NEGOTIABLE INSTRUMENTS ACT,1881

Presented By:

Saakshi Gera (2209) Akshi Goel (2240)

Neha Aggarwal(2228) Ozra Karim Batt(2246)

Section 13 of the Negotiable Instruments Act states that a “Negotiable Instrument” means a promissory note,bill of exchange or cheque payable either to order or to bearer.

• Explanation (i) A promissory note,bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be paid to a particular person,and does not contain words,prohibiting transfer.

• Explanation(ii) A promissory note,bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the last endorsement is an endorsement in blank.

• (2) A Negotiable Instrument maybe payable to two or more payees jointly or it maybe made payable in the alternative to one of the two ,or one or some of several payees.

A Negotiable Instrument is a piece of paper which entitles a person to a sum of money and which is transferable from person to person by mere delivery or by endorsement and

delivery.The person to whom it is transferred becomesentitled to the money and also the right to further transfer

it.

NEGOTIABLE INSTRUMENT

Negotiable“ Transferable by

Delivery”

Instrument“ a written document

by which a rightis created in

favor of some person.

LIST OF AMMENDING ACTS AND ADAPTATIONS ORDERS

• 1.The Negotiable Instruments Act,1885• 2.The Amending Act,1891• 3.The Decentralization Act,1914• 4.The Negotiable

Instruments(Amendment)Act’1914,1919,1920,1921,1922,1926,1930,1934

• 5.The Repealing and Amending Act,1957• 6.The Banking,Public Financial Institutions and

Negotiable Instruments(Amendment) Act,1988• 7. The Negotiable Instruments(Amendment and

Miscellaneous provisions)Act,2002

CHARACTERSTICS OF A NEGOIABLE INSTRUMENTT

• 1.Easy Negotiability:The great element of negotiability is the acquisition of property by your own conduct ,not by another’s, that if you take it bonafide and for value,nobody can deprive you of it.

• 2.Title of holder free from all defects:A Holder in due course gets the instrument free from all defects.

• 3.Presumptions:• Consideration:Every negotiable instrument is presumed to

have been made,drawn,accepted,negotiated for a consideration.

• Date:The negotiable instrument bearing a date is presumed to be drawn on the same date.

• Order of Endorsements:The endorsements appearing on a negotiable instrument are presumed to have been made in the order in which they appear thereon

The Negotiable Instruments act does not affect the provisions of the RBI act,1934.Section 31 of

the act states that:

• 1.No person (other that the RBI or the Central Government) can make or issue promissory notes “payable to bearer.”

• 2. No person (other that the RBI or the Central Government) can draw or accept bills of exchange “ payable to bearer on demand”

PROMISSORY NOTE

• According to Section 4 “ a promissory note is a instrument in writing (not being a bank or a currency note) containing an unconditional undertaking signed by the maker,to pay a certain sum of money only to,or to the order of, a certain person ,or to the bearer of the instrument.

PAYEE

MAKER

CHARACTERSTICS OF PROMISSORY NOTES:

• 1.Writing:An oral engagement to pay a sum of money is not an instrument.

• 2.Promise to pay:A mere acknowledgement of debt is not a promissory note.e.g. Mr. B, I own you Rs. 500 is not a promissory note.

• 3.Unconditional:The promise to pay must be unconditional or subject only to a condition which is bound to happen.

• E.g. in the Beardsley Vs Baldwin case, a written undertaking to pay a sum of money within so many days after the defendant’s marriage was not recognized as a promissory note,because possibly the defendant may never marry and the sum may never become payable.

CHARACTERSTICS OF PROMISSORY NOTES (Cont.)

• 4.Money Only: the sum payable should be in monetary terms only and also should be certain.E.g.I promise to pay B Rs. 500, and all other sums which shall be due to him” is not a promissory note.

• 5.Certain Parties: The parties to a promissory note must be designated with reasonable certainty.It is not however essential that the payee should be specifically mentioned provided on reading the document as a whole there is no doubt as to the person who is the payee.

BILL OF EXCHANGE

• Section 5 of the negotiable Instruments Act defines a bill of exchange as:” A Bill of Exchange is an instrument in writing containing an unconditional order,signed by 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 bearer of the instrument.

DRAWEE

Payee:To whom

payment is made

DRAWER

Distinction between promissory note and bill of exchange

• 1.In a promissory note there is a promise to pay whereas an order to pay is required in the latter.

• 2.A bill of exchange must be accepted by the drawee whereas no such acceptance is required in a promissory note.

• 3.The difference in liability of the maker and the Drawer.• 4.Maker’s position vis-à-vis the position of the drawer.

• Another important feature of the bill of exchange is that it is an order upon the drawee to pay the money,is not binding upon unless he accepts it,but acceptance is not necessary for the validity of the bill.

Little vs Slackford

• In this case ,the defendant issued a paper addressed to the plaintiff in the following words:

• Mr. little,Please to let the bearer have seven pounds and place them to my account ,and you will oblige.Yours humble servant

R.Slackford

Judgment:the paper does not purport to be a demand made by a party having a right to call upon the other to pay.The fair meaning is you will oblige by doing it.Hence it is not a bill of exchange

ACCOMODATION BILL

• The only distinguishing feature from an ordinary bill is that such a bill is not supported by any consideration or trading transaction.The drawer doesn't give any consideration to the drawee but it is drawn with the objective of providing financial help.actually it is a sort of mercantile trade where one person lends out his name on the bill so that the other person taking the bill can get it discounted from the bank

and get money for the same.

