PROJECT REPORT

THE NEGOTIABLE INSTRUMENTS ACT, 1881

SUBMITTED TO: UPDESH SINGH SACHDEVA SUBMITTED BY: Bidyut Biplab Das Enrollment no-13BSP0177 IBS GURGAON
1

ACKNOWLEDGEMENT

I would like to take this opportunity to thank all the people who have helped me in the completion of this project. Firstly, I express my sincere gratitude towards , Updesh Singh Sachdeva , who has helped me at every step , provided me with relevant study material for the project, rectified my mistakes, and always guided me in my research. This project would not have been possible without his help and guidance . I am also grateful to staff of Library for rendering cooperation .

Bidyut Biplab Das

NEGOTIABLE INSTRUMENTS ACT, 1881 STRUCTURE 1.0 OBJECTIVES 1.1 INTRODUCTION 1.2 MEANING OF NEGOTIABLE INSTRUMENTS 1.3 CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT 1.4 PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT 1.5 TYPES OF NEGOTIABLE INSTRUMENT 1.5.1 PROMISSORY NOTES 1.5.2 BILL OF EXCHANGE 1.5.3 CHEQUES 1.5.4 BANK DRAFT 1.5.5 HUNDIS 1.6 PARTIES TO NEGOTIABLE INSTRUMENTS 1.6.1 PARTIES TO BILL OF EXCHANGE 1.6.2 PARTIES TO A PROMISSORY NOTE 1.6.3 PARTIES TO A CHEQUE 1.7 NEGOTIATION 1.7.1 MODES OF NEGOTIATION 1.8 ASSIGNMENT 1.8.1 NEGOTIATION AND ASSIGNMENT DISTINGUISHED 1.8.2 IMPORTANCE OF DELIVERY IN NEGOTIATION 1.9 ENDORSEMENT 1.10 INSTRUMENTS WITHOUT CONSIDERATION 1.11 HOLDER IN DUE COURSE 1.12 DISHONOUR OF A NEGOTIABLE INSTRUMENT 1.13 NOTING AND PROTESTING 1.14 OF REASONABLE TIME
1.15 OF COMPENSATION 1.16 SPECIAL RULES OF EVIDENCE 1.17 OF CROSSED CHEQUES 1.18 OF BILLS IN SETS 1.19 OF INTERNATIONAL LAW

1.20 OF NOTARIES PUBLIC OF PENALTIES IN CASE OF DISHONOUR OF

CERTAIN CHEQUES FOR INSUFFICIENCYOF FUNDS IN THE ACCOUNTS

1.21 SUMMARY 1.22 THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) BILL, 2002 1.23 Legal proceeding under section 138 of the Negotiable Instruments Act, 1881 1.24 Procedure For filing Complaint Under Section 138 Negotiable Instrument Act 1.25 CHEQUES BOUNCING

1.1 INTRODUCTION
The Act called the Negotiable Instruments Act, 1881states that Local extent. Saving of usages relating to hundis, etc. It extends to the whole of India but nothing herein contained affects the 'Indian Paper Currency Act, 1871, (3 of 1871). section 21, or .affects any local usage relating to any instrument in an oriental language : Provided that such usages may be excluded by any words in the body of the instrument which indicate an intention that the legal relations of the parties thereto shall be governed by this Act and it shall come into force on the first day of March, 1882. The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India . The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of India Act provides that no person in India other than the Bank or as expressly authorised by this Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand. This Section further provides that no one except the RBI or the Central Government can make or issue a promissory note expressed to be payable or 5

demand or after a certain time. Section 32 of the Reserve Bank of India Act makes issue of such bills or notes punishable with fine which may extend to the amount of the instrument. The effect or the consequences of these provisions are: 1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on demand or after a certain time. 2. A bill of exchange cannot be made payable to the bearer on demand though it can be made payable to the bearer after a certain time. 3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a persons account with a banker.

1.2 MEANING OF NEGOTIABLE INSTRUMENTS

According to Section 13 (a) of the Act, Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer, whether the word order or bearer appear on the instrument or not. In the words of Justice, Willis, A negotiable instrument is one, the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from whom he took it. Thus, the term, negotiable instrument means a written document which creates a right in favour of some person and which is freely transferable. Although the Act mentions only these three instruments (such as a promissory

note, a bill of exchange and cheque), it does not exclude the possibility of adding any other instrument which satisfies the following two conditions of negotiability: 1. the instrument should be freely transferable (by delivery or by endorsement. and delivery) by the custom of the trade;

2. The person who obtains it in good faith and for value should get it free from all defects, and be entitled to recover the money of the instrument in his own name. As such, documents like share warrants payable to bearer. debentures payable to bearer and dividend warrants are negotiable instruments. But the money orders and postal orders, deposit receipts, share certificates, bill of lading, dock warrant, etc. are not negotiable instruments. Although they are transferable by delivery and endorsements, yet they are not able to give better title to the bonafide transferee for value than what the transferor has.

1.3 CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

A negotiable instrument has the following characteristics: 1. Property: The prossessor of the negotiable instrument is presumed to be the owner of the property contained therein. A negotiable instrument does not merely give possession of the instrument but right to property also. The property in a negotiable instrument can be transferred without any formality. In the case of bearer instrument, the property passes by mere delivery to the transferee. In the case of an order instrument, endorsement and delivery are required for the transfer of property.

2. Title: The transferee of a negotiable instrument is known as holder in due course. A bona fide transferee for value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the instrument. 3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A negotiable instrument can be transferred any number of times till it is at maturity. The holder of the instrument need not give notice of transfer to the party liable on the instrument to pay. 4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that consideration has been paid under it. It is not necessary to write in a promissory note the words for value received or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration. 5. Prompt payment: A negotiable instrument enables the holder to expect prompt payment because a dishonour means the ruin of the credit of all persons who are parties to the instrument.

1.4 PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court presumes in regard to negotiable instruments. In other words these presumptions need not be proved as they are presumed to exist in every negotiable instrument. Until the contrary is proved the following presumptions shall be made in case of all negotiable instruments: 1. Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted or endorsed for consideration. It is presumed that,

consideration is present in every negotiable instrument until the contrary is presumed. The presumption of consideration, however may be rebutted by proof that the instrument had been obtained from, its lawful owner by means of fraud or undue influence. 2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date, unless the contrary is proved.

3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to have been accepted within a reasonable time after its issue and before its maturity. This presumption only applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date on which it was made. 4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of a negotiable instrument was made before its maturity. 5. Order of endorsement: Until the contrary is proved it shall be presumed that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange or cheque was duly stamped 7. Holder in due course: Until the contrary is proved, it shall be presumed that the holder of a negotiable instrument is the holder in due course. Every holder of a negotiable instrument is presumed to have paid consideration for it and to have taken it in good faith. But if the instrument was obtained from its lawful owner by means of an offence or fraud, the holder has to prove that he is a holder in due course.

8. Proof of protest: Section 119 lays down that in a suit upon. an instrument which has been dishonoured, the court shall on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved.

1.5 TYPES OF NEGOTIABLE INSTRUMENT

Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of exchange or a cheque payable either to order or to bearer. Negotiable instruments recognised by statute are: (i) Promissory notes (ii) Bills of exchange (iii) Cheques. (iv) Bankers draft

Negotiable instruments recognised by usage or custom are: (i) (ii) (iii) (iv) (v) (vi) (vii) Hundis Share warrants Dividend warrants Circular Bearer debentures Debentures of Bombay Port Trust Railway receipts

(viii) Delivery orders.

This list of negotiable instrument is not a closed chapter. With the growth of commerce, new kinds of securities may claim recognition as negotiable

10

instruments. The courts in India usually follow the practice of English courts in according the character of negotiability to other instruments.

1.5.1 Promissory notes

Section 4 of the Act defines, A promissory note is an instrument in writing (note being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments. Essential elements an instrument to be a promissory note must possess the following elements: 1. It must be in writing: A mere verbal promise to pay is not a promissory note. The method of writing (either in ink or pencil or printing, etc.) is unimportant, but it must be in any form that cannot be altered easily. 2. It must certainly an express promise or clear understanding to pay: There must be an express undertaking to pay. A mere acknowledgment is not enough.

The following are not promissory notes as there is no promise to pay. If A writes: (a) Mr. B, I.O.U. (I owe you) Rs. 500 (b) I am liable to pay you Rs. 500. (c) I have taken from you Rs. 100, whenever you ask for it have to pay . The following will be taken as promissory notes because there is an express promise to pay: If A writes: 11

(a) I promise to pay B or order Rs. 500 (b) I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for the value received.

