M3 Negotiable

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Negotiable Instruments Act 1881


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Meaning:

Negotiable means freely transferable from oneperson to another person, by mere delivery or byendorsement & delivery.

According to section 13 of Negotiable InstrumentAct a negotiable instrument means a promissorynote, bill of exchange or cheque payable either toorder or to bearer.

According to this definition, any other instrumentwhich satisfies the condition of negotiability can be

added to the list of negotiable instruments.


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TYPES OF NEGOTIABLE INSTRUMENTS

Negotiable instruments may be

1. Negotiable by Statute, or2. Negotiable by custom or usage.

1. Instruments negotiable by Statute.

The Negotiable Instruments Act mentions onlythree kinds of negotiable instruments (Sec. 13).

These are : promissory notes, bills of exchange and

cheques. These instruments are negotiable byStatute.


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2. Instruments negotiable by custom or usage.

There are certain other instruments which have

acquired the character of negotiability by usage or

custom of trade.

Thus in India, Government promissory notes,

bankers draft and pay orders, hundis, railway

receipts for goods, have been held to be

negotiable by usage or custom.


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Bearer and order instruments

Bearer instruments. A negotiable instrument is payable tobearer

(1) when it is expressed to be so payable, or (2) when the only or last indorsement on the instrument is an

indorsement in blank.

Order instruments. A negotiable instrument is payable toorder

when it is expressed to be payable to order, e.g., 'Pay toA ororder' or 'Pay to the order of A'. In both these cases, the bill is

payable toA or his order at his option.

when it is expressed to be payable to a particular person, anddoes not contain words prohibiting or restricting its transfer,

e.g., 'PayA one hundred rupees'


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Instruments payable on demand

An Instrument is payable on demand

when no time for payment is specified in it (Sec. 19); or

when it is expressed to be payable 'on demand', or

'at sight' or 'on presentment'. Time instruments

A bill or note which is payable (a) after a fixed

period, or (b) after sight, or (c) on a specified day, or(d) on the happening of an event which is certain to

happen, is known as a time instrument.


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HOLDER AND HOLDER IN DUE COURSE

Holder:- Means a person, who is entitled, in his own

name:

To the possession of an instrument, &

To recover the amount thereon.

Holder in due course:- Means a person, who fulfilsfollowing conditions:

He must have paid consideration to obtain the

negotiable instrument.He must have obtained possession of instrument,

before the maturity date.

He must have obtained the instrument in good faith


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Thus, where a person receives a negotiable

instrument without consideration, he may be a

holder but will not be called a holder in due course.

The title of holder of a negotiable instrument is

always subject to the title of its transferor whereas

a holder in due course acquires a better title than

that of its transferor.


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Indorsement

It means writing of a persons name on the

face or back of the NI or on a slip of paper

called allonge.

Who signs the instrument is called indorser

and the person to whom the instrument is

indorsed is called the indorsee.

The first indorsement shall be made by the

payee and subsequent can be made by any

person who is a holder of an instrument.


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The first signature of drawer as a drawer is no

an indorsement but if he signs it for the

second time for the purpose of negotiating it,

the second will be an indorsement.


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Essential of valid indorsement

It must be on instrument itself

It must be signed by the indorser for the

purpose of negotiation

It may be made by the indorser either by

signing or in addition to signing also writing

the name of the person to whom or to whose

order the instrument is payable.


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Kinds of indorsement Blank or general indorsement

Full or special indorsement

Restrictive indorsement Partial indorsement

Conditional indorsement

Sans recourse : A clause inserted into an agreement which

indicates that the endorser does not wish to incurliability ifthe document of title is not honored. It is essentially sayingthat the other party is entering into agreement at his or herown risk. For example, if Party A (the "endorser") signs abill of exchange containing a sans recourse endorsement

with Party B (the "endorsee") over a financial instrument,Party B signs into an agreement with Party C over the sameinstrument, and the instrument is dishonored, the Party Bcannot seek payment from Party A. A sans recourse

endorsement is often made by those in a representativecapacity rather than those acting as principal. Also called
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Characteristics of a negotiable instrument

The characteristics of a negotiable instrument are asfollows:

Freely transferable. The property in a negotiableinstrument passes from one person to another bydelivery, if the instrument is payable to bearer, and byindorsementand delivery ifit is payable to order.

Title of holder free from all defects. A person, takingan instrument bone fide and for value, known as a

holder due course, gets the instrument free from alldefects in the title of the transferor. He is not in anyway affected by any defect in the title of the transferoror of any prior party.


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Example. S sells certain goods to B. B gives a

promissory note to S for the price. He refuses to pay

the promissory note, claiming that the goods are

not according to order. If S suesB on the note, B's

defence is good. But if he negotiates the note to H,

a holder in due course, B's defence will be of no

avail. The holder in due course is also not affected by

certain defences, for example, fraud, which might

be available against previous holders, provided hehimself is not a party to it.

h h ld d


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Recovery. The holder in due course can sue upon anegotiable instrument in his own name for the recoveryof the amount. Further he need not give notice of

transfer to the party liable on the instrument to pay. Presumptions. Certain presumptions apply to all

negotiable instruments, unless contrary is proved.These presumptions are dealt with in Secs. 118 and 119

and are as follows: Consideration. Every negotiable instrument is

presumed to have been made, drawn, accepted,indorsed, negotiated or transferred,for consideration.

