Question:

What are the powers of the RBI over banking companies?

Answer:

Various powers are given to the RBI under the Banking Regulation Act, 1949:

a)  The RBI has power to control the advances by banking companies by determining the purposes for which the advances may or may not be made, the margins to be maintained in respect of secured advances, the maximum amount of advances or other financial accommodation or the rate of interest and other terms and conditions on which advances or other financial accommodation may be made etc.

b)  Power of the RBI to give directions in the public interest, in the interest of banking policy and to prevent the affairs of any banking company being conducted in the manner detrimental to the interests of the depositors or prejudicial to the interest of the banking

company.

c)  The RBI may caution or prohibit banking companies against entering into any particular transaction(s), and can generally give advice to any banking company.

d)  The RBI may on a request by the companies concerned, assist as intermediary or otherwise in proposals for the amalgamation of such banking companies.

e)  If the RBI thinks it fit, it may require the banking company to call a meeting of its directors for the purpose of considering any matter relating to or arising out of the affairs of the banking company.

f)  Where the Reserve Bank is satisfied that in the public interest or for preventing the affairs of a banking company being conducted in a manner detrimental to the interests of the depositors or for securing the proper management of any banking company it is necessary so to do, it may, for reasons to be recorded in writing, any chairman, director, chief executive officer or other officer or employee of the banking company.

If the RBI, in the interest of banking policy or a

banking company or its depositors, may from time to time by order in writing appoint one or more persons to hold office as additional directors of the banking company.

Question:

Under what circumstances can the High Court order the winding up of a banking company?

Answer:

Provisions related to the winding up of banking company are given under s. 38 of the Banking Regulation Act, 1949. Some of the provisions are given below:

a)  If the banking company is unable to pay its debts or

b)  If the application for its winding up has been made by the RBI - the RBI may make an application, if the banking company:

  i.  has failed to comply with the requirements as to minimum paid up capital and cash reserves or

  ii.  has become disentitled to carry on banking

business in India or

c)  If in the opinion of the RBI,

  i.  a compromise or arrangement sanctioned by a Court in respect of the banking company cannot be worked satisfactorily with or without modifications or

  ii.  the returns, statements or information furnished to it under or in pursuance of the provisions of this Act disclose that the banking company is unable to pay its debts or

  iii.  the continuance of the banking company is prejudicial to the interest of its depositors.

Read more:

In the case B. Suryanarayanan v. The K.P. Co-op. Bank Ltd, it was held that co-operative banks are excluded from being wound up under the Banking Regulation Act, 1949. However, if the RBI, with its necessary expertise in the matter of banking, sanctions the winding up of a co-operative bank, the High Court should not interfere unless the decision is malafide

Question:

What is a negotiable instrument?

Answer:

A negotiable instrument is a promissory note, bill of exchange or cheque payable either to order or to bearer. Negotiable Instruments gets passed on by mere delivery, if it is payable to bearer and if in case it is payable to order, it passes by endorsement and delivery. The transferee gets the instrument for consideration and in good faith is not affected by any defect of title of his transferor or any prior party.

Banking & Finance -> Negotiable Instruments

Question:

What are the presumptions to be made in the case of negotiable instruments, which hold ground until the contrary is proved?

Answer:

Sections 118 and 119 of the Negotiable Instruments Act, 1881 provides for the following assumptions:

1. Every negotiable instrument was made or drawn for a certain consideration, and that every such instrument accepted, endorsed, negotiated or transferred, was for consideration. Therefore, if the execution of a promissory note is admitted, the burden to prove that promissory notes were not supported by consideration shifts on to the defendants.

2. Every negotiable instrument bearing a date was made or drawn on the date mentioned on it.

3. Every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity.

4. Every transfer of a negotiable instrument was made before its maturity.

5. Endorsements appearing upon a negotiable instrument were made in the order in which they appear in the instrument.

6. A promissory note, bill of exchange or cheque was appropriately stamped.

7. The holder of a negotiable instrument is a holder in due course, except where the instrument has been obtained by means of an offence or fraud from its lawful owner, or from any person in lawful custody of the instrument, or has been obtained from the maker or acceptor of it by means of an

offence or fraud, or for an unlawful consideration, the burden of proving that the holder is a holder in due course lies upon the person who currently holds the instrument.

