Isha Aggarwal (2503)Mehak Sharma (2558)

Saurabh Patel (2561)Varun Kalia (2528)

Dishonour and Discharge of

NEGOTIABLE INSTRUMENTS

Recapturing Negotiable Instruments ..

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

becomes

entitled to the money and also the right to further transfer it.

Instrument“ a written document creating a favour of

some person”

Negotiable“ Transferable by

Delivery” +

Char

acte

ristic

s 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.PRESUMPTIONSConsideration: 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

For a Negotiable Instrument to cease to exist, it must either be Dishonoured or Discharged.

Let us study the various modes in which this is done…

Dishonor and Discharge of NEGOTIABLE INSTRUMENTS

Discharge From Liability [S. 82-90]

Dishonour Of Negotiable Instruments [S. 91-98]

Noting And Protest [S. 99-101]

Crossing and Bouncing of Cheques

Discharge from Liability ..

A Party is said to be discharged from his/her liability when his/her liability on the instrument comes to an end by any one of the following :

1. By cancellation [S. 82]

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

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

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

5. By qualified acceptance [S. 86]

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

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

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

1. B

y ca

ncel

latio

n [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 endorser, 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.

--<<(( Lets Understand this with a

Case))>>--

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. B

y re

leas

e Section 82

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. B

y pa

ymen

t [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 [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]

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. B

y de

lay

in p

rese

nting

ch

eque

[S. 8

4]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. B

y m

ater

ial a

ltera

tion

[S. 8

7,88

,89]

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”

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.

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.

EXAMPLES OF MATERIAL ALTERATION

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 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 LondesboroughA 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]

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.

Another method of ceasing of an instrument is Dishonour of the Negotiable Instruments…

DISHONOUR OF NEGOTIABLE INSTRUMENTS

Lets venture…

Dishonour of Negotiable Instruments

Dishonour By Non-Acceptance [S. 91]

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

NON ACCEPTANCE

Dishonour By Non-Acceptance [S. 91]

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 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.

NON PAYMENT

Dishonour By Non-Payment [S. 92]

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 given

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

NOTICE OF DISHONOUR

Notice of Dishonour

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

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

Lets Study them in Detail!

NOTING AND PROTESTSections [99-101]

Noting

Authentic and Official Proof NOTING

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

Protest

Formal Certificate of Dishonour PROTEST

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 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 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 FOR ISSUING CHEQUES WITHOUT FUNDS [S. 138-147]

with 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)

1998 AMENDMENT (NEW SECTIONS FROM 138 TO 141)

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).

CONDITIONS OF SECTION 138 FOR CREATING AN OFFENCE FOR DISHONOUR 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 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

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

for dishonour is not material at this stage.

CONDITIONS OF SECTION 138 FOR CREATING AN OFFENCE FOR DISHONOUR OF A CHEQUE

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 notice

must be sent to drawer within 15 days (amended to 30 days by the 2002

amendment) of the receipt of the information from the drawee bank that the

cheque got dishonoured.

The 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.

Sections 139-141 ..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 This section says that defence in the prosecution under section 138 shall not be available to the drawer if the conditions of 138 are completed.

Section 141This 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.

Sections 143-147 ..Section 143It 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 144This 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 145According 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

Sections 143-147 ..Section 146This 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 147Every 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.

Legal relationshipRights and obligations of banker

Crossing of chequesWhen a banker may and must dishonour a cheque

Protection to paying bankerProtection to collecting banker

Bouncing of cheques

Bankers & CustomersThe Relationship Between

Banker

Deposits InvestmentsBANKER

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

Deposits InvestmentsCUSTOMER

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

Contractual relationship

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

Agent (the banker) and principal (the customer)

Rights and obligations of bankerObligation 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 interestRight to set off

Right of appropriation [Sec 59 to 61 of Indian Contract Act, 1872]

CHEQUESOPEN

CHEQUES

Payable at the counter of the drawee bank on the presentation of the

cheque.

Cheques May be of Two Types

Crossing of

CROSSED CHEQUES

Payable only through a collecting banker and not directly at the counter

of the bank

Types of crossing

SEC- 123 | GENERAL CROSSING ..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:

& Company

Not-Neg

otiable

Types of crossing

SEC- 124 | SPECIAL CROSSING ..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:Ban

k of In

dia

Bank o

f India

Not-Neg

otiable

Bank o

f India

Types of crossing

ACCOUNT PAYEE OR RESTRIVTIVE 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:Acc

ount Pay

ee O

nly

A/C Pa

yee

Bank o

f India

A/C Pa

yee

Not Neg

otiable

Types of crossing

SEC- 130 | NOT NEGOTIABLE CROSSING ..

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.

“

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

SECTION 125

Who May Cross A 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.

MAY DISHONOUR

When a banker may 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

MUST DISHONOUR

When a banker must dishonour a customer’s cheque

Protection to a Paying BankerOrdered Cheques

Bearer Cheques

Crossed Cheques

“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 Ordered Cheques

Section 85(1)

“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 In Case of Bearer Cheques

Section 85(2)

Protection of Collecting BankerAS AN AGENT OF HIS CUSTOMER

1

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

AS A HOLDER IN DUE COURSE

2

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 ChequesA 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.AmendmentsBy Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act,1988Came into force on April 1,1989Chapter XVII “Penalties in case of dishonour of certain cheques for insufficeincy of funds in the accounts” was insertedIncludes sections 138 to 142

Requirements to be SatisfiedCheque should be dishonoured due to insufficiency of funds.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 Satisfied4. 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 days6. 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.

Any Questions?THANK YOU