Date. Every negotiable instrument bearing date ispresumed to have been drawn on such date.

Time of acceptance. When a bill of exchange has been

accepted, it is presumed that it was accepted within a


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Time of transfer. Every transfer of a negotiable

instrument is presumed to have been made before

its maturity.

Order of indorsements. The indorsements

appearing upon a negotiable instrument are

presumed to have been made in the order in which

they appear thereon.

Stamp. When an instrument has been lost, it is

presumed that it was duly stamped.

Holder presumed to be a holder in due course.

Every holder of a negotiable instrument is

presumed to be a holder in due course (Sec. 118).

Proofofprotest. In a suit upon an instrument which

T f N i bl I


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Types of Negotiable Instruments:

1. Promissory note

A promissory note' is an instrument in writingcontaining an unconditional undertaking, signed bythe maker, to pay a certain sum of money only to,

or to order of, a certain person, or to the bearer ofthe instrument (Sec. 4).

The person who makes the promissory note andpromises to pay is called the maker. The person towhom the payment is to be made is called thepayee.


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Specimen of a promissory note

Rs. 1,000 Delhi, July 10, 2007

Three months after date I promise to pay Shyam

Sunder or order the sum of one thousand rupees,for value received.

To StampShyam Sunder

222, Ashok Vihar

Delhi-110052 Sd/-Ram

E ti l l t


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Essential elements

For an instrument to become a promissory note, itmust have the following essential elements

1. Writing. The instrument must be in writing. Mereverbal engagement to pay is not enough. Writingincludes print and typewriting and may also be in pencilor ink.

2. Promise to pay. The instrument must contain anexpress promise to pay. A mere acknowledgement ofindebtedness or implied undertaking by the use of theword 'debt' or 'pronote', is not sufficient.

The following instruments signed by A are notpromissory notes

"Mr. B. I.O.U. Rs. 100"or "Mr. B, l owe you Rs. 100."

I am liable to B, in a sum of Rs. 500 to be paid by

f f


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Example. "I of my own free will and accord

approached B and borrowed from him the sum of

Rs. 100 bearing interest at the rate of 2 per cent per

mensem. I have, therefore, executed these fewpresents by way of a promissory note so that it may

serve as evidence and be of use when needed."

Signed by A. [Bal Mukand v. Munna LalRamji Lal)

Example. 'We have received the sum of Rs. 9,000

from Shri R.R. Sharma. This amount will be repaidon demand. We have received this amount in cash.

(Surjit Singh v. Ram Ratan)

fi i d di i l h


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3.Definite and unconditional. The promise to pay

must be definite and unconditional. If it is

uncertain or conditional, the instrument is invalid.

Thus the following instruments signed byA are not

promissory notes

I promise to pay B a sum of Rs. 500, when

convenient or able.

"I promise to pay Rs. 1,000 to B, 30 days after his

marriage with C.

This is not a promissory note as it is probable that B

may not marry C (Beardsleyv. Baldwin, (1741)

i ( d i f bill f


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However, a promise (or order, in case of a bill of

exchange) to pay is not 'conditional' if

(1)it depends upon an event which is certain to

happen though the time of its happening may be

uncertain.

Example.A promises to pay B a sum of Rs. 500 after

the death ofC.

This is not a conditional promise for it is certain that

Cshall die.

(2) the promise is to pay at a particular place or after

a specified time.

4 Si d b h k


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4. Signed by the maker.

The instrument must be signed by the maker,

otherwise it is incomplete and of no effect.

5. Certain parties.

The instrument must point out with certainty as to

who the maker is and who the payee is.

The payee may sometimes be misnamed or

designated by description only. In such case, the

note is valid if the payee can be ascertained by

evidence.

A i t t b d bl t th


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A promissory note cannot be made payable to the

maker (promisor) himself. Such a note is a nullity. But if

it is indorsed by the maker to some other person or

indorsed in blank, it becomes a valid promissory note(Gay v. Landal, (1848))

6. Certain sum of money. The sum payable must becertain and must not be capable o contingent additions

or subtractions.

The following instruments signed by A are not

promissory notes (as the sum payable is no certain)

"I promise to pay B Rs. 1,000 and all the other sums

due to him."

I romise to a B Rs. 1,000 and the fine accordin to

7 P i t l


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7. Promise to pay money only.

The promise must be to pay money only & not any

other thing

If the instrument contains a promise to pay

something in addition to the money, it cannot be a

promissory note.

For Eg.

"I promise to pay B Rs. 200 and deliver one quintal

of Wheat. is not a valid promissory note.

8 B k t t i t i


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8. Bank note or currency note is not a promissory

note. This is because a bank note or a currency note

is money itself.

9.Formalities like number, date, place, consideration,

etc. These are usually found in an instrument

although they are not essential in law. But it must

bear the necessary stamp under the Indian StampAct, 1899.

10. It may be payable on demand or after a definite

period of time.

11. It cannot be made payable to bearer on demand.

The Reserve Bank of India Act 1934 prohibits issue

of such promissory notes except by the Reserve

BILL OF EXCHANGE


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BILL OF EXCHANGE

A bill of exchange is an instrument in writing containingan unconditional order, signed b the maker, directing a

certain person to pay a certain sum of money only to,or to the order of, a certain person or to the bearerofthe instrument (Sec. 5).