CHEQUE

• Section 6 defines cheque as:A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in electronic form.

• Explanation(i)A cheque in an electronic form means a cheque which contains the exact mirror image of a paper cheque and is generated,written and signed in a secure system ensuring safety standards.

• Explanation(ii) A truncated cheque means a cheque which is truncated during the course of a clearing cycle,either by the clearing house or by the bank whether paying or receiving payment.

• A cheque has certain peculiarities which distinguish it from a bill of exchange.

• A cheque is presented for payment,whereas a bill in the first instance is presented for acceptance unless it is a bill on demand.

• Also a bill is dishonored for non-acceptance,this is not so incase of cheque.

• A cheque has always to be made payable on demand whereas an ordinary bill of exchange can be made payable after a fixed period.

Cole Vs Milson

• A document was drawn absolutely in the form of a cheque.it was made payable to “cash or order”.The question was whether it was a valid cheque.Section 5 of the Indian act require that a bill of exchange must be payable to or to the order of a specified person or the bearer.This document was made payable to “cash or order”.hence was not payable to any person or bearer and hence was not a bill of exchange and consequently couldn’t be a cheque either.

HOLDER

• The “holder” of a promissory note,bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.

• Where the note,bill or cheque is lost the holder is the person so entitled at the time of such loss or destruction.

• If a person is in possession of a negotiable instrument without having the right to possess the same he cannot be called a holder.

• A person maybe the bearer or payee or endorsee of an instrument but he may not be called the holder if he is prohibited by the court order from receiving the amount due on the instrument.

HOLDER(Cont.)

• The use of the phrase “ entitled in his own name “ is significant because of the institution on benamdari.

• Sarooj Prasad vs Rampyari Devi

• The plaintiff advanced a sum of Rs. 2500 under a hand note.The note was executed not in the name of the plaintiff ,but in the name of one X who was a benamidar.On maturity the plaintiff brought an action to recover the amount.His claim was rejected.He was not entitled to the possession of the note in his own name and therefore was not a holder.

HOLDER IN DUE COURSE

• Holder in due course means any person who for consideration became the possessor of a promissory note,bill of exchange or cheque if payable to bearer,or payee or endorsee thereof,before the amount mentioned in it became payable,and without having sufficient cause to believe that any defect existed in the title of the reason from whom he derived his title.

• He must possess the following qualifications:• 1.He must be holder for valuable consideration.• 2.He must have become the holder of a negotiable

instrument before its maturity.• 3.He must take the negotiable instrument complete and

regular on the face of it.

HOLDER IN DUE COURSE(Cont.)

• 4.He must have become the holder in good faith without having sufficient cause to believe that any defect existed in the title of the transferor.

• PRIVILEGES OF A HOLDER IN DUE COURSE

• 1.He gets a better title than that of the transferor.For e.g. if P obtains an instrument by theft or fraud and transfers it to R under circumstances that make him a holder in due course.The party liable to pay can take against P,the defense of theft or fraud, but as against R he will not be allowed to take such defense.

Privileges of a Holder in due course(cont.)

• 2.Liability of Prior Parties• 3.Prior Defects:For e.g. In a case before Kerela High

Court,a cheque was given to the employee of a company to enable him to withdraw money for payment of the workman’s wages.he instead transferred the cheque to a bank for consideration.The bank,having acted in good faith,was held not to be affected by the employee’s fraud.

• 4.Privilege when an instrument delivered conditionally is negotiated.

• 5.Estoppel against denying original validity of instrument.

CAPACITY OF PARTIES

• Every person capable of contracting,according to the law to which he is subject may bind himself and be bound by the making ,drawing,acceptance,endorsement,delivery and negotiation of a promissory note,bill of exchange or cheque.

• 1.Minor:A minor can be a party to a negotiable instrument but doesn’t incur any liability himself.

• 2.Insolvent:An insolvent is not competent to draw ,make ,accept or indorse a negotiable instrument so as to bind his estate which now stands vested in the official receiver.

CAPACITY OF PARTIES(Cont.)

• 3.Joint Stock Company:If a company executes a negotiable instrument without being authorized to do so by its MOU,the instrument is void and even a holder in due course cannot enforce the same against the company.

Liability of Drawer

• The Drawer of a bill of exchange or cheque is bound,incase of dishonor by drawee or acceptor thereof to compensate the holder provided due notice has been given to,or,has been received by the drawer as hereinafter provided.

• There are two cases here:

The liability of the Drawer is

secondary if the acceptor fails to

pay.

In case of non-acceptance by the drawee of the bill the liability of the drawer becomes

primary.

LIABILITY OF THE DRAWEE OF THE CHEQUE

• The drawee of the cheque must pay the cheque when duly presented for payment provided he has sufficient funds of the drawer applicable to the payment of such cheque.if the drawee bank wrongfully dishonours the cheque he can be made liable to pay exemplary damages to the drawer.

LIABILITY OF THE ‘MAKER’ OF NOTE OR OF ‘ACCEPTOR’ OF BILL

• The maker of a promissory note or the acceptor of the bill of exchange are the principal debtors and hence are primarily liable for the amount due on the instrument ,according to its apparent tenor,in the absence of contract to the contrary.The maker of the note or the acceptor of the bill must make the payment respectively at or after maturity to the holder.For ,if he makes a pre-mature bill or note,and the same is subsequently endorsed over,it is valid in the hands of a holder in due course and the maker or the acceptor will be liable to pay again on the instrument.