(3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend upon the happening of some outside contingency or event. It must be payable absolutely. (4) It should be signed by the maker: The person who promise to pay must sign the instrument even though it might have been written by the promisor himself. There are no restrictions regarding the form or place of signatures in the instrument. It may be in any part of the instrument. It may be in pencil or ink, a thumb mark or initials. The pronote can be signed by the authorised agent of the maker, but the agent must expressly state as to on whose behalf he is signing, otherwise he himself may be held liable as a maker. The only legal requirement is that it should indicate with certainty the identity of the person and his intention to be bound by the terms of the agreement.

(5) The maker must be certain: The note self must show clearly who is the person agreeing to undertake the liability to pay the amount. In case a person signs in an assumed name, he is liable as a maker because a maker is taken as certain if from his description sufficient indication follows about his identity. In case two or more persons promise to pay, they may bind themselves jointly or jointly and severally, but their liability cannot be in the alternative. (6) The payee must be certain: The instrument must point out with certainty the person to whom the promise has been made. The payee may be ascertained by name or by designation. A note payable to the maker himself is not pronate unless it is indorsed by him. In case, there is a mistake in the name of the payee or his designation; the note is valid, if the payee can be ascertained by evidence. Even where the name of a dead person is entered as payee in ignorance of his death, his legal representative can enforce payment. 12

(7) The promise should be to pay money and money only: Money means legal tender money and not old and rare coins. A promise to deliver paddy either in the alternative or in addition to money does not constitute a promissory note. (8) The amount should be certain: One of the important characteristics of a promissory note is certaintynot only regarding the person to whom or by whom payment is to be made but also regarding the amount. However, paragraph 3 of Section 5 provides that the sum does not become indefinite merely because (a) there is a promise to pay amount with interest at a specified rate. (b) the amount is to be paid at an indicated rate of exchange. (c) the amount is payable by installments with a condition that the whole balance shall fall due for payment on a default being committed in the payment of anyone installment. (9) Other formalities: The other formalities regarding number, place, date, consideration etc. though usually found given inthe promissory notes but are not essential in law. The date of instrument is not material unless the amount is made payable at a certain time after date. Even in such a case, omission of date does not invalidate the instrument and the date of execution can be independently ascertained and proved. On demand (or six month after date) I promise to pay Peter or order the sum of rupees one thousand with interest at 8 per cent per annum until payment.

13

FIG:A promissory note used in INDIA

1.5.2 Bill of exchange Section 5 of the Act defines, 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. A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor and accepted by the debtor. There are usually three parties to a bill of exchange drawer, acceptor or drawee and payee. Drawer himself may be the payee. Essential conditions of a bill of exchange (1) It must be in writing. (2) It must be signed by the drawer. (3) The drawer, drawee and payee must be certain. (4) The sum payable must also be certain. 14

(5) It should be properly stamped. (6) It must contain an express order to pay money and money alone. For example, In the following cases, there is no order to pay, but only a request to pay. Therefore, none can be considered as a bill of exchange: (a) I shall be highly obliged if you make it convenient to pay Rs. 1000 to Suresh. (b) Mr. Ramesh, please let the bearer have one thousand rupees, and place it to my account and oblige However, there is an order to pay, though it is politely made, in the following examples: (a) Please pay Rs. 500 to the order of A. (b) Mr. A will oblige Mr. C, by paying to the order of P.

(7) The order must be unconditional.

15

Distinction Between Bill of Exchange and Promissory Note 1. Number of parties: In a promissory note there are only two parties the maker (debtor) and the payee (creditor). In a bill of exchange, there are three parties; drawer, drawee and payee; although any two out of the three may be filled by one and the same person, 2. Payment to the maker: A promissory note cannot be made payable the maker himself, while in a bill of exchange to the drawer and payee or drawee and payee may be same person. 3. Unconditional promise: A promissory note contains an unconditional promise by the maker to pay to the payee or his order, whereas in a bill of exchange, there is an unconditional order to the drawee to pay according to the direction of the drawer. 4. Prior acceptance: A note is presented for payment without any prior acceptance by the maker. A bill of exchange is payable after sight must be accepted by the drawee or someone else on his behalf, before it can be presented for payment. 5. Primary or absolute liability: The liability of the maker of a promissory note is primary and absolute, but the liability of the drawer of a bill of exchange is secondary and conditional. 6. Relation: The maker of the promissory note stands in immediate relation with the payee, while the maker or drawer of an accepted bill stands in immediate relations with the acceptor and not the payee. 7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is required to be made by the law of the country where they are drawn, but no such protest is needed in the case of a promissory note. 8. Notice of dishonour: When a bill is dishonoured, due notice of dishonour is to be given by the holder to the drawer and the intermediate indorsers, but no such notice need be given in the case of a no 16

Classification of Bills Bills can be classified as: (1) Inland and foreign bills. (2) Time and demand bills. (3) Trade and accommodation bills. (1) Inland and Foreign Bills Inland bill: A bill is, named as an inland bill if: (a) it is drawn in India on a person residing in India, whether payable in or outside India, or (b) it is drawn in India on a person residing outside India but payable in India. The following are the Inland bills (i) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in Bombay. The bill is an inland bill. (ii) A bill is drawn by a Delhi merchant on a person in London, but is made payable in India. This is an inland bill. (iii) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is accepted for payment in Japan. The bill is an inland bill.

Foreign Bill: A bill which is not an inland bill is a foreign bill. The following are the foreign bills:

17

1. A bill drawn outside India and made payable in India. 2. A bill drawn outside India on any person residing outside India. 3. A bill drawn in India on a person residing outside India and made payable outside India 4. A bill drawn outside India on a person residing in India. 5. A bill drawn outside India and made payable outside India. Bills in sets (Secs. 132 and 133): The foreign bills are generally drawn in sets of three, and each sets is termed as a via. As soon as anyone of the set is paid, the others becomes inoperative. These bills are drawn in different parts. They are drawn in order to avoid their loss or miscarriage during transit. Each part is despatched separately. To avoid delay, all the parts are sent on the same day; by different mode of conveyance.

Rules: Sections 132 and 133 provide for the following rules: (i) A bill of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All parts make one bill and the entire bill is extinguished, i.e. when payment is made on one part- the other parts will become inoperative (Section 132). (ii) The drawer should sign and deliver all the parts but the acceptance is to be conveyed only on one of the parts. In case a person accepts or endorses different parts of the bill in favour of different persons, he and the subsequent endorsers of each part are liable on such part as if it were a separate bill (Sec. 132). (iii) As between holders in due course of the different parts of the same bill, he who first acquired title to anyone part is entitled to the other parts and is also entitled to claim the money represented by bill (Sec. 133).

18

(2) Time and Demand Bill Time bill: A bill payable after a fixed time is termed as a time bill. In other words, bill payable after date is a time bill. Demand bill: A bill payable at sight or on demand is termed as a demand bill.

(3) Trade and Accommodation Bill Trade bill: A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but only to provide financial help to some party is termed as an accommodation bill. Example: A, is need of money for three months. He induces his friend B to accept a bill of exchange drawn on him for Rs. 1,000 for three months. The bill is drawn and accepted. The bill is an accommodation bill. A may get the bill discounted from his bankers immediately, paying a small sum as discount. Thus, he can use the funds for three months and then just before maturity he may remit the money to B, who will meet the bill on maturity. In the above example A is the accommodated party while B is theaccommodating party. It is to be noted that an recommendation bill may be for accommodation of both the drawer arid acceptor. In such a case, they share the proceeds of the discounted bill.

19

Rules regarding accommodation bills are: (i) In case the patty accommodated continues to hold the bill till maturity, the accommodating party shall not be liable to him for payment of, the bill since the contract between them is not based on any consideration (Section 43). (ii) But the accommodating party shall be liable to any subsequent holder for value who may be knowing the exact position that the bill is an accommodation bill and that the full consideration has not been received by the acceptor. The accommodating party can, in turn, claim compensation from the accommodated party for the amount it has been asked to pay the holder for value. (iii) An accommodation bill may be negotiated after maturity. The holder or such a bill after maturity is in the same position as a holder before maturity, provided he takes it in good faith and for value (Sec. 59). In form and all other respects an accommodation bill is quite similar to an ordinary bill of exchange. There is nothing on the face of the accommodation bill to distinguish it from an ordinary trade bill.