Parties to a Bill of Exchange,

There are three parties to bill of exchange, viz., thedrawer, the drawee and the payee.

The person who gives the order to pay or who makes

the bill is called the drawer. The person who is directed to pay is called the drawee.

When the drawee accepts the bill, he is called theacceptor.

The person to whom the payment is to be made is

Wh th d i bill i fi titi


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Where the payee named in a bill is a fictitious or

non-existing person, the bill is treated as payable to

bearer [Clutton v.Attenborough, (1897).

In some cases, the drawer and the payee, may be

one and the same person.

The drawer or the payee who is in possession of the

bill is called the holder. The holder must present the

bill to the drawee for his acceptance.

When the holder indorses the bill, note or cheque,

he is called the indorser. The person to whom thebill, note or cheque is indorsed is called the

indorsee.

S i f bill f h


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Specimen of a bill of exchange

Shyam of Delhi buys goods on credit from Krishan of

Mumbai for Rs. 500 to be paid 3 months after date.

Krishan buys goods from Ram of Delhi for Rs. 500

on similar terms. Now Krishan may order Shyam to

pay the sum of Rs. 500 to Ram. The order will be a

bill of exchange.


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Rs. 500 Mumbai, Jan. 10, 2007

Three months after date pay to Ram or order the

sum of five hundred rupees, for value received.

ToShyam,

235, Subhash Marg, Accepted Stamp

Delhi 110006 Shyam Sd/-Krishan

Essential elements


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Essential elements

It must be in writing.

It must contain an order to pay.

Example. "Mr. Little, Please let the bearer have 7 andoblige.' Signed by A . This is not a bill of exchange as itcontains a request and not an order [Little v. Slackford, (1828) M.& W. 171].

The order must be unconditional. It requires three parties, i.e., the drawer, the drawee and the

payee.

The parties must be certain.

It must be signedby the drawer. The sum payable must be certain

It must contain an order to pay money.

The formalities relating to number, date, place andconsideration, though usually found in bills, are not essential

Distinction between a bill of exchange and a


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Distinction between a bill of exchange and a

promissory note

In a note there are two partiesthe maker and the

payee. In a bill there are three parties the drawer, thedrawee and the payee.

A note contains an unconditionalpromise to pay. A bill

contains an unconditional orderto pay. The maker of a note is the debtor and he himself

undertakes to pay. The drawer of a bill is the creditor

who directs the drawee (his debtor) to pay.

The liability of the maker of a note is primary and

absolute, whereas the liability of the drawer of a bill is

secondary and conditional.

A note cannot be made a able to the maker himself,

A note requires no acceptance whereas a bill


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A note requires no acceptance whereas a bill

payable after sight or after a certain period must be

accepted by the drawee before it is presented for

payment.

A note cannot be drawn payable to bearer. A bill can

be so drawn. But in no case can a note or bill be

drawn payable to bearer on demand.'

The maker of a note stands in immediate relation

with the payee. The drawer of a bill stands in

immediate relation with the acceptor and not thepayee.

A note cannot be drawn payable to bearer A bill can


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A note cannot be drawn payable to bearer. A bill can

be so drawn. But in no case can a note or bill be

drawn payable to bearer on demand.

The maker of a note stands in immediate relation

with the payee. The drawer of a bill stands in

immediate relation with the acceptor and not the

payee.

In case of dishonour of a bill either by non-

acceptance or by non-payment, due notice of

dishonour must be given to all the persons who areto be made liable to pay. This includes the drawer

and the prior indorsers. But in the case of dishonour

of a note no such notice is required to be given to

Types of Bills of Exchange:


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Types of Bills of Exchange:

Demand & Usance Bills:

Demand bills are otherwise called sight bills. These

bills are payable immediately as soon as they are

presented to the drawee. No time of payment is

specified and hence they are payable at sight.

Usance bills are called time bills. These bills arepayable immediately after the expiry of time period

mentioned in the bills.

Clean bills and Documentary bills:


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Clean bills and Documentary bills:

When bills have to be accompanied by documents

of title to goods like railway receipt, lorry receipt,

bill of lading etc. the bills are called documentary

bills.

When bills are drawn without accompanying any

documents, they are called clean bills.

Inland and foreign Bills:


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Inland and foreign Bills:

Inland instruments. A promissory note, bill of exchangeor cheque which is (1) both drawn or made in India and

made payable in India, or (2) drawn upon any personresident in India, is deemed to be an inland instrument(Sec. 11).

Examples:

A bill of exchange drawn upon a resident in India is aninland bill irrespective of the place where it was drawn.

A bill is drawn in Delhi on a merchant in Mumbai and

accepted payable in Kolkata or London. A bill is drawn in Delhi on a merchant in London and

accepted payable in Kolkata.

Foreign instruments. An instrument, which is not an

inland instrument, is deemed to be aforeign

Accommodation bill


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Accommodation bill

A bill may be

a genuine trade bill, or

an accommodation bill.

When a bill is drawn, accepted, or indorsed for

consideration, it is called a 'genuine trade bill'. When it

is drawn, accepted or indorsed without anyconsideration, it is called an 'accommodation bill'.

Example. A is in need of Rs. 1,000. He approaches his

friend B for borrowing the amount. B is not in aposition to lend, but he suggests that A might draw a

bill on him which he would accept. If the credit ofA is

good, he would get the bill discounted with his banker.

