Nunna Gopalan v. Vuppuluri Lakshminarasamma (1940)

It is the best worked illustration of holder in due course in the Indian reports, and it decides the question that makes the doctrine bite: can the maker of a promissory note, who has actually paid the payee, resist a subsequent endorsee who took the note for value and in ignorance of the payment?

The answer is no, and getting to it requires putting four sections together — ss. 9, 22, 60 and 118. That chain is the most examinable sequence in the whole of Part IV, because it shows how a demand note works.

On 10 December 1933 the respondent executed a promissory note in favour of one Maddipati Tattabayi, alias Tata, the second defendant in the suit. The note was payable on demand.

The respondent said that she paid the amount due two days later, on 12 December 1933, but the instrument was left in the hands of the payee.

The next day the payee endorsed it to the petitioner.

The petitioner sued on the note in the court of the District Munsif of Kovvur, who decreed against the respondent and the payee. On appeal the Subordinate Judge of Ellore confirmed the decree against the payee but dismissed the suit against the respondent. He held that the petitioner was a holder in due course, but that because the respondent had paid the amount to the payee she was not liable.

A second appeal did not lie because less than Rs. 500 was involved, but the appeal was allowed to be treated as an application for revision and placed before a Bench.

Where a demand promissory note is paid to the payee but left in his hands, and he then endorses it for value to a person ignorant of the payment, may the maker resist the endorsee?

The Subordinate Judge's view that the petitioner was not entitled to recover was contrary to the provisions of the Act. The petition was allowed, and the decree of the District Munsif restored in its entirety.

The statutory chain

The Court's reasoning is a sequence, and it should be reproduced as one.

Section 9. A holder in due course means a person who for consideration became the possessor of a note, bill or cheque if payable to bearer, or the payee or endorsee if payable to order, before the amount mentioned in it became payable, and without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

Section 22. The maturity of a note or bill is the date at which it falls due.

The crucial observation. In the case of a promissory note payable on demand, as in this case, it does not become payable until demand is made. On demand being made it falls due immediately.

That single sentence decides the case. Since there was no evidence of any demand having been made on the respondent before she paid the amount to the payee, the note had not yet become payable, and it must therefore be taken that the endorsement to the petitioner took place before maturity.

Section 60. A negotiable instrument may be negotiated, except by the maker, drawee or acceptor after maturity, until payment or satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction. The Court read such payment as meaning payment at or after maturity. Payment before maturity therefore does not stop the instrument being negotiated.

Section 118. Until the contrary is proved it is presumed that every transfer of a negotiable instrument was made before its maturity, and that the holder of a negotiable instrument is a holder in due course.

On those sections the petitioner was clearly entitled to recover from the maker.

The English authority

Glasscock v. Balls (1890) 24 Q.B.D. 13 is directly in point. The payee of a note had taken a mortgage from the maker as further security for the same amount; he transferred the mortgage to another person and received the amount of the debt; he then endorsed the note, which remained in his hands, to the plaintiff for value, the plaintiff having no knowledge of the circumstances. It was held that the note, not having been paid or returned to the maker, was still current at the time of the endorsement, and that the plaintiff, as a bona fide endorsee for value, was entitled to recover.

Lord Esher's reasoning: the plaintiff could not be said to have taken the note when overdue, because it was not shown that payment had ever been applied for, and the cases show that such a note is not to be treated as overdue merely because it is payable on demand and bears a date some time back. 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.

The equitable principle

The Court added the principle from Lickbarrow v. Mason (1787) 2 T.R. 63: wherever one of two innocent persons must suffer by the acts of a third, he who has enabled the third person to occasion the loss must sustain it.

The respondent had discharged the note on 12 December 1933, but it was endorsed to the petitioner the next day without knowledge of that fact. She, as maker, should have insisted on its return to her when she paid. She did not, and by leaving the instrument in the hands of the payee she gave him the opportunity to commit a fraud. She must therefore suffer in preference to the petitioner.

What she should have done

Section 81 gives the answer. Any person liable to pay, and called upon by the holder to pay, is before payment entitled to have the instrument shown, and on payment entitled to have it delivered up to him; or, if the instrument is lost or cannot be produced, to be indemnified against any further claim on it. Having paid without insisting on its return and without obtaining a guarantee, she acted at her own risk.

The Court noted the limit of the indemnity: an indemnity would not of course have precluded the endorsee from recovering from her, but a proper indemnity would have safeguarded her position — that is, it would have given her recourse against the payee.

Conflicting authority resolved

Muthureddi v. Velu Asari (AIR 1917 Mad 886) had held that the maker could not plead against a holder in due course that he had paid the money to the payee before the endorsement. The only dissentient note was Venkanna v. Subbayya (AIR 1933 Mad 300), on which the respondent relied. There a note was executed by A in favour of B; the note came into the possession of B's wife and nephew, who refused to give it up; B asked A for a fresh note, which A gave; the new note was negotiated and A eventually paid the endorsee; after B's death his wife negotiated the original note, and the endorsee called on A for payment. Pandalai J. accepted A's defence.

The Bench held that decision clearly wrong and not to be allowed to stand. Apart from the provisions of the Act, the principle in Lickbarrow v. Mason applied: the maker gave, of his own free will, a new note without insisting on the return of the original or obtaining an indemnity.

A promissory note payable on demand does not become payable until demand is made; so where a maker pays the payee before any demand and leaves the instrument in his hands, an endorsement afterwards is an endorsement before maturity, the endorsee for value and without notice is a holder in due course, and the maker cannot set up the earlier payment against him. The maker's protection lies in s. 81 — demanding production before payment, delivery up on payment, or an indemnity.