1.5.3 Cheques Section 6 of the Act defines A cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand. A cheque is bill of exchange with two more qualifications, namely, (i) it is always drawn on a specified banker, and (ii) it is always payable on demand. Consequently, all cheque are bill of exchange, but all bills are not cheque. A cheque must satisfy all the requirements of a bill of exchange; that is, it must be signed by the drawer, and must contain an unconditional order on a specified banker to pay a certain sum of money to or to the order of a certain person or to the bearer of the cheque. It does not require acceptance.

20

FIG:A Cheque

Different types of cheques based on methods of issuing

Open cheque or bearer cheque: The issuer of the cheque would just fill the name of the person to whom the cheque is issued, writes the amount and attaches his signature and nothing else. This type of issuing a cheque is also called bearer type cheque also known as open cheque or uncrossed cheque. The cheque is negotiable from the date of issue to three months. The issued cheque turns stale after the completion of three months. It has to be revalidated before presenting to the bank. A crossed cheque or an account payee cheque: It is written in the same as that of bearer cheque but issuer specifically specifies it as account payee on the left hand top corner or simply crosses it twice with two parallel lines on the right hand top corner. The bearer of the cheque presenting it to the bank should have an account in the branch to which the written sum is deposited. It is safest type of cheques. A self cheque: A self cheque is written by the account holder as pay self to receive the money in the physical form from the branch where he holds his account. Pay yourself cheque: The account holder issues this type of crossed cheque to the bank asking the bank deduct money from his account into banks own account for the purpose buying banking products like drafts, pay orders, fixed 21

deposit receipts or for depositing money into other accounts held by him like recurring deposits and loan accounts. Post dated cheque (PDC): A PDC is a form of a crossed or account payee bearer cheque but post dated to meet the said financial obligation at a future date. Various types of cheques based on their functionality Local Cheque: A local cheque is a type of cheque which is valid in the given city and a given branch in which the issuer has an account and to which it is connected. The producer of the cheque in whose name it is issued can directly go to the designated bank and receive the money in the physical form. If a given citys local cheque is presented elsewhere shall attract some fixed banking charges. Although these type of cheques are still prevalent, especially with nationalised banks, it is slowly slated to be removed with at par cheque type. At par cheque: With the computerisation and networking of bank branches with its headquarters, a variation to the local cheque has become common place in the name of at par cheque. At par cheque is a cheque which is accepted at par at all its branches across the country. Unlike local cheque it can be present across the country without attracting additional banking charges. Bankers cheque: It is a kind of cheque issued by the bank itself connected to its own funds. It is a kind of assurance given by the issuer to the client to alley your fears. The personal account connected cheques may bounce for want of funds in his account. To avoid such hurdles, sometimes, the receiver seeks bankers cheque. Travelers cheques: They are a kind of an open type bearer cheque issued by the bank which can be used by the user for withdrawal of money while touring. It is equivalent to carrying cash but in a safe form without fear of losing it. Gift cheque: This is another banking instrument introduced for gifting money to the loved ones instead of hard cash.

22

Cheques per se have been around since the inception of banking system. The cheque transactions are one of the safest ways of conducting business. Although cheque is going to be still the mainstay of banking transactions, it leaves a good amount of paper usage. With net banking becoming popular and made secure, more and more people are looking forward to transacting their business using net banking. ATMs are slowly replacing the self cheques for withdrawal of money. Post dated cheques are getting replaced by periodic electronic clearing instructions.

Distinction Between Bills of Exchange and Cheque 1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a bank. 2. It is essential that a bill of exchange must be accepted before its payment can be claimed A cheque does not require any such acceptance. 3. A cheque can only be drawn payable on demand, a bill may be also drawn payable on demand, or on the expiry of a certain period after date or sight. 4. A grace of three days is allowed in the case of time bills while no grace is given in the case of a cheque. 5. The drawer of the bill is discharged from his liability, if it is not presented for payment, but the drawer of a cheque is discharged only if he suffers any damage by delay in presenting the cheque for payment. 6. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque. 7. A cheque may be crossed, but not needed in the case of bill. 8. A bill of exchange must be properly stamped, while a cheque does not require any stamp. 9. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never be drawn to bearer. 23

10. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

1.5.4 Bank Draft

Bill of exchange drawn by a bank on itself, or on a correspondent bank in another city or country. Bank drafts are commonly used by banks in dealings with other banks, or when a creditor or seller is unwilling to accept an ordinary check from a debtor or buyer in another city or country. (In local transactions a certified check or a cashier's check serves the same purpose.) When a customer (the drawer) requests a draft, the bank withdraws the amount of the draft from his orher account and holds it to honor the draft on its presentment by the drawee. Because, in normal circumstances, a draft is certain to be paid, it is generally accepted as a cash equivalent. Also called banker's draft.

Fig:

A bank draft

1.5.5 Hundis
A Hundi is a negotiable instrument written in an oriental language. The term hundi includes all indigenous negotiable instrument whether they be in the form of notes or bills.The word hundi is said to be derived from 24

the Sanskrit word hundi, which means to collect. They are quite popular among the Indian merchants from very old days. They are used to finance trade and commerce and provide a fascile and sound medium of currency and credit. Hundis are governed by the custom and usage of the locality in which they are intended to be used and not by the provision of the Negotiable Instruments Act. In case there is no customary rule known as to a certain point, the court may apply the provisions of the Negotiable Instruments Act. It is also open to the parties to expressly exclude the applicability of any custom relating to hundis by agreement (lndur Chandra vs. Lachhmi Bibi, 7 B.I.R. 682). Kinds Of Hundis Several varieties of Hundis are current amongst Indian traders. Hundis may be either Darshani or Muddati. Darshani hundis are payable at sight while Muddati hundis are payable after a certain period, after date of sight. The various kinds of hundis which relate to these classes are as follows.

1. Shah jog Hundi : This is a hundi payable only to a shah i.e., a respectable person or a person of worth in the market. This is the most widely used hundi in the country. Such a hundi is not payable to bearer but only to a respectable bearer. A shah jog hundi may pass from hand to hand till it reaches a shah, who , after making due enquiries to secure himself presents it to the drawee for acceptance or payment; then its negotiability ceases. It will not be paid unless the name of the shah by whom it is presented is endorsed on it. A shah jog hundi differs from a bill of exchange in two respects: (1) The acceptance of the drawee is not generally written across it, but the particulars are entered in the drawers book. (2) It is not usually presented for acceptance before due date. A shah jog hundi may be either darshani or muddati. It has all the characteristics of negotiable instrument. It passes by mere delivery. But it is

25

payable only to a respectable person. A minor may be the holder of shah jog hundi and a payment to whom may be a good payment. 2. Jokhmi Hundi : This is a hundi drawn against goods shipped on the vessel named in the Hundi. The drawer of the hundi is the consigner who draws for the value of the goods on the consignee. It resembles a policy of marine insurance. A jokhmi hundi is designed with a double purpose; namely to put the drawer of the hundi in funds and at the same time to affect an insurance upon the goods themselves. The drawer negotiates the hundi to a broker and the broker charges a commission for his services. The broker will get the money if the vessel arrives safe in port. If the ship is lost the broker bears loss. Thus both the drawer and the drawee are protected. 3. Nam jog Hundi : This is a hundi payable to named party or his order. Its form is very much the same as that of the shah jog hundi, except that in place of the word shah, the name of the payee is inserted. Generally it contains a description of the person mentioned; when this is so it is not transferable. The alteration of a nam jog hundi into a shah jog hundi is a material alteration and renders the hundi void. 4. Dhani jog Hundi : This is hundi payble to Dhani or owner, i.e., a person who purchases it. It is payable to any owner, holder or bearer. It is a negotiable instrument payable to bearer; where it is endorsed in full, it ceases to be a bearer hundi. It is in the form of promote. 5. Jawabi Hundi : This is a hundi employed to send money to distant places and resembles a money order. The drawer who is interested in sending the money writes to the payee and delivers the letter along with the remittance to a banker. The banker either endorses it on to any of his correspondents or negotiates its transfer. On payment the payee signs his receipt on the letter which is then returned to the remitter in the same way.

26

6. Firman jog Hundi: This is a hundi which is payable to order. 7. Zickri Chit: A Hundi may be accepted for honour under what is called a Zickri Chit or letter of protection without being noted or protested. It is in use all over India in connection with Marwari hundis. It is furnished, to the holder by some prior party to the Hundi, when the hundi gets dishonored. It creates something like an acceptor for honor, and it is valid in law.