On the due date,A would a Rs. 1,000 to B who would

CHEQUES:


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CHEQUES:

A cheque, in essence, is an order by the customer of

the bank directing his banker to pay on demand,

the specified amount, to or to the order of the

person named therein or to the bearer.

Section 6 defines a cheque as a bill of exchange

drawn on a specified banker and not expressed to

be payable otherwise than on demand. Thus, a

cheque is a bill of exchange with two added

features, viz. (i) it is always drawn on a specifiedbanker, (ii) and it is always payable on demand and

not otherwise.

Every bank has its own printed cheque forms which


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Every bank has its own printed cheque forms which

are supplied to the account holders at the time of

opening the account as well as, subsequently

whenever needed. These forms are printed onspecial security paper which is sensitive to

chemicals and makes any chemical alterations

noticeable. Although, legally; a customer may withdraw his

money even by writing his directions to the banker

on a plain paper but in practice bankers honouronly those orders which are issued on the printed

forms of cheques.

Requisites of a Cheque The requisites of a cheques


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Requisites of a Cheque. The requisites of a cheques

are:

Written instrument. A cheque must be an

instrument in writing. Regarding the writing

materials to be used, law does not lay down any

restrictions and therefore cheque may be written

either with (a) pen (b) typewriter or may be (c)printed.

Unconditional order. A cheque must contain an

unconditional order. It is, however, not necessarythat the word order or its equivalent must be used

to make the document a cheque.. Generally, the

order to bank is expressed by the word "pay".

A cheque must be drawn on a specified banker


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A cheque must be drawn on a specified banker

only.

A certain sum ofmoney. The order must be only for

the payment of money and that too must be

specified. Thus, orders asking the banker to deliver

securities or certain other things cannot be

regarded as cheques. Payee to be certain. A cheque to be valid must be

payable to a certain person. 'Person' should not be

understood in a limited sense including only humanbeings. The term in fact includes 'legal persons'

also. Thus, instruments drawn in favour of a body

corporate, local authorities, clubs, institutions, etc.,

Payable on demand. A cheque to be valid must be


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Payable on demand. A cheque to be valid must bepayable on demand and not otherwise. Use of thewords 'on demand' or their equivalent is not

necessary. When the drawer asks the banker to payand does not specify the time for its payment, theinstrument is payable on demand (s.19).

Amountof the cheque. Amount of the cheque must

be clearly mentioned. The amount should bewritten both in words as well as figures so as toavoid mistakes. Moreover, the amount should be so

written as to leave no blank space before or afterthe words and figures specifying the amount. Incase a customer does so, though innocently and hisbanker pays the forged amount because the forgery

is not noticeable in spite of reasonable care, the

Dating of cheques.


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The drawer of a cheque is expected to date it before it leaves his hands. Acheque without a date is considered incomplete and is returned unpaid bythe banks.

The drawer can date a cheque with the date earlier or later than the dateon which it is drawn. A cheque bearing an earlier date is ante-dated and theone bearing the later date is called post-dated.

A post-dated cheque cannot be honoured, except at the personal risk of thebank's manager, till the date mentioned. A post-dated cheque is as muchnegotiable as a cheque for which payment is due, i.e., the transferee of apost-dated cheque, like that of the cheque on which payment is due,acquires a better title than its transferor, if he is a holder in due course.

A cheque that bears a date earlier than six months is a stale cheque andcannot be claimed for.

A Bill of Exchange and a Cheque Distinguished.


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A Bill of Exchange and a Cheque Distinguished.

Cheque must be drawn only on a banker. A Bill can

be drawn on any person including a banker.

In Cheque, the amount is always payable on

demand. In bills amount may be payable ondemand or after a specified time.

The cheque is not enlitled to days of grace. Ausance (time) bill is entitled to three days of grace.

Acceptance is not needed in a cheque, A bill

A cheque can be crossed Crossing of a bill of


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A cheque can be crossed. Crossing of a bill of

exchange is not possible

In Cheque notice of dishonour is not necessary. The

parties thereon remain liable, even if no notice of

the dishonour is given,

In bills notice of dishonour is necessary to hold the

parties liable thereon. A party who does not receivea notice of dishonor can generally escape its liability

thereon.

A cheque is not to be noted or protested in case of


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A cheque is not to be noted or protested in case of

dishonour.

A bill is noted or protested to establish dishonour.

Out-of-date, or Stale and Post dated Cheques:

The paying banker is bound to pay only suchcheques as are presented to him for payment

within a reasonable time of issue.

Usually, the cheque presented after six months of

the date mentioned thereon are considered stale

and hence are returned by the banker for their

confirmation of the drawers.

This period of six months is sometimes varied by a


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This period of six months is sometimes varied by a

special agreement with a particular customer. For

example, a company issuing dividend warrants,

reduces this period to three months. In any case,the company may revalidate the same on the

request of the holder who fails to present it within

the stipulated period of three months.

There are two types of cheques, open cheques and


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yp q , p qcrossed cheques. A cheque which is payable in cashacross the counter of a bank is called an open cheque.When such a cheque is in circulation, a great riskattends it, If its holder loses it, its finder may go to thebank and get payment unless its payment has alreadybeen stopped. It was to prevent the losses incurred byopen cheques getting into the hands of wrong personsthat the custom of crossing was introduced.