Presentment of negotiable instruments

• Exhibiting, presenting or placing of a negotiable instrument for acceptance, sight or payment before the acceptor, maker, drawee or other party liable there on by or on behalf of the holder is called ‘presentment’. Thus presentment may be made for any of the following purposes.:

1. Presentment for acceptance2. Presentment for sight3. Presentment for payment

Presentment for acceptance

• A bill of exchange may have to be presented for acceptance before it is presented for payment. but it is not every bill which has to be presented for acceptance. It is necessary only where-

1. The bill is payable at a given time after acceptance or after sight.

2. The bill expressly stipulates that it shall be presented for acceptance before it is presented for payment.

3. The bill is made payable at a place other than the place of residence or business of the drawee

In no other case is presentment for acceptance necessary in order to render liable any party to the bill

Time for Presentment for sight

• Where a bill or promissory note is payable after sight it must be presented by the holder for the drawee’s or maker’s acceptance within the specified time or, if no time is specified, within a reasonable time of its issue.

• And if the holder fails in this duty, the drawer and all indorsers prior to him shall be discharged from their liability to him. thus in a case before privy council:

A party in kolkata drew a bill on a party in hongkong, payable sixty days after sight. the holder retained it for five months and when he ultimately presented it for acceptance, the china bills had lost their value. this was held to be an unreasonable delay discharging the parties.

Place of presentment(S.61)

• The bill should be presented at the place which is specified for presentment, for as per sec61 “if the bill is directed to the drawee at a particular place, it must be presented at that place” . If the drawee cannot be found at that place after reasonable search then the bill is deemed to be dishonored .if no place is specified then the bill should be presented at the drawee’s place of business or residence

Presentment for payment(s.64)

• Section 64 casts upon the holder the duty to present the instrument for payment in accordance with the principles laid down in the act. The section further provides that in default of such presentment, the other parties to the instrument are discharged from their liability to the holder.

• Presentment for payment is not required is the case of a promissory note which is payable on demand and is not payable at a specified place.

Time for Presentment

• When an instrument is payable after a fixed period of time, it should be presented for payment on its maturity.

• An instrument payable on demand must be presented for payment within reasonable time after it is received by the holder.

• Delay in presentment will discharge the party thereto except one which is primary liable will be discharged from their liability.

• In all cases, presentment should be made during the usual hours of business and in case of a cheque , with in banking hours

Place for Presentment

• Where in an instrument the precise address of the place of payment has been indicated by the maker, drawer or acceptor, it must be presented at that place for payment (S.68 and 69)

• Where no place of payment has been indicated , the note or the bill must be presented at the place of the business or at the usual address of the maker, drawee or acceptor, as the case may be

• if the maker, drawee or acceptor of a negotiable instrument has no known place of business or fixed residence, and no place is specified in the instrument for Presentment for acceptance or payment such Presentment may be made to him in person wherever he can be found

If there is default in making the presentment in accordance to the above rules the drawer or maker will be discharged from the liability and other parties will remain liable.(S.69)

When Presentment for payment unnecessary.

1. When the Presentment is initially prevented.

2. Place of business is closed.

3. Payer absents from the place of payment.

4. When the payer cannot be found.

5. Waiver of Presentment .

6. When the drawer could not suffer damage.

Negotiation of negotiable instruments.

• The transfer of an instrument by one party to another so as to constitute the transferee a holder is called ‘negotiation’. A bearer instrument is transferable by simple delivery.

Who can negotiate?• Every maker, drawer, payee or indorsee and if there are several

makers, drawers, payees or indorsees all of them jointly can negotiate an instrument, provided negotiability is not restricted

Duration of negotiability;• A negotiable instrument may be negotiated until payment or

satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction.

• A payment before maturity does not stop negotiability.

Assignment and negotiation

• Assignment: when a person transfers his right to receive the payment of a debt that is called ‘assignment of the debt’.

for eg: the holder of a life insurance policy transfers the right to receive the payment to another person, that is an assignment

• The point of difference between assignment and negotiation may now be stated:

1. Subject to equities: The assignee of a debt takes it subject to all the defects and equities that may exist in the title of his assignor. But the holder in due course of a negotiable instrument takes it free from all defects in the title of the previous transferors

2. Notice of assignment: an assignment does not bind the debtor unless a notice of the assignment has been given to him and he has expressly or impliedly, assented to it. But no information of the transfer of a negotiable instrument has to be given to the debtor.

3. Presumptions: there are a no. of presumptions in favor of a holder in due course. for e.g. he is presumed to have given consideration for the instrument. The burden lies upon the opposite party to how that he had given no consideration. But there are no such presumptions in favor of an assignee. He has to prove that he has given consideration for the assignment

Negotiation by delivery (s44 and 47)

• An instrument payable to bearer can be negotiated by simple delivery.

• The person to whom it is delievered becomes the holder

• Delivery though simple is an important formality, for without it no possesor is constituted as the holder of the instrument.

Negotiation by indorsement

• an instrument payable to order is negotiated by indorsement and delivery. thus indorsement requires two formalities:

1. The holder should indorse it and then deliver it to the indorsee.

2. An indorsement is completed by the delivery of the instrument to the indorsee

for eg: where a person indorses an instrument to another and keeps it in his papers where it is found after his death and then deliver it to the indorsee, the latter get no rights on the instrument.