Fig :Shows a HUNDI used in india

Maturity
"Maturity". The maturity of a promissory note or bill of exchange is the date at which it falls due. Days of grace. Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is 27

at maturity on the third day after the day on which it is expressed to be payable.

Calculating maturity of bill or note payable so many months afterdate or sight. Calculating maturity of bill or note payable so many months after date or sight. In calculating the date at which a payable a stated number of event, is at promissory note or bill of exchange, made months after date or after sight, or after a certain

maturity, the period stated shall be held to terminate on the day of

the month which corresponds with the day on which the instrument is dated, or presented for acceptance or sight, or noted for non- acceptance, or protested for nonacceptance, or the event happens, or, where the instrument is a bill of exchange made payable a stated number of months after sight and has been accepted for honour, with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month.

Illustrations

(a) A negotiable instrument, dated 29th January 2013, is made payable at one month after date. The instrument is at maturity on the third day after the 28th February 2013.

(b) A negotiable instrument, dated 30th August 2013, is made 28

payable three months after date. The instrument is at maturity on the 3rd December 2013.

(c) A promissory note or bill of exchange, dated 31st August 2013, is made payable three months after date. The instrument is at maturity on the 3rd December ,2013. When day of maturity is a holdiay. When day of maturity is a holdiay.When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day.

1.6 PARTIES TO NEGOTIABLE INSTRUMENTS 1.6.1 Parties to Bill of Exchange 1. Drawer: The maker of a bill of exchange is called the drawer. 2. Drawee: The person directed to pay the money by the drawer is called the drawee, 3. Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more parts than one, upon one of such pares and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the acceptor. 4. Payee: The person named in the instrument, to whom or to whose order the money is directed to be paid by the instrument is called the payee. He is the real beneficiary under the instrument. Where he signs his name and makes

29

the instrument payable to some other person, that other person does not become the payee. 5. Indorser: When the holder transfers or indorses the instrument to anyone else, the holder becomes the indorser. 6. Indorsee: The person to whom the bill is indorsed is called an indorsee. 7. Holder: A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a holder. He is either the original payee, or the indorsee. In case the bill is payable to the bearer, the person in possession of the negotiable instrument is called the holder. 8. Drawee in case of need: When in the bill or in any endorsement, the name of any person is given, in addition to the drawee, to be resorted to in case of need, such a person is called drawee in case of need. In such a case it is obligatory on the part of the holder to present the bill to such a drawee in case the original drawee refuses to accept the bill. The bill is taken to be dishonoured by non-acceptance or for nonpayment, only when such a drawee refuses to accept or pay the bill. 9. Acceptor for honour: In case the original drawee refuses toaccept the bill or to furnish better security when demanded by the notary, any person who is not liable on the bill, may accept it with the consent of the holder, for the honour ofany party liable on the bill. Such an acceptor is called acceptor for honour.

1.6.2 Parties to a Promissory Note 1. Maker. He is the person who promises to pay the amount stated in the note. He is the debtor. 2. Payee. He is the person to whom the amount is payable i.e. the creditor. 3. Holder. He is the payee or the person to whom the note might have been indorsed.

30

4. The indorser and indorsee (the same as in the case of a bill). 1.6.3 Parties to a Cheque 1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank. 2. Drawee. It is the drawers banker on whom the cheque has been drawn. 3. Payee. He is the person who is entitled to receive the payment of the cheque. 4. The holder, indorser and indorsee (the same as in the case ofa bill or note).

1.7 NEGOTIATION Negotiation may be defined as the process by which a third party is constituted the holder of the instrument so as to entitle him to the possession of the same and to receive the amount due thereon in his own name. According to section 14 of the Act, when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated. The main purpose and essence of negotiation is to make the transferee of a promissory note, a bill of exchange or a cheque the holder there of. Negotiation thus requires two conditions to be fulfilled, namely: 1. There must be a transfer of the instrument to another person; and 2. The transfer must be made in such a manner as to constitute the transferee the holder of the instrument. Handing over a negotiable instrument to a servant for safe custody is not negotiation; there must be a transfer with an intention to pass title. 1.7.1 Modes of negotiation Negotiation may be effected in the following two ways:

31

1. Negotiation by delivery (Sec. 47): Where a promissory note or a bill of exchange or a cheque is payable to a bearer, it may be negotiated by delivery thereof. Example: A, the holder of a negotiable instrument payable to bearer,delivers it to Bs agent to keep it for B. The instrument has been negotiated. 2. Negotiation by endorsement and delivery (Sec. 48): A promissory note, a cheque or a bill of exchange payable to order can be negotiated only be endorsement and delivery. Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are more payees than one, all must endorse it.

1.8 ASSIGNMENT Bills, notes and cheques represent debts and as such have been held to be assignable without endorsement. Transfer by assignment takes place when the holder of a negotiable instrument sells his right to another person without endorsing it. The assignee is entitled to get possession and can recover the amount due on the instrument from the parties thereto. Of the two methods of transfer of negotiable instruments discussed, transfer by negotiation is recognised by the Negotiable Instrument Act. 1.8.1 Negotiation and Assignment Distinguished The various points of distinction between negotiation and assignment are as below: 1. Negotiation requires delivery only to constitute a transfer,whereas assignment requires a written document signed by the transferor. 2. Consideration is always presumed in the case of transfer by negotiation. In the case of assignment consideration must be proved.

32

3. In case of negotiation, notice of transfer is not necessary, whereas in the case of assignment notice of the transfer must be given by the assignee to the debtor. 4. The assignee takes the instrument subject to all the defects in the title of the transferor. If the title of the assignor was defective the title of the assignee is also defective. However, in case of negotiation the transferee takes the instrument free from all the defects in the title of the transferor. A holder in due course is not affected by any defect in the title of the transferor. He may therefore have a better title than the transferor. 5.In case of negotiation a transferee can sue the third party in his own name. But an assignee cannot do so.

1.8.2 Importance of delivery in negotiation

Delivery is a voluntary transfer of possession from one person to another. Delivery is essential to complete any contract on a negotiable instrument whether it be contract of making endorsement or acceptance. The property in the instrument does not pass unless the delivery is fully completed. Section 46 of the Act provides that a negotiable instrument is not made or accepted or endorsed unless it is delivered to a proper person. For instance, if a person signs a promissory note and keeps it with himself, he cannot be said to have made a promissory note; only when it is delivered to the payee that the promissory note is made. Delivery may be actual or constructive. Delivery is actual when it is accompanied by actual change of possession of the instrument. Constructive delivery is effected without any change of actual possession.

1.9 ENDORSEMENT
The word endorsement in its literal sense means, writing on the back of an instrument. But under the Negotiable Instruments Act it means, the writing of ones name on the back of the instrument or any paper attached to it with the 33

intention of transferring the rights therein. Thus, endorsement is signing a negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called an endorser, and the person to whom negotiable instrument is transferred by endorsement is called the endorsee.

Essentials of a valid endorsement

The following are the essentials of a valid endorsement: 1. It must be on the instrument. The endorsement may be on the back or face of the instrument and if no space is left on the instrument, it may be made on a separate paper attached to it called allonage. It should usually be in ink. 2. It must be made by the maker or holder of the instrument. A stranger cannot endorse it. 3. It must be signed by the endorser. Full name is not essential. Initials may suffice. Thumb-impression should be attested. Signature may be made on any part of the instrument. A rubber stamp is not accepted but the designation of the holder can be done by a rubber stamp. 4. It may be made either by the endorser merely signing his name on the instrument (it is a blank endorsement) or by any words showing an intention to endorse or transfer the instrument to a specified person (it is an endorsement in full). No specific form of words is prescribed for an endorsement. But intention to transfer must be present. When in a bill or note payable to order the endorsees name is wrongly spelt, he should when he endorses it, sign the name as spelt in the instrument and write the correct spelling within brackets after his endorsement. 5. It must be completed by delivery of the instrument. The delivery must be made by the endorser himself or by somebody on his behalf with the intention of passing property therein. Thus, where a person endorses an instrument to

34

another and keeps it in his papers where it is found after his death and then delivered to the endorsee, the latter gets no right on the instrument. 6. It must be an endorsement of the entire bill. A partial endorsement i.e. which purports to transfer to the endorse a part only of the amount payable does not operate as a valid endorsement. If delivery is conditional, endorsement is not complete until the condition is fulfilled. Who may endorse? The payee of an instrument is the rightful person to make the first endorsement. Thereafter the instrument may be endorsed by any person who has become the holder of the instrument. The maker or the drawer cannot endorse the instrument but if any of them has become the holder thereof he may endorse the instrument. (Sec. 51). The maker or drawer cannot endorse or negotiate an instrument unless he is in lawful possession of instrument or is the holder there of. A payee or indorsee cannot endorse or negotiate unless he is the holder there of.