A crossed cheque is one on which two paralleltransverse lines with or without the words '& Co.' are

drawn. The payment of such a cheque can be obtainedonly through a banker. Thus crossing is a direction tothe drawee banker to pay the amount of money on acrossed cheque generally to a banker or a particular

banker so that the party who obtains the payment of

The crossing compels the holder to present the


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The crossing compels the holder to present the

cheque through a 'quarter of known respectability

and credit" and affords security and protection to

the owner of the cheque, as the cheque is payableonly through a banker.

Types of crossing.

1. General crossing. A cheque is said to be crossedgenerally where it bears across its face an addition

of-

the words 'and company' or any abbreviationthereof, between two parallel transverse lines,

either with or without the words 'not negotiable' or

two parallel transverse lines simply, either with or

Where a cheque is crossed generally, the drawee


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Where a cheque is crossed generally, the drawee

banker shall not pay it unless it is presented by a

banker (Sec. 126, para 1).

2. Special crossing. Where a cheque bears across its

face an addition of the name of a banker, either

with or without the words 'not negotiable', thecheque is deemed to be crossed specially (Sec.

124).

Where a cheque is crossed specially the banker onwhom it is drawn shall pay it only to the banker on

whom it is crossed, or his agent for collection (Sec.

126, para 2).

Restrictive crossing. In addition to the two


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Restrictive crossing. In addition to the two

statutory types of crossing discussed above, there is

another type which has been adopted by

commercial and banking usage. In this type ofcrossing the words 'A/c Payee' are added to the

general or special crossing.

The words 'A/c Payee' on a cheque are a directionto the collecting banker that the amount collected

on the cheque is to be credited to the account of

the payee. If he credits the proceeds to a differentaccount, he is guilty of negligence and will be liable

to the true owner for the amount of the cheque.

In practice, the collecting banker sees to it that such

Not negotiable crossing (Sec. 130).


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g g ( )

The effect of the words 'not negotiable' on acrossed cheque is that the title ofthe transferee of

such a cheque cannot be better than that of itstransferor. The addition of the words 'notnegotiable' does not restrict the furthertransferability of the cheque. It only takes away the

main feature of negotiability, which is, that a holderwith a defective title can give a good title to asubsequent holder in due course. Anyone who takes

a cheque marked 'not negotiable' takes it at his ownrisk.

The object of crossing a cheque 'not negotiable' isto afford protection to the drawer or holder of the

cheque against miscarriage or dishonesty in the

Example. Wdrew a cheque crossed 'not negotiable'


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p q g

in blank and handed it to his clerk to fill in the

amount and the name of the payee. The clerk

inserted a sum in excess of her authority anddelivered the cheque to P in payment of a debt of

her own. Is W liable to P?

(Wilson & Meeson v. Pikering, (1946))

When Banker must refuse payment?


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p y

A paying banker must refuse payment on cheques if

any of the following circumstances exist:

1. Where the customer countermands the payment

A banker must refuse to honour cheque, payment

for which has been stopped by the drawer.

However, the instructions regarding StopPayment

should be honored only if it is in a (a) writing, (b)

signed by the drawer, and (c) mentions the number,

the date, the name of the payee and the amount ofthe cheque.

In case of joint account or partnership accounts any


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j p p y

of the joint account holders or any of the partner if

asks the banker to stop the payment, he should do

so. But in such cases any request to remove thestop order must be signed by all the required

signatories, though the better course is to suggest

the issue of the new cheque.

It needs to be emphasized that a banker must

follow the customers instructions to stop paymentvery carefully to avoid liability thereon. In Hilton v.

Westminster Bank Ltd. (1927), it was observed that

a bank could be sued as much for failing to honour

In case information regarding Stop Payment is


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g g p y

received by telegram or telephone, the payment

should be postponed and the drawer asked to send

a written confirmation so as to avoid the risk of anyunauthorized stopping of payment.

Effect of Payment of countermanded Cheque

In case a bank pays a countermanded cheque, notonly he will be asked to reverse the entry but also

to pay damages for dishonor of the cheques

presented subsequently which would have beenhonored otherwise.

2. On receipt of a notice ofcustomers Death


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p

The payment of cheques presented after death of

customer must not be made. But where the

payment is made without knowing the fact of the

customers death, bank can not be held liable.

3. On customers becoming Insolvent.

On a person being declared or adjudicated as

insolvent, his properties vest in the official receiver

or assignment and therefore any cheques presented

after the adjudication of a customer as insolventmust be refused payment.

4. On receipt of a notice of the customers Insanity.


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p y

A banker should refuse payment on cheques drawn

and received after the receipt of notice of the

customers insanity. As to how a banker should

believe a customer insane, it is suggested that if the

customer has been removed to the lunatic asylum,

the banker will be justified in assuming him asinsane. Otherwise a certificate from a competent

doctor should be obtained in this regard.

5. On suspicion as to title Where the banker believes that the person

presenting the cheque is not entitled to receive the

payment thereon. For eg. Where the banker

6. On suspicious misuse by trustee


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p y

In case of trust accounts, if the banker feels

suspicious that the trustee intends to use the

amount of the cheque for his personal use.

When bankers may refuse payment?