Indorsement

Section 15 defines indorsement as follows:“when the maker or holder of a negotiable instrument signs

the same, for the purpose of negotiation, on the back or face thereof on a slip of a paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as negotiable instrument.”

• The person making the indorsement is called an indorser, and the person to whom the instrument is indorsed is called an indorsee.

• A valid indorsement should be made in ink. an indorsement in pencil or by a rubber stamp is invalid.

Kinds of indorsement

1 Blank or general indorsement: if the indorser signs his name only and does not specify the name of the indorsee, the indorsement is said to be in blank. The effect of a blank indorsement is to convert the order instrument into bearer instrument, which may be transferred merely by delivery.

2 Indorsement in full or special indorsement : if the indorser in addition to his signature also adds a direction to pay the amount mentioned is said to be in full. for e.g. A, the holder of a bill of exchange, wants to make an indorsement in full to B,he would thus ‘Pay to B or order, Sd/A’.After such an indorsement it is only the indorsee i.e. B, who is entitled to receive the payment of the instrument and to further negotiate the instrument by his indorsement

3 Partial indorsement : a partial indorsement which transfers the rights to receive only a part payment of the amount due on the instrument is invalid. such an indorsement has been declared invalid it would object the prior parties to plurality of actions and will thus cause inconvenience to them.

• Also an indorsement which purports to transfer the instrument to two or more indorses separately and not jointly is also treated as partial indorsement and hence is invalid.

4 Restrictive indorsement : an indorsement which by express words prohibits the indorsee from further negotiating the instrument or restricts the indorsee to deal with the instrument as directed by the indorser.

• The indorsee under a restrictive indorsement gets all the rights of an indorser except the right of further negotiation.

• E.g. B the holder, makes an indorsement saying “pay c only”

5 Conditional indorsement : if the indorser of a negotiable instrument, by express words in the indorsement makes his liability dependent on the happening of a certain evevt, although such an event may never happen, such indorsement is called a ‘conditional’ indorsement

• The law permits a conditional indorsement and therefore it does not in anyway affect the negotiability of the instrument.

• Thus, indorsements can validly be made in the following terms. a) “pay B or order on his marriage” b) ”pay B on the arrival of ship at Mumbai” 6 Sans recourse indorsement: when the indorser expressly excludes his own

liability on the negotiable instrument to he indorsee or any subsequent holder in case of dishonor of the instrument , the indorsement is known as Sans recourse indorsement

• E.g. pay X or order sans recourse”

Negotiation back

• During the course of negotiation if a negotiable instrument is reindorsed by the last indorsee to the original holder or a previous indorser it is called as ‘negotiation back’

• the person who becomes the holder by reason of negotiation back cannot make any of the intermediate indorsers liable on the instrument.

• But where an indorser excludes his liability by the use of words ‘sans recourse’ and afterwards becomes the holder of the instrument in his own right, all intermediate indorsers are liable to him

• And in case of dishonour he can recover the amount from all or anyone of them.

Negotiation by unauthorised parties.

Lost instruments

1. Where a bill of exchange has been lost before it is overdue. The person who was its holder may apply to the drawer to give him another bill of the same tenor.

• The drawer may require the holder to give security to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again

• If the Drawer refuses to give a duplicate bill he may be compelled to so by means of a suit.

2 To avoid the risks involved in case of a negotiable instrument, its holder should inform all parties liable on it and should also give public notice by advertisement in some local newspaper.

3 If the holder could not obtain a duplicate copy, he should on maturity make an application to the person liable to pay.

• Although the payer is entitled to refuse payment till the instrument is delivered, he may make the payment after getting a written undertaking from he payee to indemnify him against any further claim thereon.

• In case payer refuses to pay then payment can be obtained through court on similar undertaking to indemnify.

4 The finder of the instrument gets no title to it and cannot sue the party thereon for its payment.

• The rightful holder is entitled to get back the instrument from him.• But if the finder obtains the payment of the instrument in his possession, it

being a bearer document, the payer will be discharged from his liability if he makes the payment in due course.

• The true owner however will be entitled to recover the amount from the finder.

5 Although the finder ,in the absence of title to it , cannot lawfully transfer it, but if he negotiates it, being a bearer instrument or one indorsed in blank,to a holder in due course, such holder gets a good tile to it and can obtain the payment from the party concerned

• The true owner cannot take possession of the same from such a holder but he can claim damages from the finder, if traceable

6 In case the finder transfers an order instrument by making a forged indorsement, even a transferee for value gets no legal title to it. And therefore he is not entitled to sue on the instrument.

• Forgery can confer no title and thus indorsee is not a holder in due course.• If the party liable to pay on the instrument makes the payment to the

indorsee who holds it under a forged indorsement, he shall continue to be liable to the true owner.

STOLEN INSTRUMENTS• The position in this case is almost the same as in the case of a lost

instrument.• The thief is open to criminal prosecution while a finder is not• Thief does not acquire any title and the true owner can sue him for the

recovery.• But if the thief transfers a bearer instrument to a holder in due course, such

a holder gets a good title to it.

Instruments obtained by fraud

• If a person obtains a negotiable instrument by fraud, undue influence or coercion, he is not entitled to enforce its payment as his title is defective.