Classes of endorsement An endorsement may be: (1) Blank or general. (2) Special or full. (3) Partial. (4) Restrictive. (5) Conditional. (a) Blank or general endorsement (Sections 16 and 54). It is an endorsement when the endorser merely signs on the instrument without mentioning the name of the person in whose favour the endorsement is made. Endorsement in blank specifies no endorsee. It simply consists of the signature of the endorser on the endorsement. A negotiable instrument even though 35

payable to order becomes a bearer instrument if endorsed in blank. Then it is transferable by mere delivery.An endorsement in blank may be followed by an endorsement in full. Example: A bill is payable to X. X endorses the bill by simply affixing his signature. This is an endorsement in blank by X. In this case the bill becomes payable to bearer.There is no difference between a bill or note indorsed in blank andone payable to bearer. They can both be negotiated by delivery. (b) Special or full endorsement (Section 16) When the endorsement contains not only the signature of the endorser but also the name of the person in whose favour the endorsement is made, then it is an endorsement in full. Thus, when endorsement is made by writing the words Pay to A or As order,followed by the signature of the endorser, it is an endorsement in full. In such an endorsement, it is only the endorsee who can transfer theinstrument.

Conversion of endorsement in blank into endorsement in full: When a person receives a negotiable instrument in blank, he may without signing his own name, convert the blank endorsement into an endorsement in full by writing above the endorsers signature a direction to pay to or to the order of himself or some other person. In such a case the person is not liable as the endorser on the bill. In other words, the person transferring such an instrument does not incur all the liabilities of an endorser. (Section 49). Example: A is the holder of a bill endorsed by B in blank. A writes over Bs signature the words Pay to C or order. A is not liable as endorser but the writing operates as an endorsement in full from B to C. When a bill is endorsed in blank, or is payable to bearer and is afterwards endorsed by another in full, the bill remains transferable by delivery with regard to all parties prior to such endorser in full. But such endorser in full cannot be sued by any one except the person in whose favour the endorsement in full is made. (Section 55).

36

Example: C the payee of a bill endorses it in blank and delivers it to D, who specially endorses it to E or order. E without endorsement transfers the bill to F. F as the bearer is entitled to receive payment or to sue the drawer, the acceptor, or C who endorsed the bill in blank but he cannot sue D or E. (c) Partial endorsement (Section 56) A partial endorsement is one which purports to transfer to the endorsee a part only of the amount payable on the instrument. Such an endorsement does not operate as a negotiation of the instrument. Example: A is the holder of a bill for Rs.1000. He endorses it pay to B or order Rs.500. This is a partial endorsement and invalid for the purpose of negotiation. (d) Restrictive endorsement (Section 50) The endorsement of an instrument may contain terms making it restrictive. Restrictive endorsement is one which either by express words restricts or prohibits the further negotiation of a bill or which expresses that it is not a complete and unconditional transfer of the instrument but is a mere authority to the endorsee to deal with bill as directed by such endorsement.Pay C, Pay C for my use, Pay C for the account of B are instances of restrictive endorsement. The endorsee under a restrictive endorsement acquires all the rights of the endoser except the right of negotiation. Conditional or qualified endorsement It is open to the endorser to annex some condition to his owner liability on the endorsement. An endorsement where the endorsee limits or negatives his liability by putting some condition in the instrument is called a conditional endorsement. A condition imposed by the endorser may be a condition precedent or a condition subsequent. An endorsement which says that the amount will become payable if the endorsee attains majority embodies a condition precedent. A conditional endorsement unlike the restrictive endorsement does not affect the negotiability of the instrument. It is also some times called qualified endorsement. An endorsement may be made conditional or qualified in any of the following forms:

37

(i) Sans recourse endorsement: An endorser may be express word exclude his own liability thereon to the endorser or any subsequent holder in case of dishonour of the instrument. Such an endorsement is called an endorsement sans recourse (without recourse). Thus Pay to A or order sans recourse, pay to A or order without recourse to me, are instances of this type of endorsement. Here if the instrument is dishonoured, the subsequent holder or the indorsee cannot look to the indorser for payment of the same. An agent signing a negotiable instrument may exclude his personal liability by using words to indicate that he is signing as agent only. The same rule applies to directors of a company signing instruments on behalf of a company. The intention to exclude personal liability must be clear. Where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate endorsers are liable to him. Example: A is the holder of a negotiable instrument.Excluding personal liability by an endorsement without recourse, he transfers the instrument to B, and B endorses it to C, who endorses it to A. A can recover the amount of the bill from B and C. (ii) Facultative endorsement: An endorsement where the endorser extends his liability or abandons some right under a negotiable instrument, is called a facultative endorsement. Pay A or order, Notice of dishonour waived is an example of facultative endorsement. (iii) Sans frais endorsement: Where the endorser does not want the endorsee or any subsequent holder, to incur any expense on his account on the instrument, the endorsement is sans frais. (iv) Liability dependent upon a contingency: Where an endorser makes his liability depend upon the happening of a contingent event, or makes the rights of the endorsee to receive the amount depend upon any contingent event, in such a case the liability of the endorser will arise only on the happening of that contingent event. Thus, an endorser may write Pay A or order on his marriage with B. In such a case, the endorser will not be liable until the marriage takes place and if the marriage becomes impossible, the liability of the endorser comes to an end. 38

Effects of endorsement The legal effect of negotiation by endorsement and delivery is: (i) to transfer property in the instrument from the endorser to the endorsee. (ii) to vest in the latter the right of further negotiation, and (iii) a right to sue on the instrument in his own name against all the other parties (Section 50). Cancellation of endorsement

When the holder of a negotiable instrument, without the consent of the endorser destroys or impairs the endorsers remedy against prior party, the endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity (Section 40).

Negotiation back Negotiation back is a process under which an endorsee comes again into possession of the instrument in his own right. Where a bill is re-endorsed to a previous endorser, he has no remedy against the intermediate parties to whom he was previously liable though he may further negotiate the bill.

1.10 INSTRUMENTS WITHOUT CONSIDERATION

A person cannot pass a better title than he himself possesses. A person who is a mere finder of a lost goods or a thief or one who obtains any article by fraud or for an unlawful consideration does not get any title to the thing so acquired. The true owner can recover it not only from him but from any person to whom he may have sold it. But there is a difference between the transfer of ordinary 39

goods and negotiation of negotiable instruments. The Negotiable Instruments Act provides protection to those persons who acquire the instruments in good faith and for valuable consideration. A holder in due course who has no means to discover the defect of title in an instrument of any previous holder when the instrument may have passed through several hands must be protected if he obtains the instrument for value and in good faith.Section 58 of the Act provides that no person in possession of an instrument with a defect of title can claim the amount of the instrumentunless he is a holder in due course. The moment an instrument comes into the hands of a holder in due course, not only does he get a title which is free from all defects, but having passed through his hands the instrument is cleaned of all defects. Lost instruments Where the holder of a bill or note loses it, the finder gets no title to it. The finder cannot lawfully transfer it. The man who lost it can recover it from the finder. But if the instrument is transferable by mere delivery and there is nothing on its face to show that it does not belong to the finder, a holder obtaining it from the finder in good faith and for valuable consideration and before maturity is entitled to the instrument and can recover payment from all the parties thereof. If the instrument is transferable by endorsement, the finder cannot negotiate it except by forging the endorsement. The holder of the instrument when it is lost must give a notice of loss to all the parties liable on it and also a public notice by advertisement. The holder of a lost bill remains owner in law and as such on maturity can demand payment from the acceptor, and if is dishonoured he must give notice of dishonour to prior parties. The owner of the lost bill has a right to obtain the duplicate from the drawer and on refusal he can sue the drawer for the same. Stolen instrument The position of thief of an instrument is exactly the same as that of a finder of lost instruments. A thief acquires no title to an instrument if he receives payment on it the owner can sue him for the recovery of the amount. But if an instrument payable to bearer is stolen and if transferred to a holder in due course, the owner must suffer. 40

Instruments obtained by fraud

It is of the essence of all contracts including those on negotiable instruments, that they must have been brought about by free consent of the parties compenent to contract. Any contract to which consent has been obtained by fraud is voidable at the option of the person whose consent was so obtained. A person who obtains an instrument by fraud gets a defective title. But if such an instrument passes into the hands of a holder in due course, the plea of fraud will not be available against him. If however, it could be shown that a person without negligence on his part was induced to sign an instrument it being represented to him to be a document of a different kind he would not be liable even to a holderin due course. Instrument obtained for an unlawful consideration The general rules as to the legality of object or consideration of a contract apply to contracts on negotiable instruments also. An instrument given for an illegal consideration is void and does not covey a valid title to the holder. He cannot enforce payment against any party thereto. Thus, a bill of exchange given in consideration of future illicit cohabitation is void. But if such an instrument passes into the hands of a holder in due course, he obtains a good and complete title to it.

