Facts of the Case
- ‘B’ obtains A’s acceptance to a bill of exchange by fraud.
- ‘B’ then endorses the bill to ‘C’, who is a holder in due course (HDC).
- ‘C’ further endorses the bill to ‘D’, who is aware of the original fraud committed by B.
- The issue is whether ‘D’, knowing about the fraud, can still enforce the bill against A.
Issues in the Case
- Does a person who receives a bill from a holder in due course acquire a valid title even if he knows of prior fraud?
- Can ‘D’, with knowledge of the fraud, still recover from A on the strength of the bill?
- What is the effect of holder in due course protection on subsequent endorsements?
Principles Associated With It
- Section 53 of the Negotiable Instruments Act: A holder in due course gets the instrument free from all defects in title of prior parties.
- Once a bill comes into the hands of a holder in due course (C), it is purged of prior defects, including fraud.
- A subsequent holder (D) derives title from the HDC (C), and takes the instrument with the same rights, even if he has knowledge of past fraud.
- The knowledge of D does not affect the enforceability of the instrument, because the title was cleansed by the HDC’s ownership.
Judgement
- Since ‘C’ was a holder in due course, the bill was cleansed of the original fraud.
- ‘D’, despite knowing of the fraud, receives a good title from ‘C’.
- Therefore, ‘D’ can recover money from A, as the instrument is now valid in the hands of a successor to a holder in due course.
- The knowledge of prior fraud does not affect D’s right to enforce the bill once it has passed through a holder in due course.