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Presumptions as to negotiable instruments

Section 118 of the Negotiable Instruments Act,1881.

Until the contrary is proved, the following presumptions shall be made:

(a) of consideration —that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration;
(b) as to date —that every negotiable instrument bearing a date was made or drawn on such date;
(c) as to time of acceptance —that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity;
(d) as to time of transfer —that every transfer of a negotiable instrument was made before its maturity;
(e) as to order of indorsements —that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;
(f) as to stamps —that a lost promissory note, bill of exchange or cheque was duly stamped;
(g) that holder is a holder in due course —that the holder of a negotiable instrument is a holder in due course:

Provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him.

Chapter XIII lays down special rules of evidence applicable only to negotiable instruments and not to instruments which are not negotiable. These special rules apply as between the parties to the instruments or those claiming under them.

Presumption as to consideration

This section which confers certain special privileges on a negotiable instrument is a relaxation of the ordinary rule of law under which the plaintiff has to prove what he alleges, the most important being consideration. The words 'for consideration' as used in this clause are quite general and not limited to consideration mentioned in the instrument. An instrument without consideration is void and in order to enforce an instrument the plaintiff has, under the ordinary rule of law, not only to prove its execution but also the passing of consideration. Failure to prove the passing of consideration will lead to the dismissal of the case. A negotiable instrument which has been designed for facility of trade and commerce would fail of its effect if during its currency every holder is suing on it were to prove the passing of consideration from the stall in order to get a decree as no body would, in such a state of uncertainty, go to have recourse to it. The result would be that trade and commerce would suffer.

To obviate this difficulty it has been laid down that every negotiable instrument must be presumed to be honest at its inception and to have been made drawn, accepted or indorsed for consideration. These provisions of the section are imperative and the court is bound to draw the initial presumption that the consideration has passed if the execution of the instrument is admitted or proved and the onus lies on the defendant to prove that there was no consideration. The view that where the defendant pleads that his signature was taken in a blank paper must mean a denial of execution throwing the onus of proving the passing of consideration on the plaintiff appears to militate against the accepted principle to prove that the document is, not what it purports to be. All bona fide holders and all intermediate parties can avail themselves of this presumption. A holder is not bound to establish that he has given any value for the note until the other side has established the want or failure or illegality of the consideration or that the note had been lost or stolen before it came into the possession of the holder. The burden of asserting and proving that consideration did not pass lies on the defendant. Failure on the part of the defendant to prove want of consideration entitles the plaintiff to a decree on account of the presumption of the passing of consideration raised by this section.

This presumption is a statutory presumption in case of negotiable instruments only and does not apply to non-negotiable instruments. The result of this presumption may be that persons who have not paid any consideration may at times be entitled to a decree. But still the rule has worked well in the interest of the mercantile community and the onus rightly lies on the person who promises to pay on the instrument. The presumption arises against the debtor personally but not against a creditor or a receiver in an insolvency proceeding. Nor does any presumption of consideration arise in a criminal trial other as provided in section 139. In a charge for perjury the prosecution must prove that the promissory note was executed for consideration and that the accused falsely stated that it was not for consideration. The section does not raise any presumption that the consideration was advanced for legal necessity which must be proved by the person suing on the note. Nor does it raise a presumption as to the quantum of consideration.

In Bharat Barrel & Drum Manufacturing Co. v. Amin Chand Pyarelal1) the Hon'ble Patna High Court held that: once execution of the promissory note is admitted, the presumption Under Section 118(a) would arise that it is supported by a consideration.

The court further held that:

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.

When the Burden of proof shifts to plaintiff

The presumption that arises under this section is from its very nature not conclusive but is rebuttable2) and the onus shifts to the plaintiff under various circumstances but it does not shift because part of the consideration is shown not to have been paid in cash as stated in the note.

When the parties go to trial on the issue of want of consideration the presumption has no value if the evidence adduced before the court on this issue is against the plaintiff. If the pronote mentions one kind of consideration and it is found in evidence that the consideration was of a different nature, the suit is not liable to be dismissed for that reason.

In Deepak Kumar vs State Of Bihar And Anr3) the Patna High Court held that:

Apart from adducing direct evidence to prove that the note in question was not supported by consideration or that he had not incurred any debt or liability, the Accused may also rely upon circumstantial evidence and if the circumstances so relied upon are compelling, the burden may likewise shift again on to the complainant. The Accused may also rely upon presumptions of fact, for instance, those mentioned in Section 114 of the Evidence Act to rebut the presumptions arising Under Sections 118 and 139 of the Act.

Fraud or Illegality

Under clause (g) there is a presumption in favour of a holder that he is a holder in due course i.e. he has given valuable consideration and the burden to prove the contrary is on the defendant. But under the proviso to the clause the initial presumption is rebutted and the burden is shifted to the plaintiff to prove that he is a holder in due course when the defendant establishes that a negotiable instrument was obtained from its maker or holder by means of an offence or fraud or for unlawful consideration or that the acceptance was a forgery.

