Misso v. Mohamtdatty
1954Present: Gratiaen J. and Gunasekara J.G. E. MISSO, Appellant., and B. MOHAMEDALLY et al., RespondentsS. C. 282—D. C. Colombo, 11,594 (Summary)
Promissory note—Subsequent additional security—Does not amount to discharge bynovation— Negotiability—Bills of Exchange Ordinance, s. 36 (1).
The maker of a promissory note who subsequently creates a mortgage tosecure the repayment of his debt is nevertheless liable to an indorsee for valuewithout notice unless he shows that the mortgage bond was not merely anadditional security but had superseded the obligation fouiidoil on the promissorynote.-
Appeal from a judgment of the District Court, Colombo.
Colvin R. de Silva, with S. J. Kadirgamar and L. Mulutanlri, for t.hoplaintiff appellant.-
H. V. Perera, Q.C., with H. W. TambiaK and C. Shanmuganayagam,for the defendants respondents.
Cur. adv. mill.
nnATTABW J,—•Miaao v. Mohamedally
February 11, 1954. Gratia Eli J,—
This was an action for the recovery of a sum of Rs. 34,450 and interestalleged to be due on a promissory note dated 16th October, 1947, fromthe Ut defendant (as maker of the note) and the 2nd defendant (as payeewho had subsequently indorsed it to the plaintiff).
The defendants filed separate answers, denying liability on the note.For the purposes of this appeal, the following facts as held by the learnedtrial Judge will form the basis of my judgment:
The “ on demand promissory note sued on had been granted bythe 1st defendant to the 2nd defendant for valuable consideration.On 15th January, 1948, a total sum of Rs. 94,1.50 was found to bedue by the 1st defendant to the 2nd defendant on this and certainother transactions, and the 1st defendant executed a notarially attestedmortgage bond wherel^y l»e hypothecated certain immovable propertyas security for the repayment of the aggregate amount (which wasspecifically stated to include the sum of Rs. 35,450, and interestborrowed on the promissory. note sued on). The 2nd defendantcontinued, however, to retain the promissory note in its originalcondition except that it now bore an endorsement signed by bothdefendants and by the attesting notary to the following effect:
“ The amount due on this promissory note together with interestfrom the (bite hereof has been secured by mortgage bond No. 44dated 15th January 1948…. ”
The endorsement was undated, but it was in fact made atthe attesting notary’s office immediately after the execution of thebond. Several months later, the 2nd defendant endorsed anddelivered the note to the plaintiff for valuable consideration. Ithad never come back into the maker’s hands during the interveningperiod.
Upon these facts, and upon the evidence of the attesting notary whoexplained his version of the circumstances which led to the executionof the bond and to the endorsement made on the note, the learned Judgeheld (1) that the note had .been dipoharged on 15th January, 1948 by the2nd defendant’s acceptance of the “ higher security ” of the mortgagebond, and that therefore ,(2) only the 2nd defendant (but not the 1stdefendant) was liable on the note to the plaintiff who subsequentlybecame its holder for value. Judgment was accordingly entered asprayed for against the 2nd defendant, but the plaintiff’s action againstthe 1st defendant was dismissed with costs. This appeal is againstthe latter part of the decree.
The learned Judge has rejected as unproved the allegation that theplaintiff was aware, at the time of the endorsement in his favour, that thenote had been previously (as alleged) “ discharged ”. Nevertheless,he held, on the authority of Jayawardena v. Rahaiman Lebbe 1 and Tennav. Balaya 2 that, when the bond had been granted to secure the liability1 (1919) 21 N. L. R. 178..» (1908) 11 N. L. R. 27.
ORATIAEN J.'—Miasa v. Mohamedally
on the promissory note, the note itself was automatically dischargedand became “ a mere waste-paper ”—with the result that its subsequentindorsement by the original payee could not vest the indorsee with anyrights on the document against the original maker.
Section 36 (l) of the Bills of Exchange Ordinance provides, inter alia,that a promissory note loses its character of negotiability when it hasbeen “ discharged by payment or otherwise ”, and it is clear law that therights of a holder of a note can be satisfied, extinguished or released ina number of ways besides payment—Byles on Bills (20th Ed.) p. 237.As an illustration of a discharge “ otherwise than by payment ”, thetextbook mentions, at p. 238, a case where “ the taking of a security ofa higher nature for a bill or note merges the remedy on the inferior instru-ment It is by the application of this rule that the learned Judgedecided the present case.
There is no absolute proposition of law which declares that the takingof a “ higher security ” necessarily operates in every case as a dischargeof the earlier “ inferior instrument As I understand the true principle,the issue invariably calls for a decision on a question of fact, and theonus of proving the discharge in an action between an indorsee for valueand a maker is on the maker. In Twopenny v. Young l, for instance,the plea of “ discharge ” was rejected because the latter securityrecognized the earlier note as still existing. In other words, the makerhad failed to prove that the transaction was intended to operate as anextinguishment of the payee’s claims on the original security.