In the following cases banker may dishonor a

cheque without incurring any liability thereon:

1. Where the cheque is post dated.

Refusal to pay a post dated cheque before its due

date does not make a banker liable for wrongful

dishonor.

2. Where the funds of the customer are insufficient.


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The banker may however honor the cheque in case

it feels that the customer is a long trusted customer.

3. Where the cheque is not duly presented.

For instance, a cheque presented after business

hours shall be deemed not to have been duly

presented.

4. In case of a Joint account to be operated by all

jointly, where the cheque is not signed by all of the

joint account holders.

5. Where the cheque is irregular, ambiguous or

otherwise materially altered.

Answers generally given by Banks in Case of


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Dishonored Cheques:

R.D.Refer to Drawer. The expression is used to

convey to the holder that funds in the drawers

account are not sufficient to honor the cheque and,

therefore, he should refer to the drawer for

payment. N .S. = "Not Sufficient"; N.E. = "No Effects" and N .F.

= "No Funds" are other abbreviations used for the

same purpose. These terms have been declared to have

defamatory meaning and therefore, where a

cheque has to be returned for reasons other than

E.I. = "Endorsement Irregular".


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When an endorsement on a cheque is not in order

e.g., the spelling of the payee's name appearing in

the endorsement from that on the face of thecheque, the cheque is returned with his remark.

E.N.C. = "Effects Not Cleared." This reply is given

where the drawer has paid in cheques or bills forcollection, but their proceeds have not been

realised by that time.

"Irregularly drawn: requires confirmation." Thisexpression is used where the cheque appears to

have been drawn in an unusual manner or

ambiguous manner or where the banker suspects

D.D. = "Drawer Deceased." When the drawee comes


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to know of the drawer's death, payment on

cheques drawn prior to his death should be

suspended. W. & ED. = "Words and Figures Differ," This answer

is given where the amount stated in words differ

from the amount in figures.

DISHONOUR OF A CHEQUE ON GROUNDS OF


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INSUFFICIENCY OF FUNDS

Sections 138-142 of the Negotiable Instruments Act

[added by the (Amendment) Act,B8] provides forcriminal penalties in the event of dishonour of

cheques for insufficiency of funds. The drawer,

under Sec. 138, may be punished withimprisonment up to 2 years or with a fine up to

twice the amount of the cheque or with both.

However, in order to attract the aforesaid penalties,


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following conditions must be satisfied-

1. The cheque has been dishonoured due to

insufficiency of funds in the account maintained byhim with a banker for payment of any amount of

money to another person from out of that account.

In case of stop-payment, it shall be deemed to havebeen so dishonoured for insufficiency of funds

unless stop payment can be justified.

Dishonour due to closure of account has also beenheld to be dishonour for insufficiency of funds

Similarly, directing the payee not to present will be

deemed to have the same effect [Modi Cement Ltd.

2. The payment for which the cheque was issued


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should have been in discharge of a legally

enforceable debt or liability in whole or part of it.

It may be noted that the holder of a cheque shall bepresumed to have received the cheque for

discharge, in whole or in part, of any debt or other

liability (Sec. 139).

3. The cheque should have been presented within 6

months from the date on which it is drawn or withinthe period of validity, whichever is earlier.

4. The payee or the holder in due course of the


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cheque should have given notice demanding

payment within 30 daysfrom the drawer on receipt

of information of dishonour of cheque from thebank. If notice is served within the said 30 days, no

fresh cause of action can be created by presenting

the cheque again.But, if notice is not served as above, presentment

again will create a fresh cause ofaction

It may be noted that there is no compulsion to issuenotice on first default

5. The drawer is liable only if he fails to make the


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payment within 15 days of such notice period.

6. The payee or holder in due course of the cheque

dishonoured should have made a complaint withinone month of cause of action arising out of Sec.

138.

However, no Court shall take cognizance of anyoffence punishable under Sec. 138 except upon a

complaint, in writing, made by the payee, or, as the

case may be, the holder in due course of thecheque.

Further, no Court inferior to that of a Metropolitan

Magistrate or a Judicial Magistrate of the First Class

Offences by Companies

If th itti ff i


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If the person committing an offence is a company, everyperson, who at the time the offence was committed, was incharge of and was responsible to, the company for the

conduct of the banker of the company, as well as thecompany, shall be deemed to be guilty of offence and shall beliable to be proceeded against and punished accordingly.

To invoke the liability of the company, notice of dishonourshould be served on the company. However, notice served onthe director who had signed the cheque was held valid -Rajneesh Aggarwal v. Amit Bhalla (2001).

Further, a director, manager, secretary or other officer of thecompany shall be liable to be proceeded against andpunished accordingly in case the offence has been committed

with the consent or connivance, or is attributable to any

However, a person will not be liable in a case:


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where such person proves that the offence was

committed without his knowledge, or

where he had exercised all due diligence to prevent

the commission of such offence;

where he is nominated as a Director of a company

by virtue of his holding any office or employment in

the Central Government or State Government or

financial corporation owned or controlled by the

Central Government or the State Government, asthe case may be.

Liability of Company in Liquidation


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The Supreme Court in Pankaj Mishra v. State of

Maharashtra (2001) had held that the offence

under Section 138 would be complete when drawerfails to make payment within stipulated time

whatever because for such failure and, therefore,

company could not avert its penal liability underSection 138 on mere ground that petition for its

winding up was presented prior to company being

called upon by notice to pay amount ofdishonoured cheque.