8. In a suit upon a dishonored instrument, the court would presume the fact of dishonor, unless and until such fact is disproved by the defendant.

Question:

When is a negotiable instrument dishonored?

Answer:

A promissory note, bill of exchange, cheque is said to be dishonored by non-payment, when the maker of the note, acceptor of the bill or drawee of the cheque defaults in making the payment due.

When the presentation of an instrument for payment is excused and the instrument having become overdue remains unpaid, the instrument is presumed to be dishonored for non-payment.

Question:

What steps may be taken by the holder once a negotiable instrument is dishonoured?

Answer:

When a promissory note, bill of exchange or cheque is dishonored by non-acceptance or non-payment, the holder of the instrument must give a notice that the instrument has been dishonored to all the parties to whom the holder seeks to make severally liable, and to any one of several parties, whom he seeks to make jointly liable for the dishonor.

It may also be served on the duly authorized agent of the person to whom it is required to be given, or in case the defaulting person has died, to his legal representatives or where the defaulter has been declared an insolvent, to his assignee.

If there are two or more parties jointly liable as drawers or endorsers, notice to one of them will make all of them liable. No notice is required to be given to the maker of the dishonored promissory note, or the drawee or acceptor of the dishonored bill of exchange or cheque.

The notice of dishonor can be given by the

holder, or any of the parties liable on the instrument. The notice may be given by an endorsee or an agent but a stranger cannot give such notice.

Notice of dishonor is served to inform the party about the liability which has accrued as a result of the dishonour of the instrument. The service of notice is necessary, unless the party has received the due notice through other means.

If the holder does not serve the notice of dishonour within a reasonable time from the date of dishonour, then all the parties who are liable for the dishonor and entitled to notice would stand discharged.

Question:

What happens when a negotiable instrument is deposited with an agent for presentation?

Answer:

If an instrument is deposited with an agent for presentation, the agent is entitled to the same time in order to give notice to his principal, as if he were the holder giving the notice of dishonour

and the principal is entitled to a further similar period to give notice of dishonor to the defaulting party.

Question:

What should be the format/language of the notice of dishonour of a negotiable instrument to be served?

Answer:

The notice of the dishonour of the instrument may be in any form. It must inform the party to whom it is given that the instrument has been dishonored and in what way the party is liable. The notice should specifically state that the instrument was presented for payment or acceptance and that the instrument had been dishonored.

Question:

When and where should the notice of dishonour of a negotiable instrument be served?

Answer:

The notice must be given within a reasonable time after dishonour, at the place of business or in a case where the defaulting party has no place of business, at the residence of the party for whom it is intended.

If the notice is duly directed and sent by post and is miscarried, such miscarriage would not render the notice invalid.

Question:

Is a cheque a type of negotiable instrument?

Answer:

Yes. A cheque is in nature and a sub-category of a negotiable instrument. It is drawn on a specified banker and not expressed to be payable otherwise than on demand.

Read also:

Culture and credibility of cheques, P T Giridharan and A N Vijaya Kumar

Question:

What are the essential elements of a cheque?

Answer:

A cheque:

1. is always drawn on a specified banker, 2. is always payable on demand without any

grace period, 3. does not require acceptance for its validity, 4. is presumed to be drawn on the balance in

the hands of the banker, unless the banker has allowed credit to the drawer

5. does not require notice of dishnonour, 6. is a revocable mandate and the drawer may

countermand the payment, 7. if not presented within the stipulated time,

does not discharge the drawer from liability, unless the drawer has sustained damages by non-presentation of the cheque, and

8. may be crossed or bearer.

Read more:

Culture and credibility of cheques, P T Giridharan and A N Vijaya Kumar

Question:

How many times can a cheque be presented to a bank for being encashed?

Answer:

There is no restriction as to how many times a cheque can be presented to the bank within the period of its validity. However, there shall only be one notice.

In Sadanandan Bhadran v. Madhavan Sunil Kumar, the Supreme Court held that that on each presentation of a cheque and its subsequent dishonour, a fresh right accrues in favour of the holder but there accrues no fresh cause of action. The holder may, without taking pre-emptory action in exercise of his right under clause (b) of s. 138, can go on presenting the cheque during the validity of the cheque.