Forged instrument Forgery confers no title and a holder acquires no title to a forged instrument. A forged instrument is treated as anullity. Forgery with the intention of obtaining title to an instrument would include: (1) fraudulently writing the name of an existing person, (2) signing the name of a fictitious person with the intention that it may pass that of a real person, or

41

(3) signing ones own name with the intention that the signature may pass as the signature of some other person of the same name. Example: A bill is payable to Ram Sunder or order. At maturity it wrongfully comes into the possession of another Ram Sunder who knows that he has no claim on the bill. He puts his own signature and the acceptor pays him. The bill is not discharged and the acceptor remains liable to Ram Sunder who is the owner of the bill. A forged instrument has no existence in the eyes of law. A title which never came into existence cannot be improved even if it passes into the hands of a holder in due course. A forges Bs signature on a promissory note and transfers the same to C who takes it in good faith for value. C gets no title of the note even though he is a holder in due course. Examples: (a) On a note for Rs.1000, A forges Bs signature to it as maker. C, a holder who takes it bonafide and for value acquires no title to the note. (b) On a bill for Rs.1000 As acceptance to the bill is forged. The bill comes into hands of B, a bonafide holder for value, B acquires no title to the bill.

Forged endorsement The case of a forged endorsement is slightly different. If an instrument is endorsed in full, it cannot be negotiated except by an endorsement signed by the person to whom or to whose order the instrument is payable, for the endorsee obtains title only through his endorsement. If an endorsement is forged, the endorsee acquires no title to the instrument even if he is a bonafide purchaser. On the other hand, if the instrument is a bearer instrument or has been endorsed in blank,and there is a forged endorsement the holder gets a good title because holder in such a case derives title by delivery and not by endorsement. Bankers are specially protected against forged endorsement under section 85 of the Act.

42

Examples: (a) A bill is endorsed, Pay X or order. X must endorse the bill and if his signature is forged, the bill is worthless. (b) A bill is payable to X or order. It is stolen from X and the thief forges Xs endorsement and endorses it to Y who takes it in good faith and for value. Y acquires no title to the bill. (c) A bill payable to A or order is endorsed in blank by A. It comes into the hands of B. B by simple delivery passes it to C. C forges Bs endorsement and transfers it to D. As D does not derive his title through the forged endorsement of B, but through the genuine endorsement of A, he obtains a good title to the instrument in spite of the intervening forged endorsement. Instrument without consideration Sections 43 to 45 of the Negotiable Instrument Act deal with the consequences of failure or absence of consideration in negotiable instruments. In the case of negotiable instruments consideration is presumed to exist between the parties unless the contrary is proved. As between immediate parties, if an instrument is made, drawn or endorsed without consideration, or for a consideration which subsequently fails, it is void. As between immediate parties, failure of consideration has the same effect as the absence of consideration. For instance if a promissory note is delivered by the maker to the payee as a gift, it cannot been forced against such maker.

Examples: (a) C the holder of a bill endorses it in blank to D receiving no value. D for value transfers it by delivery to E. E is a holder of value. (b) A is the holder of a bill for consideration. A endorses it to B,without consideration. The property in the bill passes to B. The bill is dishonoured at maturity. B cannot sue A on the bill. As between remote parties, the defence of absence or failure of consideration is not available at all. The holder in due course who has paid consideration can recover it from all prior parties immaterial of the fact whether any of them has received consideration or not.

43

Where there is a partial absence or failure of consideration, as between immediate parties, only that part can be recovered which was actually paid. However, a holder in due course is not affected by this rule. But even between immediate parties, where the part of the consideration which is absent or cannot be ascertained without collateral inquiry, the whole of the amount is recoverable. Examples: (a) A owes B Rs. 500. B draws a bill on A for Rs. 1000. A to accommodate B and at his request accepts it. If B sues A on the bill he can only recover Rs. 500. (b) A draws a bill on B for Rs. 500 payable to the order A. B accepts the bill but subsequently dishonours it by non-payment. A sues B on the bill. B proves that it was accepted for value as to Rs. 400 and as an accommodation to A (the plaintiff) for Rs. 100. A can only recover Rs.400. But if this bill gets into the hands of a holder in due course, he canrecover the full amount of Rs. 500.

1.11 HOLDER IN DUE COURSE

Section 9 of the Act defines holder in due course as any person who (i) for valuable consideration, (ii) becomes the possessor of a negotiable instrument payable to bearer or the indorsee or payee thereof,(iii) before the amount mentioned in the document becomes payable, and(iv) without having sufficient cause to believe that any defect existed in the title of the person from whom he derives his title. (English law does not regard payee as a holder in due course). The essential qualification of a holder in due course may, therefore,be summed up as follows: 1. He must be a holder for valuable consideration. Consideration must not be void or illegal, e.g. a debt due on a wagering agreement. It may, however, be inadequate. A donee, who acquired title to the instrument by way of gift, is not a holder in due course, since there is no consideration to the contract. He cannot maintain any action

44

against the debtor on the instrument. Similarly, money due on a promissory note executed in consideration of the balance of the security deposit for the lease of a house taken for immoral purposes cannot be recovered by a suit. 2. He must have become a holder (passessor) before the date of maturity of the negotiable instrument. Therefore, a person who takes a bill or promissory note on the day on which it becomes payable cannot claim rights of a holder in due course because he takes it after it becomes payable, as the bill or note can be discharged at any time on that day. 3. He must have become holder of the negotiable instrument in good faith. Good faith implies that he should not have accepted the negotiable instrument after knowing about any defect in the title to the instrument. But, notice of defect in the title received subsequent to the acquisition of the title will not affect the rights of a holder in due course.Besides good faith, the Indian Law also requires reasonable care on the part of the holder before he acquires title of the negotiable instrument. He should take the instrument without any negligence on his part. Reasonable care and due caution will be the proper test of his bona fides. It will not be enough to show that the holder acquired the instrument honestly, if in fact, he was negligent or careless. Under conditions of sufficient indications showing the existence of a defect in the title of the transferor, the holder will not become a holder in due course even though he might have taken the instrument without any suspicion or knowledge. Example: (i) A bill made out by pasting together pieces of a tom bill taken without enquiry will not make the holder, a holder in due course. It was sufficient to show the intention to cancel the

45

bill. A bill should not be taken without enquiry if suspicion has been aroused. (ii) A post-dated cheque is not irregular. It will not preclude a bonafide purchase instrument from claiming the rights of a holder in due course. It is to be noted that it is the notice of the defect in the title of his immediate transferor which deprives a person from claiming the right of a holder in due course. Notice of defect in the title of any prior party does not affect the title of the holder. 4. A holder in due course must take the negotiable instrument complete and regular on the face of it. Privileges of a holder in due course 1. Instrument purged of all defects: A holder in due course who gets the instrument in good faith in the course of its currency is not only himself protected against all defects of title of the person from whom he has received it, but also serves, as a channel to protect all subsequent holders. A holder in due course can recover the amount of the instrument from all previous parties although, as a matter of fact, no consideration was paid by some of the previous parties to instrument or there was a defect of title in the party from whom he took it. Once an instrument passes through the hands of a holder in due course, it is purged of all defects. It is like a current coin. Who-so-ever takes it can recover the amount from all parties previous to such holder (Sec. 53). It is to be noted that a holder in due course can purify a defective title but cannot create any title unless the instrument happens to be a bearer one. Examples: (i) A obtains Bs acceptance to a bill by fraud. A indorses it to C who takes it as a holder in due course. The instrument is purged of its defects and C gets a good title to it. In case C indorses it to some other person he will also get a good title to it except when he is also a party to the fraud played by A. 46