Scope of Section 138 Post dated Cheques


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Post-dated Cheques

Offence under Section 138 of the Act would becommitted only when a cheque drawn for payment ofany debt or liability is returned by the bank unpaid andthe drawer fails to make payment of the said amountwithin 15 days of the notice of dishonour.

One of the elements to be satisfied is that the cheque

should have been returned unpaid. It goes withoutsaying that such return of the cheque by the draweecould only be on presentation; that is when he iscapable of presenting the same for encashment. In the

case of the post-dated cheque, the same can bepresented only on or after the date of the cheque.

Thus, if a post-dated cheque is presented within 6months from the date it hears, the presentation shall be

deemed to be in order and hence cause of action shall

The Supreme Court in Anil Kumar Sawhney v.


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Guishan Rai (1993) observed that in case of a post-

dated cheque, up to the date shown on the cheque,

it remains a mere bill of exchange and becomes acheque only from the date written on it. A cheque is

an instrument payable on demand. A post-dated

cheque which is not payable on demand till theparticular date is not a cheque in the eyes of law till

the date it becomes payable on demand.

The period of six months is, therefore, to bereckoned from the date of the cheque.

Account Closed

Whether Covered Under Section


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138?

Whether Section 138 is attracted when the cheque

is returned with the memorandum "AccountClosed"?

The question was considered in the case of S.

Prasanna v. R. Vijayalakshnii (1993) 76 Comp. Cas.522. The Madras High Court observed as follows:

Section 138 is attracted when a cheque is returned

by the bank unpaid in two circumstances, viz, (i) theamount of money standing to the credit of that

account is insufficient to honour the cheque, or (ii)

it exceeds the amount arranged to be paid from

However, the recent judgements offer an otherwiseview In G M Mittal Stainless Steel v Nagarjuna


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view. In G.M. Mittal Stainless Steel v. NagarjunaInvestments (1997) 90 Comp. Cas. 106, it was held

that 'the return of cheque by the bank withendorsement 'account closed' and non-payment ofthe amount of the cheque after due notice issufficient for deemed commission of an offence

under Section 138 of the Negotiable InstrumentsAct, 1881.

Again, in N.E.P.C. Micon Ltd. v. Magma Leasing Ltd.(1999) 96 Comp. Cas. 822, it has been held thatdishonour of a cheque on account of 'accountclosed' tantamounts to dishonour for insufficiencyof funds since the account is rendered to a cipher.

Any otherwise interpretation will only encourage

Cheque not issued in discharge of liability

h h d?


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Whether covered?

The Calcutta High Court in In-mark Finance &

Investment Co. Pvt. Ltd. and another v.Metropolitan Magistrate, Bombay and others

(1993) 76 Comp. Cas. 156 (Cal.) held that in order to

attract the provisions of Section 138 of theNegotiable Instruments Act, it is necessary that the

cheques are issued in discharge of a debt or liability.

Unless the cheques are so issued, the drawer willnot be guilty of the offence under Section 138 of

the Negotiable Instruments Act even if other

conditions are fulfilled.

Jurisdiction of the Court under Section 138


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As to which Court shall have the jurisdiction to

entertain complaints under Section 138, the Kerala

High Court in P.K. Muraleedharan v. C.K. Pareed(1993) 76 Comp. Cas. 615, observed that the cause

of action as contemplated by Section 142 of the

Negotiable Instruments Act arises at the placewhere the drawer of the cheque fails to make

payment of the money. That can be the place where

the bank to which the cheque was issued is located.It can also be the place where the cheque was

issued or delivered.

The Court within whose jurisdiction any of the

Time within which action must be taken under Section 138


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Under Section 142 (b) of the Negotiable Instruments Act,action under Section 138 must be taken within one month

after the failure of the drawer to make the payment on expiryof 15 days from the service of the notice.

TheAndhra Pradesh High Court, therefore held the period oflimitation viz, one month starts from the 16th day after thereceipt of notice by the petitioner

Thus, in the case of M/s Mahalakshmi Enterprises, Calicut -Kerala and Another v. Sri Vishnu Trading Co. and Another,

AIR 1991 A.P. 74, MIs Sri Vishnu Trading Co. field a complaintuls 138 on the ground that the cheque dated 16.7.1989issued for I Rs. 15,260/- by the petitioner was dishonoured on24.7.1989. In view of the dishonour, they issued a notice tothe petitioner on 20 August, 1989, which was received by the

petitioner on 24.8.1989. On 5.9.1989, they field the petition

The Court held that the notice was received by the

i i 24 8 1989 d h f h h d i


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petitioner on 24.8.1989 and thereafter he had time

to pay the amount within 15 days. The limitation

starts from the date of expiry of 15 days, viz., from9.9.1989, the 16th day. The complaint was field on

5.9.1989 which therefore is within limitation.

Effect of

Part Payment Any part-payment would not affect the cause of action


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Any part-payment would not affect the cause of actionof the payee to file a complaint. Clause (b) of theproviso requires that on dishonour the payee shall

make a demand for the payment of the "said amount ofmoney" by giving a notice in writing which means thatthe notice shall make a demand for payment of theamount mentioned in the cheque.