But, once a notice under clause (b) of s. 138 of the Negotiable Instruments Act, 1881 is given, the holder is then deemed to have forfeited such right, and in the case of failure of the drawer, to pay the money within the stipulated time, the drawer would be held liable for the offence and the cause of action for filing the complaint would arise.

Question:

What legal action may be taken if the cheque is dishonored because of insufficient funds in the account?

Answer:

On dishonour of a cheque, civil and as well as criminal proceedings may be initiated.

A suit for recovery of the cheque amount (including cost and interest) could be filed under the summary procedure provided in Order XXXVII of the Code of Civil Procedure, 1908.

A criminal complaint under s. 138 of the Negotiable Instruments Act, 1881 could also be made after giving statutory notice to the signatory of the cheque. This section provides that the dishonor of a cheque for the reason of “insufficiency of funds” or for the reason that the amount covered by the cheque was not arranged for, constitutes a penal offence punishable with imprisonment for a term which may extend to one year, or with fine which may extend to twice the amount of the cheque or both.

Normally in criminal law, the existence of guilty

intent is an essential ingredient of any crime. However, the Legislature has the power and has created in the form of s. 138, an offence of absolute liability or strict liability where ‘mens rea’ or guilty intent is not necessary to constitute a crime.

A cheque should be presented within 6 months of the date of drawing, to the bank. If the cheque gets dishonored, the payee has to make a demand for the payment of the said amount by giving a notice in writing to the drawer of the cheque, within 30 days of the receipt of information from the bank regarding the dishonor of the cheque.

If, within 15 days of the service of notice, the drawer does not make the payment, the payee can file a complaint before the jurisdictional magistrate within one month from the end of the 15th day.

If the payee fails to make a complaint within the period of one month, as stated above, no proceedings can lie under s. 138 of the Act, and the only recourse available would be to initiate recovery proceedings before the competent civil court.

The mode of notice is provided under Section 94 of the Negotiable Instruments Act, 1881, which states that the notice of dishonor may be given to a duly authorized agent of the person to whom it is required to be given or to the legal representatives in the event the drawer has died.

Any demand made after the dishonour of cheque will constitute a notice. The notice may be oral or written and if it is written, it could be sent by post and it may be in any form/style.

The essential condition to be satisfied is that that it must inform the party to whom it is given, either in express terms or by reasonable intimation that the instrument has been dishonored.

If this principle is taken in practical approach, the word ‘post’ does not emphasis that it has to be a registered post or UPC. It could be sent even by fax. A courier sent and the POD of the same is sufficient discharge of the obligation of making a demand for the amount under the dishonoured cheque.

The medium of notice may at times even be in person or through a messenger and would constitute to be a valid notice.

Question:

Can both civil and criminal proceedings be initiated against the offender at the same time, for dishonour of cheque?

Answer:

If the elements of the offence under s. 138 of the Negotiable Instruments Act, 1881 are made out, then the enforcement of the liability through a civil court will not disentitle the aggrieved person from prosecuting the offender for the offence.

Civil and criminal actions are clearly co-extensive and a civil case is no bar for criminal proceedings. The Supreme Court made this point in Medchl Chemicals and Pharma Pvt. Ltd. v. Biological E. Ltd. and put an end to the controversy.

Question:

What are the ingredients of the offence under s. 138 of the Negotiable Instruments Act, 1881?

Answer:

To constitute an offence under s. 138 of the Negotiable Instruments Act, 1881, the following criteria need to be satisfied:

1. The cheque issued must have been issued in discharge of a legally enforceable debt or liability. A cheque given as a gift, for instance, or for any other reason, which is not for the satisfaction of any debt or other liability - either partly or wholly, even if it is returned unpaid will not constitute an offence. The words “any debt or any other liability” appearing in section, makes it very clear that it is not in respect of any particular debt or liability The court would make a statutory presumption that the cheques were issued for the liability indicated by the prosecution. This presumption needs to be rebutted by the accused.