(ii) A bill is payable to A or order. It is stolen from A and the thief forges As signatures and indorses it to B who takes it as a holder in due course. B cannot recover the money. It is not a case of defective title but a case where title is absolutely absent. The thief does not get any title therefore, cannot transfer any title to it. (iii) A bill of exchange payable to bearer is stolen. The thief delivers it to B, a holder in due course. B can recover the money of the bill. 2. Rights not affected in case of an inchoate instrument: Right of a holder in due course to recover money is not at all affected even though the instrument was originally an inchoate stamped instrument and the transferor completed the instrument for a sum greater than what was intended by the maker. (Sec. 20) 3. All prior parties liable: All prior parties to the instrument (the maker or drawer, acceptor and intervening indorers) continue to remain liable to the holder in due course until the instrument is duty satisfied. The holder in due course can file a suit against the parties liable to pay, in his own name (Sec. 36) 4. Can enforce payment of a fictitious bill: Where both drawer and payee of a bill are fictitious persons, the acceptor is liable on the bill to a holder in due course. If the latter can show that the signature of the supposed drawer and the first indorser are in the same hand, for the bill being payable to the drawers order the fictitious drawer must indorse the bill before he can negotiate it. (Sec. 42). 5. No effect of conditional delivery: Where negotiable instrument is delivered conditionally or for a special purpose and is negotiated to a holder in due course,a valid delivery of it is conclusively presumed and he acquired good title to it. (Sec. 46). Example: A, the holder of a bill indorses it B or order for the express purpose that B may get it discounted. B does not do so and negotiates it to C, a holder in due course. D acquires a good title to the bill and can sue all the parties on it. 47

6. No effect of absence of consideration or presence of an unlawful consideration: The plea of absence of or unlawful consideration is not available against the holder in due course. The party responsible will have to make payment (Sec. 58). 7. Estoppel against denying original validity of instrument: The plea of original invalidity of the instrument cannot be put forth, against the holder in due course by the drawer of a bill of exchange or cheque or by an acceptor for the honour of the drawer. But where the instrument is void on the face of it e.g. promissory note made payable to bearer, even the holder in due course cannot recover the money. Similarly, a minor cannot be prevented from taking the defence of minority. Also, there is no liability if the signatures are forged. (Sec. 120). 8. Estoppel against denying capacity of the payee to indorsee: No maker of promissory note and no acceptor of a bill of exchange payable to order shall, in a suit therein by a holder in due course, be permitted to resist the claim of the holder in due course on the plea that the payee had not the capacity to indorse the instrument on the date of the note as he was a minor or insane or that he had no legal existence (Sec 121) 9. Estoppel against indorser to deny capacity of parties: An indorser of the bill by his endorsement guarantees that all previous endorsements are genuine and that all prior parties had capacity to enter into valid contracts. Therefore, he on a suit thereon by the subsequent holder, cannot deny the signature or capacity to contract of any prior

48

party to the instrument.

1.12 DISHONOUR OF A NEGOTIABLE INSTRUMENT

When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to all the previous parties in order to make them liable. A negotiable instrument can be dishonoured either by nonacceptance or by non-payment. A cheque and a promissory note can only be dishonoured by non-payment but a bill of exchange can be dishohoured either by non-acceptance or by non-payment. Dishonour by non-acceptance (Section 91) A bill of exchange can be dishonoured by non-acceptance in the following ways:

1. If a bill is presented to the drawee for acceptance and he does not accept it within 48 hours from the time of presentment for acceptance. When there are several drawees even if one of them makes a default in acceptance, the bill is deemed to be dishonoured unless these several drawees are partners. Ordinarily when there are a number of drawees all of them must accept the same, but when the drawees are partners acceptance by one of them means acceptance by all. 2. When the drawee is a fictitious person or if he cannot be traced after reasonable search. 3. When the drawee is incompetent to contract, the bill is treated as dishonoured. 4. When a bill is accepted with a qualified acceptance, the holder may treat the bill of exchange having been dishonoured. 5. When the drawee has either become insolvent or is dead.

49

6. When presentment for acceptance is excused and the bill is not accepted. Where a drawee in case of need is named in a bill or in any indorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee. Dishonour by non-payment (Section 92) A bill after being accepted has got to be presented for payment on the date of its maturity. If the acceptor fails to make payment when it is due, the bill is dishonoured by non-payment. In the case of a promissory note if the maker fails to make payment on the due date the note is dishonoured by non-payment. A cheque is dishonoured by non-payment as soon as a banker refuses to pay.

An instrument is also dishonoured by non-payment when presentment for payment is excused and the instrument when overdue remains unpaid (Sec 76). Effect of dishonour: When a negotiable instrument is dishonoured either by non acceptance or by non-payment, the other parties thereto can be charged with liability. For example if the acceptor of a bill dishonours the bill, the holder may bring an action against the drawer and the indorsers. There is a duty cast upon the holder towards those whom he wants to make liable to give notice of dishonour to them. Notice of dishonour: Notice of dishonour means the actual notification of the dishonour of the instrument by non-acceptance or by non-payment. When a negotiable instrument is refused acceptance or payment notice of such refusal must immediately be given to parties to whom the holder wishes to make liable. Failure to give notice of the dishonour by the holder would discharge all parties other than the maker or the acceptor (Sec. 93). Notice by whom: Where a negotiable instrument is dishonoured either by nonacceptance or by non-payment, the holder of the instrument or some party to it who is liable thereon must give a notice of dishonour to all the prior parties 50

whom he wants to make liable on the instrument (Section 93). The agent of any such party may also be given notice of dishonour. A notice given by a stranger is not valid. Each party receiving notice of dishonour must, in order to render any prior party liable give notice of dishonour to such party within a reasonable timeafter he has received it. (Sec. 95) When an instrument is deposited with an agent for presentment and is dishonoured, he may either himself give notice to the parties liable on the instrument or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder. The principal, too, in his turn has the same time for giving notice as if the agent is an independent holder. (Sec. 96) Notice to whom: Notice of dishonour must be given to all parties to whom the holder seeks to make liable. No notice need be given to a maker, acceptor or drawee, who are the principal debtors (Section 93). Notice of dishonour may be given to an endorser. Notice of dishonour may be given to a duly authorised agent of the person to whom it is required to be given. In case of the death of such a person, it may be given to his legal representative. Where he has been declared insolvent the notice may be given to him or to his official assignee (Section 94). Where a party entitled to a notice of dishonour is dead, and notice is given to him in ignorance of his death, it is sufficient (Section 97). Mode of notice: The notice of dishonour may be oral or written or partly oral and partly written. It may be sent by post. It may be in any form but it must inform the party to whom it is given either in express terms or by reasonable intendment that the instrument has been 51

dishonoured and in what way it has been dishonoured and that the person served with the notice will be held liable thereon. What is reasonable time?: It is not possible to lay down any hard and fast rule for determining what is reasonable time. In determining what is reasonable time, regard shall be had to the nature of the instrument, the usual course the dealings with respect to similar instrument, the distance between the parties and the nature of communication between them. In calculating reasonable time, public holidays shall be excluded (Section 105). Section 106 lays down two different rules for determining reasonable time in connection with the notice of disnonour (a) when the holder and the party to whom notice is due carry on business or live in different places, (b) when the parties live or carry on business in the same place. In the first case the notice of dishonour must be dispatched by the next post or on the day next after the day of dishonour. In the second case the notice of dishonour should reach its destination on the day next after dishonour. Place of notice: The place of business or (in case such party has no place of business) at the residence of the party for whom it is intended, is the place where the notice is to given. If the person who is to give the notice does not know the address of the person to whom the notice is to be given, he must make reasonable efforts to find the latters address. But if the party entitled to the notice cannot after due search be found, notice of dishonour is dispensed with. Duties of the holder upon dishonour (1) Notice of dishonour. When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment the holder must give notice of dishonour to all the parties to the instrument whom he seeks to make liable thereon. (Sec. 93) (2) Noting and protesting. When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument or upon a paper 52

attached thereto or partly upon each (Sec. 99). The holder may also within a reasonable time of the dishonour of the note or bill, get the instrument protested by notary public (Sec.100).