Where from the respective position of the parties as attorney and client there are suspicious circumstances in the transaction raising a presumption of undue influence or fraud the burden of proving consideration shifts to the plaintiff.

When the consideration of three notes executed in quick succession by a young man owning considerable property, but not in possession of the same at the time of execution of the notes, was alleged to be partly immoral and partly absent the onus to prove the passing of consideration lay on the plaintiff. The ordinary rule that a negotiable instrument has been executed for value is so much weakened by the allegation of the defendant a young man of extravagant habits just emerged from minority that he has not received the full consideration as is sufficient to shift the burden of proof and throw upon the money lender the obligation of satisfying the court that he paid the consideration in full.

Where the statement of the plaintiff differs from the statement in the note itself as to consideration the onus lies on the plaintiff to prove that the note was executed for full consideration. Similar will be the position if the statement of the agent of the plaintiff is inconsistent with the recital in the note regarding consideration.

In a case where the plaintiff gives evidence to show that he has paid some consideration but cannot exactly say how much has been paid the question of presumption does not arise and the plaintiff is not entitled to a decree for the full amount. He is entitled to recover only what he paid.

If the plaintiff states that a part of the consideration was paid in cash and the rest in some other way but fails to prove payment of the latter part, his claim must fail to the extent of the amount covered by the latter part. This does not in any way encroach upon the general rule of law that the defendant must plead and prove absence of consideration.

Where in a suit on a note the defendant denied execution but did not plead absence of consideration, the execution having been proved by the plaintiff he became entitled to a decree as the defendant could not be permitted to raise or prove absence of consideration.

When the recital of consideration in a pronote is false the burden of proving the consideration lies on the holder against the maker and more so against third parties. But the plaintiff can always prove that the consideration recited in the note is not the true one but that it was executed for a different consideration. Consideration is not restricted to cash money alone. Where a pronote was obtained for unlawful consideration the onus lay on the holder to prove that he was a holder in due course and for consideration. When the holder has no sufficient cause to believe that there was any defect in the title of the indorser, he is a holder in due course and the presumption of this section will be in his favour.

Where an endorsee of a note payable on demand had no knowledge of discharge of the note or of any demand not having been made at the time of endorsement he must be deemed to be a holder in due course although the endorsement was after discharge.

To promissory notes which are not negotiable the presumption of this section does not apply. Therefore, when in a suit based on such a note the defendant denies the passing of consideration the plaintiff must prove payment of consideration to get a decree. The presumption applies to Government promissory notes and other negotiable securities. When the execution is denied and the plaintiff has to prove the execution of the instrument a high standard of evidence is necessary. But in such cases has execution alone to be proved or has passing of consideration also to be proved ?According to one view both have to be proved4) and according to another only execution has to be proved.5) The latter view seems to be more reasonable.

Presumption as to Date

When a note which is genuine bears a date and a place the presumption is that it was made or drawn on the date as also at the place mentioned in the instrument and the person alleging a different date and place must prove them. Similar presumption will arise for the date of the endorsement. When there are several endorsements each endorsee will be deemed to have been the holder in the order of endorsements on the instrument. But this presumption may be rebutted by showing that successive endorsers of a note were amongst themselves co-sureties or that the indorsements were in an order different from what appeared on the instrument. If a promissory note is ante-dated no presumption arises that it was executed on the date it bears on its face nor does a presumption arise if the document is found to be false.

Presumption as to time of acceptance

Bill of exchange is prima facie deemed to have been accepted before maturity and within a reasonable time after its date which means after its issue. The presumption under this section does not extend to the exact date of its acceptance if the acceptance does not bear a date. Similarly, without a date of acceptance, the presumption will be that it has been accepted after the date of drawing and not on the date of drawing and if it bears a date it will be presumed to have been made on that day. The section applies when the acceptance bears no date. But when the acceptance bears a date, evidence is admissible to rebut the presumption and prove that it was accepted on a different date. Antedating or post dating a bill does not by itself make it invalid.

As to time of transfer

Every endorsement will be presumed to have been made before maturity, provided the endorsement does not bear a date after maturity of the bill. There can be no presumption as to the exact date of the endorsement when there is no date. Circumstantial evidence may be given to rebut the presumption. This presumption may be rebutted even by slight suspicion.

As to endorsements

In the absence of direct evidence that the endorsements on a negotiable instrument were made in a particular order the statutory presumption under this clause that they were made in the order in which they appear in the instrument will prevail.

As to stamp

In the cases of instruments lost or destroyed the presumption is that they were duly stamped and that the stamp was duly cancelled.

