to which the delivery of the pronotes was made, it cannot be held that the delivery of the notes operated to make the plaintiff holder of the notes entitled to sue thereon in his own name.

21. It is argued that these restrictive conditions may be operative as between the plaintiff and defendant 2 but that it is not open to defendant 1 to set them up. The short answer to this contention is, that the plaintiff himself has in the plaint made the agreement of 18th May 1921 part of his case, and has also put it in evidence. It is, therefore, open to defendant 1 to rely on the agreement alleged and put in by the plaintiff himself to rebut the case which in the absence of such an agreement and evidence thereof may be held to be made out by the mere possession of the promissory notes. But even if the plaintiff had made no reference to the agreement of 18th May 1921, it would be quite open to defendant 1 to rely on it to show in what character the notes were held by the plaintiff and that his case as to his being the holder of the notes cannot be legally maintained: see Section 46 of the Act.

22. The result is that the plaintiff's claim to be a holder in due course of the suit promissory notes under the assignment of 18th May 1921 accompanied by delivery of the pronotes also fails. The suit was, therefore, rightly dismissed with costs so far as defendant 1 was concerned.

23. The only remaining question is whether the plaintiff is entitled to any relief as against defendant 2. The plaintiff contends that as the suit promissory notes were dishonoured by defendant 1 and notice of dishonour was also duly given to defendant 2, the latter as endorser is bound to compensate him for the loss sustained by paying him the full amount due on the notes. It is also urged that apart from this defendant 2 is also liable to make good the plaintiff's loss under the express terms of the agreement of 5th January 1922. The endorsement and delivery of the pronotes having been made subject to the terms of the agreement of 5th January 1922 (Ex. J) the question which has to be considered is whether under the terms of that agreement defendant 2 is liable to make good to the plaintiff the loss he has sustained by reason of the suit notes being tainted with illegality when they were obtained from defendant 1. The material portion which bears on this question runs as follows:

Hereafter there is no connexion or subsequent claim between you and me in respect of the above. There are no disputes whatever with regard to the under mentioned documents.

24. The first of the above sentences no doubt supports the learned Judge's observation that it deprives the assignee of any remedies against the assignor as endorser. But the 2nd sentence clearly contains a covenant that the documents transferred are good documents and that there are no defects in the transferor's title thereto. The effect of this statement which is quite distinct from and independent of the stipulation contained in the immediately preceding sentence has not been considered by the learned Judge.

25. Upon the finding in this case that the documents were obtained by defendant 2 by fraud and for unlawful consideration, the representation made by him to the plaintiff that there is no defect in his title must be held to be not only a false but also a fraudulent representation. There can hardly be any doubt as to the plaintiff having been induced by that representation to take over the documents including the suit promissory notes which were transferred to him in discharge of the debt owed to him by defendant 2. Defendant 2 must, therefore, be held liable to file plaintiff for the loss sustained by him by the breach of the covenant as to defendant 2's title to the notes, even though defendant 2 may not be liable merely as endorser, the quantum of damages being the loss sustained by him by his failure to recover the amounts due on the pronotes.

26. In the result the appeal is dismissed as against defendant 1 with costs. As against defendant 2 who being dead is represented by respondents 3 to 5, there will be a decree for plaintiff against defendant 2's estate in the hands of respondents 2 to 5 as claimed with costs throughout.


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