• But if such an instrument is transferred to a holder in due course, such a holder will acquire good title to it and the plea of fraud will not be of use against him

Instruments obtained for an unlawful consideration

• the general rule of law of contracts that every agreement of which the object or consideration is unlawful or immoral or against the public policy is void and inoperative applies to negotiable instruments for unlawful consideration as well.

• Thus , a bill of exchange or a promissory not given in committing a crime is void and creates no obligation between the parties thereto.

Forged instruments• If the signature of maker , drawer or acceptor is forged on a negotiable instrument, it is

termed as a forged instrument.• A forged signature in law is wholly inoperative and therefore a forged instrument is

deemed incomplete on the face of it.• Even if in the course of negotiation , a forged instrument passes through the hands of a

holder in due course it cannot be cured of its defect because there is no defect of title which can be cured but there is a complete absence of title

FORGED INDORSEMENT• if the signature of indorser is forged on a negotiable instrument it is called a forged

indorsement• a forged indorsement is regarded in law as no indorsement at all.• as a result the indorsee of an order instrument bearing a forged indorsement gets no title

thereto. even if he is a bonafide holder for value, because in law he has taken an instrument which was incomplete on the face of it.

• the party liable to pay will remain liable if it makes the payment to the indorsee who holds it under a forged indorsement.

Instruments without consideration

• Unlike ordinary contracts, in the case of negotiable instruments there is a presumption of consideration

Total absence or failure of considerationAccording to sec43” a negotiation instrument made, drawn,

accepted, indorsed or transferred without consideration or for a consideration which fails, creates no obligation of payment between the parties to the transaction”

• But if any such party has transferred the instrument to a holder for consideration such holder and every subsequent holder deriving the title from him may recover the amount due on such instrument from the transferor for consideration or any prior party thereto

Partial consideration

• As per sec 44 and 45 , when there is partial failure of cnsideration , either originally or subsequently, the parties standing in immediate relation to each other cannot recover more than the actual consideration.

• But this rule does not apply to a holder in due course who can recover the full amount due on such instrument

• Thus the absence of consideration ,either total or partial ,in case of a negotiable instrument can be taken as defense to avoid the liability only towards parties to the transaction i.e. those parties who have immediate relation with one another.

DISHONOUR AND DISCHARGE OF DISHONOUR AND DISCHARGE OF NEGOTIABLE INSTRUMENTSNEGOTIABLE INSTRUMENTS

Discharge From Liability [S. 82-90]

1. By cancellation [S. 82]1. By cancellation [S. 82]

When a bill is intentionally cancelled by the holder or his agent, and the cancellation is apparent, the bill is discharged. The cancellation should be apparent on the face of the instrument otherwise the instrument remains valid in the hands of a bona fide holder for value.

Section 82(a) deals with the situation where the holder intentionally cancels the name of the acceptor. The effect is that all other parties, being sureties for the acceptor, will also be discharged from liability.

But if he cancels the name of an indorser, then all the parties subsequent to him will be discharged but those prior to him will remain liable.

Example: A draws a bill payable to his own order on B, who accepts. A indorses to C, C to D and D to E. As between E and B, B is the principal debtor and A, C and D are his sureties.

CASECASE: Ingham vs. Primorse: Ingham vs. Primorse

A accepted a bill. He later tore the bill in half intending to cancel it. B picked that bill and pasted the two pieces together in such a manner that it seemed to be folded for safe custody rather than cancelled. B put the it into circulation and it was received by plaintiff, a holder in due course.

Judgment:

A was held liable because the tearing of the bill was not so clearly manifest on the face of the bill to indicate to a reasonably person that it has been cancelled.

2. By release [S. 82(b)]2. By release [S. 82(b)]

If the holder of the 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, who have a right to action against the party so released, are discharged from liability.

3. By payment [S. 82(c)]3. By payment [S. 82(c)]

• All parties to an instrument are discharged from liability when the amount due on the instrument is paid.

• Payment is an effective discharge only if it is “payment in due course” i.e. if it is made,

On the maturity of the instrument In good faith and without negligence To the rightful holder.

Thus, payment even to a thief or finder will discharge the maker or acceptor if there is nothing to excite suspicion of a prudent man.

However, where the instrument is payable to order then it is necessary that the payment be made to the genuine indorsee. If payment is made to a person whose title is made through a forged indorsement, it will not discharge the payer and he will remain liable to the true owner of the instrument.

Example: A bill is indorsed to John Smith to order. Another person of the same name gets the bill and presents it. The acceptor pays him. The bill is not discharged. The acceptor is liable to the real John Smith.

Exception to the rule: It is in favour of a banker who pays cheque to a person whose title is derived through forged indorsement. This is a special protection of the paying banker and is necessary in the very nature of banking business.

4. By allowing more than 48 hours to accept 4. By allowing more than 48 hours to accept [S. 83][S. 83]

• After the bill holder presents it to the drawee for his acceptance, he should be allowed only 48 hours (exclusive of public holidays) to accept or not.

• If the holder allows more than 48 hours all previous parties who do not consent to such allowance are discharged from liability to the holder.

5. By qualified acceptance [S. 86]5. By qualified acceptance [S. 86]

The holder of a bill who presents it for acceptance should insist that the bill be accepted without any conditions or qualifications. If the holder acquiesces in a :

Qualified acceptance One limited to part of the sum mentioned in the bill Substitutes a different time or place of payment Where the drawees are not partners, is not signed by all the

drawees

In that case, all prior parties whose consent is not obtained are discharged from liability.