2. The cheque should have been presented for payment within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.

3. The cheque should have been returned unpaid by the drawee bank.

4. The payee should have given a notice of

dishonour to the drawer within thirty days of the receipt of information by him from the bank regarding dishonor of the cheque, demanding repayment of the amount covered by the cheque.

5. The drawer should have failed to make the payment within fifteen days of the receipt of the notice. Issuing of a cheque and its dishonour is not an offence. The offence is completed only when the drawer receives a notice from the payee and he fails to pay the dishonoured cheque amount within the grace period of 15 days.

The main object behind this piece of legislation is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. S. 138 is intended to prevent dishonesty on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account maintained by him in a bank and induce the payee or holder in due course to act upon it. This would enhance the acceptability of cheques in settlement of liabilities by making the drawer of the cheque liable for penalties along with providing adequate safeguard to prevent harassment of honest drawers.

Although on dishonour of a cheque, there is a civil liability accrued, however in reality, the processes to seek civil justice becomes notoriously dilatory and recovery by way of a civil suit takes an inordinately long time. To ensure speedy remedy against defaulters and to ensure credibility of the negotiable instrument, the criminal remedy of penalty was inserted in the form of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 which was further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.

Also read:

Judgment of the Supreme Court in K. Bhaskaran v. Sankaran Vaidhyan Balan

Culture and credibility of cheques, P T Giridharan and A N Vijaya Kumar

Question:

In what manner is the period of limitation for filing a complaint under s. 138 of the Negotiable Instruments Act calculated?

Answer:

The period of limitation for filing a complaint is a thirty-day period starting after 15 days from the date of receipt of notice but with the first day excluded. For instance, in case the period of 15 days from the date of receipt of notice would end on 14-10-1995, the thirty-day period would commence from 15-10-1995 and therefore a complaint filed on 15-11-1995 would not be time barred.

Also read:

The judgment of the Supreme Court in Saketh India Ltd. v. India Securities Ltd.

Question:

Who can take cognizance of an offence under s. 138 of the Negotiable Instruments Act?

Answer:

Under s. 142 of the Negotiable Instruments Act, 1881, the Magistrate is empowered to take cognizance of the offence but only on a written complaint by the payee or the holder in due course of the cheque, provided that such

complaint is made within one month from the end of the 15th day on which the drawer, after receiving the notice, fails to make the payment.

Such a criminal complaint cannot be filed before police authorities.

Question:

What happens in the case of dishonor of a cheque issued by a company?

Answer:

Section 141 of the Negotiable Instruments Act, 1881 extends criminal liability for the offence of dishonour of cheques to officers of the company. Every person who, at the time the offence was committed, was in charge of and was responsible to the company for the conduct of its business, is deemed to be guilty of the offence and is liable to be proceeded against and punished.

Question:

A cheque gets dishonored and a considerable period passes without holder in

due course taking any action in the matter. What recourse is available later? 

Answer:

A statutory notice has to be served to the signatory of the cheque and if the complaint under Section 138 of the Act has to be filed, it is to be done within 15 days of service of such notice.

If the cheque was dishonored few months back and no notice has been issued to the signatory, bringing to its knowledge the dishonour of the cheque, the life of the cheque is still valid which is usually six months from the date of issue, then the cheque needs to be presented again and within 30 days of receipt of the information about the dishonour of the cheque, the notice could be issued. If the amount is not paid within 15 days from the receipt of the notice, the criminal complaint could be filed.

Question:

Very often, the accused when held guilty under s. 138 of Negotiable Instruments Act, is also convicted under Section 420 of Indian

Penal Code. Is the accused not being made victim of double jeopardy?

Answer:

In K.S. Anto v. Union of India the Kerala High Court held that:

“Offences under section 138 of the Negotiable Instruments Act and section 420 of the Penal Code are different and the ingredients are also different. Convictions for different offences separately are not barred under Article 20(2) of the Constitution of India.”

Question:

Are the circumstances in which a dishonour of cheques took place, relevant?

Answer:

The circumstances under which a dishonour of cheque takes place or that may contribute to the situation are irrelevant and are required to be totally ignored.In Rakesh Nemkumar Porwal v. Narayan

Dhondu Joglekar, the Bombay High Court said:

“A clear reading of Section 138 leaves no doubt in our mind that the circumstances under which such a dishonour takes place are required to be totally ignored. In such case, the law only takes cognizance of the fact that the payment has not been forthcoming and it matters little that any of the manifold reasons may have caused that situation.”