Clause (c) refers only to failure of the drawer of suchcheque to make payment of the 'said amount ofmoney' makes it clear that the drawer would have tomake payment of the entire amount of money asmentioned in the cheque and any part payment, even ifmade, would be of no avail to the drawer ofthe chequefor evading prosecution.

Ifpart-payment could protect the drawer ofthe chequefrom prosecution this would have been a very handyand convenient device for an unscru ulous erson to

It is immaterial whether the pay order which was

i d i t t h d ft filli


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issued in part-payment was encashed after filling

the complaint. Once the offence was complete any

subsequent conduct either of the complainant or ofthe accused would not wash away the offence.

Fine:

The power to impose fine under the section is quiteflexible and the court may impose any amount of

fine not exceeding twice the amount of the cheque

or even may not impose any fine at all on passing asentence of imprisonment alone.

CONSEQUENCES OF A WRONGFUL DISHONOUR If a banker without justification dishonours his


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If a banker, without justification, dishonours hiscustomer's cheque, he makes himself liable tocompensate the customer for any loss or damage. The

words "loss or damage" used in Section 31, not onlymean the pecuniary loss but also loss of credit or injuryto reputation of the customer.

Thus, if the customer is a trader or a business man, the

damages may be substantial. But, a non trader is notentitled to recover substantial damages for thewrongful dishonour of his cheque. In Gibbs v.Westminster Bank. Mrs, Margaret Gibbons, a non-trader, was awarded only nominal damages because ofthe absence of any special loss.

In assessing the damages for injury to credit, the Courtsgive due consideration to various factors, such asfinancial position and business reputation of thecustomer and the customs of the trade to which he

Discharge of One or More Parties from the liability:


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A party is said to be discharged from his liability

when his liability on the instrument comes to an

end. When only some of the parties to a negotiable

instrument are discharged, the instrument

continues to be negotiable and the underchargedparties remain liable on it.

One or more parties to a negotiable instrumentis/are discharged from liability in the following

ways:

1. By cancellation [s.82 (a)].


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When the holder of a negotiable instrument

deliberately cancels the name of any of the party

(by drawing a line through the name) liable on theinstrument with an intent to discharge him from

liability thereon, such party and all endorsers

subsequent to him, who have a right of actionagainst the party whose name is so cancelled, are

discharged from liability.

Thus, if the maker's or acceptor's name has beencancelled the liabilit of other parties to the


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cancelled, the liability of other parties to the

instrument, who must have obviously become

parties thereto subsequent to the maker oracceptor comes to an end, which in effect

discharges or cancels the instrument itself.

But if the name of an endorser has been cancelledthen all the endorsers subsequent to him will be

discharged but those prior to him will remain liable

2. By release (s.82 (b)).


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If the holder of a negotiable instrument releases any

party to the instrument by any method other than

cancellation of names (i.e., by a separate agreement

of waiver, release, or remission), the party so

released and all parties subsequent to him, whohave a right of action against the party so released,

are discharged from liability.

3. By payment (s.82 (c) )

h h l l bl h


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When the party primarily liable on the instrument

makes the payment in due course to the holder at

or after maturity, all the parties to the instrumentstand discharged, because the instrument as such is

discharged by such payment.

4. By allowing drawee more than 48 hours to accept(s.83).

If the holder of a bill of exchange allows the drawee

more than forty eight hours, exclusive of publicholidays, to consider whether he will accept the

same, all previous parties not consenting to such

allowance are thereby discharged from liability to 5. By taking qualified acceptance (s.86).

f h h ld f h b ll l f d


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If the holder of the bill agrees to a qualified

acceptance all prior parties whose consent is not

obtained to such an acceptance are discharged forliability.

6. By not giving notice of dishonour.

Any party to a negotiable instrument (other thanthe party primarily liable) to whom notice of

dishonour is not sent by the holder is discharged

from liability as against the holder, unless thecircumstances are such that no notice of dishonour

is required to be sent.

7. By non-presentment for acceptance of a bill (s.61).When a bill of exchange is payable certain period


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When a bill of exchange is payable certain period

after sight, its holder must present it for acceptance

to the drawee within a reasonable time after it isdrawn.

If he makes a default in making such presentment,

the drawer and all endorsers who were liabletowards such a holder are discharged from their

liability towards him.

8. By delay in presenting a cheque (s.84).

I i h d f h h ld f h i


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It is the duty of the holder of a cheque to present it

for payment within a reasonable time of its issue. If

he fails to do so and in the meanwhile the bank failscausing damage to the drawer, the drawer is

discharged as against the holder to the extent of

the actual damage suffered by him.Example: A draws a cheque for Rs. 1000, and when

the cheque ought to be presented,has funds at the

bank to meet the cheque. The bank fails before thecheque is presented and pays 25 paise per Rupee.

The drawer is discharged to the extent of Rs.750

9. By material alteration Any material alteration of a negotiable instrument


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Any material alteration of a negotiable instrumentrenders the same void, i.e., discharges the

instrument itself and all parties thereto beforesuch alteration unless they have consented to thealteration. (s.87)

But, persons who become parties to the instrument

after the alteration are liable under the instrumentas altered. In other words, those who take analtered instrument cannot complain (s.88).

10. By negotiation back.When a bill of exchange comes back to the acceptorby process of negotiation and he becomes its

M3 Negotiable

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