6. By delay in presenting cheque [S. 84]6. By delay in presenting cheque [S. 84]

The holder should present the Instrument within a reasonable time of its issue.

(Reasonable time - Regard is given to the nature of the instrument, usage of trade and of bankers, facts of the particular case and public holidays are excluded)

If he fails to do and in the meanwhile the bank fails causing

damage to the drawer, the drawer is discharged as against the holder

Provided he had sufficient balance to meet the cheque when it ought to have been presented. 

7. By material alteration [S. 87,88,89]7. By material alteration [S. 87,88,89]

Any material alteration of a negotiable instrument discharges the instrument and all parties not consenting to the change. However, those who take an altered instrument remain liable under the instrument as altered. The party in custody of the instrument is bound to preserve it in its integrity.

What constitutes a material alteration?

The negotiable Instruments Act is silent on the question. However, courts in India held that ‘anything which has the effect of altering the legal relations between the parties or the character of the instrument or sum payable amounts to a material alteration’.

Examples of material alteration:

Any alteration of the date, sum payable, time of payment and the place of payment.

Alteration by the addition of a new party to the instrument. Alteration of the rate of interest. Tearing off the material part of the instrument.

Alterations not vitiating the instrument:

Alteration made for the purpose of correcting a mistake or a clerical error. Alteration made to carry out the common intention of the original parties. Alteration made before the instrument is issued. Alteration made with the consent of the parties liable on the instrument. Conversion of bearer cheque into an order cheque. Filling blanks in the case of inchoate or incomplete instruments. Conversion of blank indorsement into an indorsement in full. Making qualified acceptance. Crossing of an uncrossed cheque. Alteration which is the result of an accident, e.g. mutilation by washing, ravages

by white ants or rats, document torn by a child, document burnt in part by the hot end of a cigarette. [ HSBC Vs. Lo Lee Shi ]

Apparent alterationApparent alteration Section 89 provides that where an instrument has been materially

altered but does not appear so, the party paying it will be discharged by payment in due course.

But the acceptor is liable only for the original tenor of the instrument.

CASE: Scholfield Vs. The Earl of Londesborough

A bill for $500 was presented with spaces left. The acceptor wrote his acceptance. The drawer then fraudulently filled the spaces and turned it into a bill of $3500 and negotiated it for that value to a bona fide holder.

Judgment: The acceptor of bill of exchange is not under a duty to take precautions against fraudulent alteration after acceptance. He was held liable for $500 only.

8. By negotiation back of a bill [S. 90]8. By negotiation back of a bill [S. 90]

When a bill of exchange comes back to the acceptor by process of negotiation and he becomes its holder, that is known as “negotiation back”. If this happens at or after maturity, all liability on the instrument comes to an end.

• Dishonour Of Negotiable Instruments [S. 91-98]

1. Dishonour By Non-Acceptance [S. 91]

2. Dishonour By Non-Payment [S. 92]

A bill of exchange is said to be dishonoured by non-acceptance in the following cases:

When the drawee or one of several drawees makes default in accepting the bill

Where presentment is excused and the bill remains unaccepted

Where the drawee is incompetent to contract

Where the drawee makes the acceptance qualifiedIf the drawee is a fictitious person or after reasonable search cannot be found

Dishonour By Non-Acceptance [S. 91]

Dishonour By Non-Payment [S. 92]   A promissory note, bill of exchange or cheque is said to be dishonoured by

non-payment when it is duly presented to the maker, acceptor or banker and he makes a default in payment.

Effect of DishonourEffect of Dishonour 

The holder becomes entitled to sue the parties liable to pay thereon The drawer of cheque, maker of note, acceptor and drawer of bill and all

indorsers are liable severally and jointly to a holder in due course The holder must give ‘notice’ of dishonour to all parties against he intends

to proceed.

Notice of Dishonour Notice of Dishonour It is a formal communication of the fact of dishonour served as a

warning to the party to be held liable.

By and to whom notice should be giveBy and to whom notice should be give

Notice may be given to a duly authorised agent of the person. If he is dead to his legal representative If he is declared insolvent to his assignee 

Notice may be oral or written

 

NotingNoting

It is the authentic and official proof of presentment and dishonour of a negotiable instrument.

•The holder may cause such dishonour to be noted by a Notary Public upon the instrument or a paper attached to the instrument.

•Note should be made within reasonable time after dishonour and must specify:The date of dishonourThe reason assigned for such dishonourThe notary’s charges

• Noting And Protest [S. 99-101]

ProtestProtest

It is a formal certificate of dishonour issued by the notary public to the holder of the bill or note, on his demand.

Protest for better security: Protest for better security:

When before the maturity of a bill, the acceptor has become insolvent, or his credit has been publicly impeached, the holder may through a notary public, demand better security from the acceptor. If the acceptor refuses it, the fact may also be noted and certified by the notary. Such a certificate is called ‘a protest for better security’.

The demand should be made within reasonable time.However, the holder shall have to wait till the date of maturity to take any action against the acceptor, drawers and indorsers.

Contents of protestContents of protest

• The instrument itself or a literal transcript of the instrument and of everything written or printed thereupon.

• The name of the person for whom and against whom the instrument has been protested.

• The fact and the reasons for dishonour

• The place and time of dishonour.