When once a cheque is issued and the same is proved, a presumption under s. 139 of the Negotiable Instruments Act would arise with regard to consideration. The accused can rebutt the presumption but the burden is on him to dislodge it.

Question:

What is the provision with regards to when a cheque is not honored because of ‘payment stopped by the drawer’?

Answer:

S. 138 does not specifically cover the case where the payment has been stopped by the

drawer or where the account has been closed prior to the endorsement of the cheque.

The Electronics Trade & Technology Development Corporation Ltd Case at the Supreme Court, has expressly held that if on issuance of the notice of dishonor by the payee or the holder in due course to the drawer, demanding payment within 15 days from the date of the receipt of such a notice, and if the drawer does not pay the due amount, the statutory presumption of dishonest intention, subject to any other liability, would stand satisfied.

Whatever may be the ground or reason on the basis of which the cheque was dishonored by a bank, whether it may be “stopped payment by drawer” or “signature differ” or any other ground, if the offence under the section is made out, then the payee has the right to initiate proceedings. The court should only take into consideration whether the payment has been made by the drawer within 15 days of notice issued by the payee after the dishonour of cheque or not.

A division Bench of the Madras High Court in Veeraraghvan v. Lalith Kumar stated that the endorsement account closed would mean that

though the account was in operation when the cheque was issued, the subsequent act of closing of the account is prima facie referable to the “intention of the drawer not to make payment”

The court also ruled that any reason for dishonour is an offence. The reason given was that that effect is to be given to the intention of the legislature, which is evident from the language of the title to s.138 which states “Dishonour of cheque for insufficiency, etc., of funds in the accounts”. The court observed that the addition of the word “etc.” cannot be considered to be an accident.

The Supreme Court in Modi Cements v. Shri Kunchil Kumar Nandi ruled that even if notice were issued stopping payment before the payee had deposited the cheque in bank, an offence under S.138 would be complete.

Question:

What is a bill of exchange?

Answer:

A bill of exchange is a written instrument, which contains an unconditional order signed by the maker of the instrument directing a certain person to pay a certain sum of money to a certain person or to the bearer of the instrument, or to his/her order.

The essential requirements of a bill of exchange are:

1.  the bill should be in writing and dated

2.  it should contain an order to pay money and money only

3.  the order to pay should be unconditional (the order is not conditional merely because the time of payment of order is expressed to be on the lapse of a particular period or after the occurrence of the specified event)

4.  the bill should be signed and be accepted by the party on whom the order is made by the drawer

5.  the amount payable must be certain

6. the money must be payable to a definite person or to his order or to the bearer and

7. the bill must be for a specified amount and

specified period.

Question:

For a Bill of Exchange or a cheque, who are the drawer, drawee and payee?

Answer:

The maker of a bill of exchange or cheque is called the “drawer” the person thereby directed to pay is called the “drawee” and the person named in the instrument, to whom, or to whose order the money is by the instrument, directed to be paid, is called the “payee”

However, a drawer and payee can be one person as he can order an amount to be paid to himself.

Question:

What is a Hundi?

Answer:

A Hundi is a bill of exchange in an Indian language, governed by customs and local usage. It is an indigenous instrument.

Question:

What are bills receivable and bills payable?

Answer: Bills receivable is the amount receivable for which the bill of exchange is received from the customer.Bills payable is the amount payable to the suppliers for which the bill of exchange is given to the suppliers.

Banking & Finance -> Negotiable Instruments

Question: Could there be a bill of exchange made by electronic means?

Answer: S. 1(4)(a) of Information Technology Act, 2000 provides that the Act will not apply to bills of exchange and promissory notes. Thus, a bill of exchange or a promissory note cannot be made by electronic means. However, since cheques are not covered under the Act, they may be made and/or sent by electronic means

Question:

Is a cheque a type of Bill of Exchange?

Answer:

A cheque is a special type of bill of exchange. It is drawn on the banker and is required to be made payable on demand.