Facts of the Case
- X obtains Y’s acceptance to a bill by committing fraud.
- X then endorses the bill to Z, who takes it in good faith and for value, thus becoming a holder in due course.
- Z later endorses the bill to F, who takes it with knowledge of the fraud.
- F now seeks to recover the amount from X, the original party.
Issues in the Case
- Can F, who knows of the fraud, recover the amount from X?
- Does the title obtained from a holder in due course protect a subsequent holder who is not in due course?
- What is the effect of fraud on subsequent endorsements?
Principles Associated With It
- Under Section 53 of the Negotiable Instruments Act, a holder deriving title through a holder in due course gets all the rights of that holder in due course.
- Once an instrument passes through a holder in due course (Z), it becomes cleansed of prior defects, including fraud.
- Even though F has knowledge of fraud, his title is protected because he received it from Z, a holder in due course.
- The liability of X (the fraudulent party) still exists to subsequent holders who derive title through a holder in due course.
Judgement
- F can recover the amount from X, even though he was aware of the fraud, because his title comes through Z, a holder in due course.
- The cleansing effect of Z’s title protects F under Section 53.
- Therefore, X is liable to F despite the original fraud committed by him.