Case: U. Ponnappa Moothan Sons, Palghat Vs. Catholic Syrian Bank Ltd. And Others

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.( 2. ) 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 defendants 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. 35,00,000.00. A promissory note was executed by defendants Nos. 2 to 4 in favour of their mother, the 5th defendant for an amount of Rs. 35,00,000.00 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 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. On6th 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.. The cheque was purchased by the plaintiff Bank from the first defendant onon valid consideration and proceeds were credited by the Bank to the account of the first defendant. Similarly another cheque was drawn onand 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 defendants 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. 1,000.00 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.( 3. ) The defendant No. 6 who is the appellant herein contended 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 honoured. 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 defendants 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 con firmed the findings of the trial Court but modified the decree holding that immoveable 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, thewould proceed against the assets of the firstand for the balance, if any, thewould 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.

Reasoning: 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 crediting the customer account does not by itself alter his position 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 is16. ) 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 it, 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." (Emphasis17. ) 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 Gills case (1824 (107) ER 806). 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 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 S. 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 this18. ) In the instant case there is sufficient evidence establishing the fact that the defendants were allowed credit facilities up to a limit of Rs. 35,00,000.00 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 intention to create an equitable mortgage to secure the repayment of the amounts due from Ist defendant and the fact that a pronote for an amount of Rs. 35,00,000.00 executed by defendants 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 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 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.