If the maker of a promissory note subsequently creates a mortgageto secure the repayment of his debt, the Court would not be justifiedin holding that the note was thereby discharged unless an intention toprovide a substituted (as opposed to an additional) security wasestablished. “ It is often a nice question whether an obligation arisingfrom a bond novates an earlier obligation founded on …. apromissory note or other causa debendi. If the facts show that thebond was granted as an additional security, there is no novation ; butif it is manifest that the parties intended the bond to supersede theoriginal obligation and take its place, then there is a novation ”—Weasels' Law of Contract, Vol. 1, p. 723, para. 2409.
In the present case, the language of the indorsement made on thenote (and signed by both defendants) by no means makes it “ manifest ”that the liability on the note had been extinguished. On the contrary,it is calculated to give the impression that the repayment of the “ amountduo” on the note was also secured by the mortgage bond dated* 15thJanuary 1948. Besides, at the time when the note was subsequentlyindorsed to the plaintiff for value, it still remained in the payee’s handsand bore all the appearances of an undischarged note. In Glasscockv. Balls 2 Lord Esher said :
“If a negotiable instrument remains current, even though it hasbeen paid, there is nothing to prevent a person to whom it has beenindorsed for value without knowledge that it has been paid from suingIt is not easy to reconcile this dictum with the proposition laid downin far more general terms by a Bench of three Judges of this Court (wrongly■ (1824) 3 B. and C. 208.* (1889) 24 Q. B. D. 13 at 15.
ORATIAEN J.—-Misso t>. MohamtdaUy
described in the Report as a “ Full Bench ”) in Jayatoardena v. RakaimanLebbe (supra), and I respectfully agree with the view of Jayawardena J.that the question calls for an authoritative decision, after reconsideration-of the problem, when a suitable occasion arises.—Mutlu Car pen Chettyv. Samaraiunge l. Be that as it may, it is certainly permissible to regardthe fact that a promissory note remained in the payee’s hands (withoutany indication of “ discharge ” or ** cancellation ” on the face of it) as arelevant circumstance to be taken.into account in deciding the questionof fact whether the liability had been extinguished by novation. More-over, the 1st defendant (as maker of the note), is, in my-opinion, precluded as against an indorsee for value without noticefrom alleging that the execution of the mortgage bond was intendedby him to have more serious implications than those'whicb were actuallyindicated in the indorsement which be signed. The language of hisindorsement is quite insufficient to support the plea of discharge bynovation, and is especially binding on the maker of a note who allowsit thereafter to remain in circulation with all the appearances of a validpromissory note. Besides, to my mind the language of the bond itselfis equivocal.
It would seriously impair the principle of negotiability attaching toinstruments governed by the Bills of Exchange Ordinance if an indorseefor value without notice could be confronted with defences which areinconsistent with the terms of a memorandum or indorsement made onthe face of the instrument by both the maker and the payee. Even,therefore, if as between the defendants inter se, the true position (unknownto the plaintiff) was that the note sued on ought to be regarded as havingbeen discharged on 15th January 1948, that defence is not in my opinionavailable as against the plaintiff. The present case is, in the specialcircumstances described by me, distinguishable from those with whichthe earlier decisions were concerned.
It was suggested to us during the argument that the learned Judgehad wrongly applied in favour of the plaintiff the statutory presumptionthat he was a holder for value, because the plaintiff had not dischargedthe initial onus of proving (as against the 1st defendant) that the notehad in fact been indorsed and delivered to him by the 2nd defendant.
I agree that generally an indorsee must establish that he is the holderof a note before he can rely on the presumption that he is a holder forvalue. But this, in any particular case, depends on whether the fact ofindorsement and delivery has been challenged by the maker. I donot doubt that, at the preliminary discussion which took place undersection 146 of the Civil Procedure Code when the trial commenced,the learned Judge was made to understand that the 1st defendant, whilenot disputing that the note had in fact been indorsed and delivered tothe plaintiff, denied only that he was a holder for value without notice.Indeed, the 1st defendant’s position (as indicated in his pleadings) Beemsto have been that the note had been indorsed to the plaintiff but collusivelyand without consideration. When the stage for determining the issues
1 (1024) 26 N. L. H. 3S1 at 3S4.
374Palaniyandi v. Commissioner for Registration of Indian and
arrived, no issue was suggested by the 1st defendant’s counsel withspecific reference to the bare fact of endorsement and delivery (as distinctfrom the connected issues of “ consideration ” and “ notice ”). Onthe contrary, the issues, as finally determined at the trial, emphasisedthat the dispute on this aspect of the litigation was confined to thealleged absence of consideration for the indorsement, and to the furtherallegation that the plaintiff was well aware that the note had been dis-charged before indorsement. It could only have been for this reasonthat the learned Judge ruled that the onus was on the defendants torebut the statutory presumptions in favour of the plaintiff. I cannotimagine that the experienced judge who tried the case could have enter-tained the view that a person purporting to sue on a promissory noteas its indorsee must be presumed to be its indorsee even though the barefact of indorsement has been put in isBue. .
I would allow the appeal and enter judgment in favour of the plaintiffas prayed for with costs in both Courts.
Gunasekara J.—I agree.
G. E. MISSO, Appellant, and B. MOHAMEDALLY et al , Respondents