• The signature of the Notary Public

• In the case of acceptance for honour or payment for honour, the names of the persons by whom and for whom it is accepted or paid.

Criminal liability of drawer for issuing cheques without funds and latest Amendments to the Act [S. 138-147]

1. 1998 Amendment (Addition of five new Sections from 138 to 141)

2. 2002 Amendment (Addition of five new Sections from 143 to 147)

Amendment (1988) aims at achieving speedy justice; exemplary and compensatory justice.

A drawer attracts a criminal liability for issuing cheques with the knowledge that they would not be paid. The liability arises when a cheque is not paid on account of, 

Insufficiency of funds or The amount of the cheque exceeds the amount of credit facility allowed to the customer.

 Criminal Liability: Imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque, or with both. (The term of punishment extended to two years vide 2002 amendment).

1998 Amendment (New Sections from 138 to 1411998 Amendment (New Sections from 138 to 141)

Five basic Five basic conditions of section 138conditions of section 138 for creating an offence for for creating an offence for dishonour of a chequedishonour of a cheque

cheque should have been drawn by the drawer in payment of a legal liability to discharge the existing debt. Cheque given by way of gift would not come under Cheque given by way of gift would not come under this provision.this provision.

The cheque should be presented within the validity period i.e. within six months or three months as the case may be. Common sense demands that the cheque should Common sense demands that the cheque should reach the drawer bank within the validity period.reach the drawer bank within the validity period.

Return of memo by the drawer bank to the drawee bank and subsequently by the drawee bank to the drawee reporting that the cheque got unpaid is must. Reasons Reasons for dishonour is not material at this stage.for dishonour is not material at this stage.

Giving notice to the drawer of the cheque by the drawee or the holder of the cheque in due course is must for making the said payment within fifteen days. The The notice must be sent to drawer within 15 days notice must be sent to drawer within 15 days (amended to 30 days by the 2002 (amended to 30 days by the 2002 amendment) amendment) of the receipt of the information from the drawee bank that the cheque of the receipt of the information from the drawee bank that the cheque got dishonoured.got dishonoured.

The drawer of the cheque fails to make the payment drawer of the cheque fails to make the payment of the said amount of money to the payee or to the holder in due course within 15 days of the receipt of the said notice.

Section 139 Section 139

By this section it shall be presumed that the holder of a cheque received the cheque for the discharge of some liability or any debt.

Section 140 Section 140  This section says that defense in the prosecution under section 138 shall not be

available to the drawer if the conditions of 138 are completed.  

Section 141Section 141

This section defines that if an offence is done by any company, the person(s) shall be held liable who were in charge and responsible to the company for the conduct of the business of the company, at the time the offence under section138 was committed.

  

2002 Amendment (New sections from 143 to 147)

It came into force from February 6, 2003 under NI (Amendment and Miscellaneous Provision) Act 2002.

Sections 6, 64, 81 and 89 amended due to entrance of the electronic technology in the Negotiable Instruments.

Section 138(a) amended regarding the term of imprisonment increased to Two years from One year and through 138(b) the period of giving notice of demand to the drawer increased from fifteen days to thirty days.

Section 143Section 143

It is intended to achieve speedy trials. This section provides the power to courts to try cases, under section 138 and endeavor is made to conclude the trial within six months from the date of filing of the complaint.

Section 144Section 144

This section provides that the copy of summon/s may also be issued by speed post or by such courier services as are approved by a court of session.

Section 145Section 145

According to this section the complainant can give his evidence by way of an affidavit and the same may be attached with the complaint and if the accused wants to contradict the contents of the affidavit the complainant may be called for examination.

Section 146Section 146 This section provides the court shall presume the fact of dishonour of a cheque on production of Bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonoured. Section 147Section 147 Every offence punishable under this Act shall be compoundable. This means that a compromise in the matters under section 138 can be made between the complainant and the accused at any stage of the case. 

Compensation [S. 117]Compensation [S. 117]

Rules for determining compensation to be paid to the holder or indorsee:

Amount due upon the instrument together with expenses incurred in presenting, noting and protesting.

Where the person liable to pay resides at a place different from that at which instrument is payable, the amount is recoverable at the current rate of exchange between the two places.

Interest on amount due is recoverable @ 18% ( vide amendment of 1998 )

Bankers and Customers

• Legal relationship• Rights and obligations of banker• Crossing of cheques• When a banker may and must dishonour a cheque• Protection to paying banker• Protection to collecting banker• Bouncing of cheques

Banker

• The Banking Regulation Act,1949 [Sec5(b)] A “banking company” is a “a company which transacts the business of banking in India”

• [Sec 5(c)] Banking as “accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.”

Customer

• A person who has an account in a bank.

• Dealings with banker must relate to the business of banking i.e., depositing, withdrawing money or taking loans.

• Merely availing of services rendered by the banker like encashing a cheque, do not create the relationship of banker and customer.

Legal relationship between banker and customer

• Contractual relationship

• Debtor (the banker) and creditor (the customer) or vice versa

• Agent (the banker) and principal (the customer)

Rights and obligations of banker

• Obligation to honour cheques [Sec.31]• Obligation to keep a proper record of transactions• Obligation to abide by the instructions given by the

customer• General lien of bankers [Sec.171]• Obligation not to disclose the state of his customer’s

account or affairs• Incidental charges and interest• Right to set off• Right of appropriation [Sec 59 to 61 of Indian Contract

Act, 1872]

Crossing of cheques

• Cheques may be of two types

(1) open or uncrossed cheques is payable at the counter of the drawee bank on the presentation of the cheque. It is risky.

