1990 (9) TMI 365 - SC - Indian Laws

Summary

Issues Involved:
1. Interpretation of Section 9 of The Negotiable Instruments Act, 1881 - Definition of 'Holder in Due Course'.
2. The validity of the plaintiff bank's claim as a 'holder in due course'.
3. The negligence and good faith of the plaintiff bank in handling the cheques.
4. The contractual relationship between the plaintiff bank and the first defendant firm.
5. The liability of the defendants under the endorsed cheques.

Issue-Wise Detailed Analysis:

1. Interpretation of Section 9 of The Negotiable Instruments Act, 1881 - Definition of 'Holder in Due Course':

The judgment revolves around the interpretation of Section 9 of The Negotiable Instruments Act, 1881, which defines 'holder in due course'. The section states: "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 court emphasized that to be a 'holder in due course', a person must be a holder for consideration, the instrument must have been transferred before it becomes overdue, and the transferee must act in good faith without any reason to believe there was a defect in the title of the transferor.

2. The Validity of the Plaintiff Bank's Claim as a 'Holder in Due Course':

The plaintiff bank credited the proceeds of the cheques to the account of the first defendant firm, who withdrew the amount on various dates. The trial court and the High Court held that the plaintiff bank was a 'holder in due course' as it purchased the cheques for valid consideration after necessary endorsement before they became overdue. The presumption under Section 118(g) of the Act, which states that the holder of a negotiable instrument shall be presumed to be a holder in due course, supported the plaintiff's claim.

3. The Negligence and Good Faith of the Plaintiff Bank in Handling the Cheques:

The appellant (defendant No. 6) contended that the plaintiff bank acted negligently and did not act in good faith by paying the amounts due under the cheques without making inquiries regarding the title of the first defendant. The court examined various authorities and legal texts, including English law and Indian law, to determine the standards of good faith and negligence. The court concluded that under Indian law, the holder must act in good faith and with reasonable caution. Mere failure to prove bona fide or absence of negligence would not negate the claim, but gross negligence indicating lack of due diligence could.

4. The Contractual Relationship Between the Plaintiff Bank and the First Defendant Firm:

The court found sufficient evidence establishing that the defendants were allowed credit facilities up to Rs. 35,00,000 by the bank. The pledging of the title deed by the 5th defendant and the endorsement of a promissory note for Rs. 35,00,000 in favor of the plaintiff bank indicated an express contract for providing credit facilities. Consequently, there was an implied contract to credit the proceeds of the cheques to the account of the first defendant before actually receiving them.

5. The Liability of the Defendants Under the Endorsed Cheques:

The court held that even if the first defendant failed to supply goods for which the cheques were issued by the 6th defendant, the plaintiff bank had no sufficient cause to doubt the title of the first defendant. The plaintiff bank did not act negligently or disregard any 'red flag' raising suspicion. Therefore, the plaintiff bank was considered a holder in due course for valid consideration and could validly maintain an action against all the defendants, including defendant No. 6.

Conclusion:

The appeal was dismissed, and the judgments of the lower courts were affirmed. The plaintiff bank was deemed a holder in due course, and the defendants were held liable under the endorsed cheques. The court directed the parties to bear their own costs throughout.