As to holder in due course

Holder” of a negotiable instrument has been defined in section 8 and “holder in due course” in section 9. Under the present clause every holder will be presumed to be a holder in due course, that is to say, he will be presumed to have paid the consideration for it and to have taken the instrument m good faith until the contrary is proved and will be unaffected by the failure of consideration as between the drawer and the payee. The onus of proving that a particular transferee is not a holder in due course is on the party challenging it.

Thus, where a drawer drew a post-dated cheque in favour of payee but no consideration passed from the payee to the drawer and the payee sold the cheque to a third person for actual consideration and there was no evidence to show that the purchaser was not a bona fide endorsee and no guilty knowledge of the defect in the title of the payee had been brought home to the purchaser and the purchaser sued for recovery of his money on the cheque as a holder in due course it was held that the fact that no consideration passed between the drawer and the payee would not affect the right of the purchaser to recover the amount nor could it be argued that burden of proving that the holder of the cheque was a holder in due course lay upon the purchaser. But the court has to decide, after giving due weight to this presumption, in each particular case, from the facts and circumstances placed before it, whether as a matter of fact the holder is a holder in due course. To come to a decision on this point the court will have to take into consideration the probabilities of the case, the respective position of the parties, and the other attendant circumstances as direct evidence is not usually , available.

Thus, when a cheque was endorsed in favour of a book maker in a betting transaction by a person with whom he had such previous transaction the presumption of being the holder in due course was rebutted and the holder was required to prove both consideration and good faith. Once it is shown that the instrument was obtained from its lawful owner or from any person in lawful custody thereof by means of an offence or fraud or in breach of an agreement, or was obtained from the maker or acceptor by such means the onus of proving that the holder is a holder in due course is shifted on the holder and he must prove that he is a holder in due course, that is, he must prove that he paid the consideration and became a holder before maturity without having sufficient reason to believe that there was any defect in the title of the transferor.

When the facts specified in this clause are proved the case will form an exception to clause (a) which states consideration may be presumed. Where a bill of exchange is on the face of it a good bill and there is nothing on the face of it to show the contrary it prima facie imports value. Prima facie, a bill of exchange is a good bill of exchange and it is necessary to show the contrary. When it is shown that a bill of exchange was a fraudulent one or an illegal one or a stolen one, in any of those cases, it being known that the person who holds it was a party to that fraud, to that illegality or to that theft and, therefore, could not sue upon it himself, the presumption is so strong that he would part with it to some body who could sue for him that it shifts the burden.

As has been already stated the onus shifts only when the defendant proves fraud or illegality in the first instance. Therefore, a mere denial of the passing of consideration between the original parties does not shift the onus and the defendant is bound to establish it Where a bill is accepted for accommodation the ordinary presumption of the holder being a holder in due course will apply. The doctrine of caveat emptor applies to sale of negotiable instruments.

Other Presumptions

Besides the presumptions noted above there are other presumptions generally applied in the case of negotiable instruments e.g. a bill will be presumed to be an inland bill unless the contrary appears on the face of it.6) A valid delivery will be presumed by all prior parties when a bill is in the hand of a holder in due course. This presumption is conclusive. Again, when a bill is not in the hands of the party who has signed it as drawer or acceptor or indorser a valid and unconditional delivery by him is presumed until the contrary is proved.7)

Presumption on proof of protest

Section 119 of the Negotiable Instruments Act,1881.

In a suit upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved.

It has been noticed before that a protest is a certificate drawn up by an officer appointed by the Government in the course of official business. Therefore, there is a presumption of correctness about the statement made therein, that is, it is presumed that whatever is stated in the certificate is correct. Unless the protest is a proper one fulfilling the conditions of sections 99 to 101 there is no presumption of correctness in its favour. In case there is a proper protest and such protest is proved, the court shall presume that the instrument was duly presented for acceptance or payment and that it was not accepted or paid. A court is entitled to presume dishonour if there is a proper protest but not if there is merely an entry “noted for non-payment” without date of dishonour or certificate of protest.

In the case of K.N. Beena vs. Muniyappan & Anr8) the Apex Court held that “in view of the provisions contained in Sections 118 & 119, the court has to presume that the cheque had been issued for discharging a debt or liability. The said presumption could be rebutted by the accused by proving the contrary.”

Protest operates as prima facie evidence of dishonour and can be rebutted by the other side. It is no evidence of notice or any other collateral fact such as the drawee had no fund of the drawer. Noting in itself is no evidence of presentment or dishonour.

1999 3 SCC 35
M.S. Narayana Menon @ Mani vs State Of Kerala & Anr decided on 4 July, 2006
decided on 26 November, 2019
Nanda v Daltca, 1933 Oudh 394
Kedar v Radha, 61 CT J 17
Bill of Exchange Act Sec 4(2)
Bill of Exchange Act Sec 21(2)
2002 SCC (Cri) 14