Bharat Barrel and Drum Manufacturing Company v Amin Chand Payrelal (1999)

Section 118(a) tells the court to presume, "until the contrary is proved", that every negotiable instrument was made for consideration. Two questions follow in every suit or complaint on a note or cheque: what must the maker do to rebut the presumption, and what happens if both sides' stories are disbelieved?

This is the Supreme Court's fullest statement of the answer. The Calcutta High Court's Full Bench (by majority) had held that once the court disbelieved both the plaintiff's and the defendant's versions, the presumption vanished and the plaintiff lost. The Supreme Court reversed that. The presumption stays until the defendant has raised a probable defence; the plaintiff's own failure to prove the loan he pleaded does not, by itself, rebut it.

The defendant, Amin Chand Payrelal, admittedly executed a promissory note for Rs. 6,20,000 on 11 October 1961, payable to the plaintiff company on demand. It did not pay or reply to a legal notice. The plaintiff sued under Order XXXVII CPC on the original side of the Calcutta High Court on 10 August 1962.

The defendant was given leave to defend. Its case was that the note had not been executed "for the value received" but as collateral security: it had agreed to import 10160 metric tonnes of steel drum sheets for the plaintiff, the plaintiff insisted on security for due performance before opening a letter of credit, and the note was given to secure damages if the foreign supplier defaulted. The import contract later fell through and was cancelled.

The plaintiff's case, through its director Goenka, was that the note was given for a loan paid at Bombay.

The trial judge disbelieved both. On issue 1 he held "the conclusion is irresistible that the promissory note was not executed by way of a collateral security as alleged by the defendant." But he also rejected the plaintiff's case of a loan, and reasoned that since the plaintiff claimed no consideration other than the loan, and the loan was disproved, the presumption under s. 118 had been "completely dislodged". The suit was dismissed.

A Division Bench referred the question of law to a larger Bench. The Full Bench, by majority (Banerjee and Sinha JJ; Ruma Pal J dissenting), dismissed the appeal. The plaintiff appealed to the Supreme Court.

1. What must a defendant show to rebut the presumption of consideration under s. 118(a)?
2. Where the court disbelieves both the plaintiff's version of the consideration and the defendant's version of how the note came to be executed, does the presumption survive?

The appeal was allowed and the plaintiff's suit for Rs. 6,51,900 was decreed with pendente lite and future interest at 6% per annum, and costs throughout.

The object of the Act shapes the presumption

The Court began from the purpose of negotiable-instruments law. The privileges the Act confers, "including the presumptions under Section 118 of the Act and summary procedure provided under the C.P.C. are aimed at providing certainty, security and continuity in business transactions." The High Court judges, it said, "appear to have completely lost sight of the purpose and object for which the Act was enacted."

The two meanings of burden of proof

The Court relied on Kundan Lal Rallaram v Custodian Evacuee Property (AIR 1961 SC 1316), which explains that s. 118 "lays down a special rule of evidence applicable to negotiable instruments." Kundan Lal distinguished the legal burden, fixed by the pleadings, from the evidential burden, which shifts: once execution is proved, the presumption throws the evidential burden on the defendant, who may discharge it by direct evidence, circumstantial evidence, or presumptions of fact such as those under s. 114 of the Evidence Act (for instance, an adverse inference where the plaintiff withholds account books in his possession).

The Court also noted with approval the Full Bench decisions of the Rajasthan High Court (Heerachand v Jeevraj) and the Andhra Pradesh High Court (G. Vasu v Syed Yaseen Sifuddin Quadri), and K.P.O. Maideenkutty Hajee v Pappu Manjooran (1996) 8 SCC 586.

The statement of law

This is the passage to reproduce:

"once execution of the promissory note is admitted, the presumption under Section 118(a) would arise that it is supported by consideration. Such a presumption is rebuttable. The defendant can prove the non-existence of consideration by raising a probable defence."

If the defendant discharges that initial onus by showing that consideration was "improbable or doubtful or the same was illegal, the onus would shift to the plaintiff who will be obliged to prove it as a matter of fact". But "In case, where the defendant fails to discharge the initial onus of proof by showing the non-existence of the consideration, the plaintiff would invariably be held entitled to the benefit of presumption arising under Section 118(a) in his favour."

The defendant need not prove a negative by direct evidence: "existence of negative evidence is neither possible nor contemplated". But a bare denial is not enough — "The bare denial of the passing of the consideration apparently does not appear to be any defence. Something which is probable has to be brought on record for getting the benefit of shifting the onus of proving to the plaintiff."

The test for rebuttal is the prudent-man test: the defendant must bring on record facts and circumstances on which the court may "either believe that the consideration did not exist or its non-existence was so probable that a prudent man would, under the circumstances of the case, shall act upon the plea that it did not exist."

Application

The defendant's only attempt to show absence of consideration was the collateral-security story, and every judge had disbelieved it. So "In the absence of disproving the existence of the consideration, the onus of proof of the legal presumption in favour of the plaintiff could not be shifted." Having held issue 1 not proved, the High Court "was not justified in holding that the defendant had discharged the onus of proof of issue No. 2."

The plaintiff's evidence being disbelieved did not matter, because the plaintiff was never obliged to prove its case: the defendant "has prima facie or initially not discharged his onus of proof by showing directly or probabilising the non existence of consideration." The High Court's finding "amounted to negating the presumption arising under Section 118(a) of the Act."

The Court was sharp about the four decades of litigation: "Faith of business community dealing in mercantile and trade cannot be permitted to be shaken by resort to technicalities of law and the procedural wrangles as appears to have been done in the instant case."

Once execution of a negotiable instrument is admitted or proved, s. 118(a) raises a rebuttable presumption of consideration. The defendant bears the initial onus of rebutting it, which he may do on a preponderance of probabilities — by direct or circumstantial evidence or presumptions of fact — by showing that consideration was improbable, doubtful or illegal; a bare denial will not do. Only when he does so does the onus shift to the plaintiff. If the defendant's own defence is disbelieved, the presumption stands, and the plaintiff succeeds even if the plaintiff's own account of the consideration is also disbelieved.

• Direct question: Explain the presumptions under s. 118 of the Negotiable Instruments Act. How may they be rebutted? Quote the "probable defence" passage, explain legal versus evidential burden (via Kundan Lal), and state the prudent-man test.
• Problem question: a maker admits signing a note, pleads it was only security, and fails to prove that; the holder also fails to prove the loan he alleges. Apply Bharat Barrel: the presumption stands and the holder gets a decree.
• Cross-reference to s. 139 and cheque cases: the same idea of a "probable defence" on a preponderance of probabilities is the starting point for rebutting presumptions in s. 138 prosecutions — use this case as the foundation and then move to the s. 139 authorities.