(2) crossed cheques is payable only through a collecting banker and not directly at the counter of the bank. Thus, crossing provides security and protection.

Types of crossing

General crossing [Sec. 123]

• Where a cheque bears across its face two parallel traverse lines without any words or with the words ‘and company’ or ‘not negotiable’ written between those two parallel lines.

• It can take the following forms:

and

com

pany

& C

o

not n

egot

iabl

e

& Co

not n

egot

iabl

e

Types of crossing

Special crossing [Sec. 124]

• Where a cheque bears across its face (traverse lines are not necessary) an addition of the name of a banker either with or without the words ‘not negotiable.’

• It can take the following forms:

The Bank o

f India

The B

ank o

f Ind

ia

Not Negotia

ble

The Bank o

f India

Types of crossing

Account Payee or Restrictive Crossing

• It can be made in the case of general as well as special crossing by adding the words ‘Account Payee’ (A/c Payee), ‘Account Payee only’ (A/c Payee only).

• It can take the following forms:

Accou

nt P

ayee

onl

y

A/c

Paye

e on

ly

Stat

e Ba

nk o

f

Indi

a

A/c

Paye

e on

ly

Not

Neg

otia

ble

Types of crossing

Not negotiable crossing [Sec. 130]

• “A person taking a cheque crossed generally or specially, bearing in either case the words ‘not negotiable’, shall not have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had.”

Who may cross a cheque

Section 125 permits the crossing being made even after issue of a cheque in the following ways:

• (1) Where a cheque is uncrossed, the holder may cross it generally or specially

• (2) Where a cheque is crossed generally, the holder may cross it specially

• (3) Where a cheque is crossed generally or specially, the holder may add the words ‘not negotiable’

• (4) Where a cheque is crossed specially, the banker to whom it is crossed may cross it again specially to another banker as his agent for collection

When a banker may dishonour a customer’s cheque

• Insufficient funds to the credit of the customer• Where the customer’s funds are not applicable to the payment

of the cheque• Where the cheque is ambiguous or of doubtful legality• Where the cheque is mutilated• Where the cheque has become stale.• Where the customer’s signature does not agree with his

specimen signatures.• Where the cheque is post dated.• Where the cheque is presented at a branch other than the one

where the customer has the account.

When a banker must dishonour a customer’s cheque

• When the banker receives notice of the customer’s death, insolvency or insanity.

• When the customer countermands payment

• Garnishee order

• Notice of assignment

• Defective title of the party

• Loss of cheque

• When the cheque is irregular

• Closing of account

Protection to paying banker

• Protection in case of order cheques

• Protection in case of bearer cheques

• Crossed cheques

Protection in case of order cheques[Sec 85(1)]

• “Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by `payment in due course`.”

• The banker can debit his customer’s account with the amount so paid even though-

(1)the indorsement by the payee may turn out to be a forgery or

(2)the indorsement might have been placed on the cheque by the payee’s agent without his authority.

Protection in case of bearer cheque[Sec 85(2)]

• “Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, not withstanding any indorsement whether in full or blank appearing thereon, and not withstanding that any such indorsement purports to restrict or exclude further negotiation.”

• As regards bearer cheques, the rule is “Once a bearer cheque, always a bearer cheque”

Protection of collecting banker

The collecting banker may collect the proceeds of the cheque

1. As an agent of his customer• Crossed cheques [Sec 131] Banker is not liable if (1) he acted in good faith and without negligence (2) The cheque was already crossed (3) he acted as an agent • Open cheques [Sec 131]

Protection of collecting banker

2. As a holder in due course

• If a collecting banker acquires a cheque for value and in good faith, he collects it for himself and has all the privileges of a holder in due course

Bouncing of cheques

• A cheque is said to be bounced or dishonoured by non payment when the drawee of the cheque makes default in payment upon being duly required to pay the same.

Amendments1) By Banking, Public Financial Institutions and

Negotiable Instruments Laws (Amendment) Act,1988• Came into force on April 1,1989• Chapter XVII “Penalties in case of dishonour of certain

cheques for insufficeincy of funds in the accounts” was inserted

• Includes sections 138 to 142

Bouncing of cheques

2.) By Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002

• Effective from February 6, 2003• Amended sections138, 141 and 142• Inserted five new sections –section 143 to 147- in chapter

XVIISalient features• Dishonoured cheques considered an offence• Punishable with imprisonment (up to two years)• Fine (up to twice the amount of the cheque)• Or both

Requirements to be satisfied

1. Cheque should be dishonoured due to insufficiency of funds.

2. Cheque should be issued by drawer in favour of another person for the discharge of legally enforceable debt or other liability, in whole or in part.

• When cheque issued for meeting social obligations is dishonoured, it is not considered an offence.

3. Cheque should be presented to bank in due time. (within six months from the date on which it is drawn or within the period of its validity, whichever is earlier)

Requirements to be satisfied

4. Payee should make demand for payment by giving a written notice to drawer within 30 days of awareness of dishonour of cheque.

5. Drawer fails to make payment within 15 days

6. The payee should make a written complaint of the offence to a court not inferior to that of a metropolitan magistrate or a first class judicial magistrate, within one month of the date on which the course of action arose under the said provisions.

Thank you