(3) Suit for money. After the formality of noting and protesting is gone through, the holder may bring a suit against the parties liable for the recovery of the amount due on the instrument. Instrument acquired after dishonour: The holder for value of a negotiable instrument as a rule, is not affected by the defect of title in his transferor. But this rule is subject to two important exceptions (i) when the holder acquires it after maturity and (ii) when he acquires it with notice of dishonour. The holder of a negotiable instrument who acquired it after dishonour, whether by non-acceptance or non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights thereon of his transfer. (Sec. 59). 1.13 NOTING AND PROTESTING When a negotiable instrument is dishonoured the holder may sue his prior parties i.e the drawer and the indorsers after he has given a notice of dishonour to them. The holder may need an authentic evidence of the fact that a negotiable instrument has been dishonoured. When a cheque is dishonoured generally the bank who refuses payment returns back the cheque giving reasons in writing for the dishonour of the cheque. Sections 99 and l00 provide convenient methods of authenticating the fact of dishonour of a bill of exchange and a promissory note by means of noting and protest. Noting As soon as a bill of exchange or a promissory note is dishonoured, the holder can after giving the parties due notice of dishonour, sue the parties liable thereon. Section 99 provides a mode of authenticating the fact of the bill having been dishonoured. Such mode is by noting the instrument. Noting is a minute recorded by a notary public on the dishonoured instrument or on a paper attached to such instrument. 53

When a bill is to be noted, the bill is taken to a notary public who represents it for acceptance or payment as the case may be and if the drawee or acceptor still refuses to accept or pay the bill, the bill is noted as stated above. Noting should specify in the instrument, (a) the fact of dishonour,(b) the date of dishonour, (c) the reason for such dishonour, if any (d) the notarys charges, (e) a reference to the notarys register and (f) the notarys initials. Noting should be made by the notary within a reasonable time after dishonour. Noting and protesting is not compulsory but foreign bills must be protested for dishonour when such protest is required by the law of the place where they are drawn. Cheques do not require noting and protesting. Noting by itself has no legal effect. Still it has some advantages. If noting is done within a reasonable time protest may be drawn later on. Noting without protest is sufficient to allow a bill to be accepted for honour. Protest Protest is a formal certificate of the notary public attesting the dishonour of the bill by non-acceptance or by non-payment. After noting, the next step for notary is to draw a certificate of protest, which is a formal declaration on the bill or a copy thereof. The chief advantage of protest is that the court on proof of the protest shall presume the fact of dishonour. Besides the protest for non-acceptance and for non-payment the holder may protest the bill for better security. When the acceptor of a bill becomes insolvent or suspends payment before the date of maturity, or when he absconds the holder may protest it in order to obtain better security for the amount due. For this purpose the holder may employ a notary public to make the demand on the acceptor and if refused, protest may be made. Notice of protest may be given to prior parties. When promissory notes and bills of exchange are required to be protested, notice of protest must be given instead of notice of dishonour. (Sec. 102) Inland bills may or may not be protested. But foreign bills must be protested for dishonour when such protest is required by the law of the place where they are drawn (Sec. 104).

54

Where a bill is required to be protested under the Act within a specified time, it is sufficient if it is noted for protest within such time. The formal protest may be given at anytime after the noting (Sec. 104A) Contents of protest Section 101 of the Act lays down the contents of a regular and perfect protest which are as follows: 1. The instrument itself or a literal transcript of the instrument; and of everything written or printed thereupon. 2. The name of the person for whom and against whom the instrument has been protested. 3. The fact of and reasons for dishonour i.e. a statement that payment or acceptance or better security, as the case may be, has been demanded of such person by the notary public from the person concerned and he refused to give it or did not answer or that he could not be found. 4. The time and place of demand and dishonour. 5. The signature of the notary public. 6. In the case of acceptance for honour or payment for honour the person by whom or for whom such acceptance or payment was offered and effected.

1.14 OF REASONABLE TIME

Reasonable time. 55

Reasonable time. In determining what is a reasonable time for presentment for acceptance or payment, for giving notice of dishonour and for noting, regard shall be had to the nature of the instrument and the usual course of dealing with respect to similar instruments ; and, in calculating such time, public holidays shall be excluded. Reasonable time of giving notice of dishonour: If the holder and -the party to whom notice of dishonour is given carry on business or live (as the case may be) in different places, such notice is given within a reasonable time if it is despatched by the next post or on the day next after the day of dishonour. If the said parties carry on business or live in the same place, such notice is given within a reasonable time if it is despatched in time to reach its destination on the day next after the day of dishonour. Reasonable time for transmitting such notice. Reasonable time for transmitting such notice. A party receiving notice of dishonour, who seeks to enforce his right against a prior party, transmits the notice within a reasonable time -if he transmits it within the same time after its receipt as he would have had to give notice if he had been the holder.

1.15 OF ACCEPTANCE AND PAYMENT FOR HONOUR AND REFERENCE IN CASE OF NEED

Acceptance for honour. When a bill of exchange has been noted or protested for nonacceptance or for better security, any person not being a party already liable thereon may, with the consent of the holder, by writing on the bill, accept the same for the honour of any party thereto.

56

How acceptance for honour must be made. A person desiring to accept for honour must, by writing on the bill under his hand, declare that he accepts under protest the protested bill for the honour of the drawer or of a particular indorser whom he names, or generally for honour to self. Acceptance not specifying for whose honour it is made.

Where the acceptance does not express for whose honour it is made, it shall be deemed to be made for the honour of the drawer.

Liability of acceptor for honour: An acceptor for honour binds himself to all parties subsequent to the party for whose honour he accepts to pay the amount of the bill if the drawee do not ; and such party and all prior parties are liable in their respective capacities to compensate the acceptor for honour for all loss or damage sustained by him in consequence of such acceptance. But an acceptor for honour is not liable to the holder of the bill unless it is presented, or (in case the address given by such acceptor on the bill is a place other than the place where the bill is made payable) forwarded for presentment, not later than the day next after the day of its maturity.

When acceptor for honour may be charged: An acceptor for honour cannot be charged unless the bill has at its maturity been presented to the drawee for payment, and has been dishonoured by him, and noted or protested for such dishonour.

Payment for honour: 57

When a bill of exchange has been noted or protested for nonpayment, any person may pay the same for the honour of any party liable to pay the same, provided that the person so paying 1[or his agent in that behalf] has previously declared before a notary public the party for whose honour he pays, and that such declaration has been recorded by such notary public. Right of payer for honour. Right of payer for honour. Any person so paying is entitled to all the rights, in respect of the bill, of the holder at the time of such payment, and may recover from the party for whose honour he pays all sums so paid, with interest thereon and with all expenses properly incurred in making such payment. Drawee in case of need: Where a drawee in case of need is named in a bill of exchange, or in any indorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee.

Acceptance and payment without protest: A drawee in case of need may accept and pay the bill of exchange without previous protest.

1.15 OF COMPENSATION

Rules as to compensation: The compensation payable in case of dishonour of a promissory note, bill of exchange or cheque, by any 58

party liable to the holder or any indorsee, shall be determined by the following rules:(a) the holder is entitled to the amount due upon the instrument, together with the expenses properly incurred in presenting, noting and protesting it ; (b) when the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places;

(c) an indorser who, being liable, has paid the amount due on the same is entitled to the amount so paid with interest at eighteen per centumper annum from the date of payment until tender or realization thereof, together with all expenses caused by the dishonour and payment;

(d) when the person charged and such indorser reside at different places, the indorser is entitled to receive such sum at the current rate of exchange between the two places; (e) the party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill.

59

1.16 SPECIAL RULES OF EVIDENCE

Presumptions as to negotiable instrumentsPresumptions as to negotiable instruments- Until the contrary is proved, the following presumptions shall be made: (a) of consideragion; that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration ; b)as to date; that every negotiable instrument bearing a date was made or drawn on such date ;

(c)as to time of acceptance; that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity ;

(d)as to time of transfer; that every transfer of a negotiable instrument was made before its maturity;

(e)as to order of indorsements; that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;

(f)as to stamp; that a lost promissory note, bill of 60

exchange or cheque was duly stamped ;

(g)that holder is a holder in due course; that the holder of a negotiable instrument is a holder in due course:provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an SP offence or fraud. or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burthen of proving that the holder is a holder in due course lies upon him. Presumption on proof of protest. .Presumption on proof of protest. In a suit upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of is dishonour, unless and until such fact is disproved.

Estoppel against denying original validity of instrument. .Estoppel against denying original validity of instrument. No maker of a promissory note, and no drawer of a bill of exchange or cheque, and no acceptor of a bill of exchange for the honour of the drawer shall, in a suit thereon by a holder in due course, be permitted to deny the validity of the instrument as originally made or drawn. Estoppel against denying capacity of payee to indorse. Estoppel against denying capacity of payee to indorse. No maker of a promissory note and no acceptor of a bill of exchange 1[payable to order] shall, 61

in a suit thereon by a holder in due course, be permitted to deny the payee's capacity, at the date of the note or bill, to indorse the same. Estoppel against denying signature or capacity of prior party. Estoppel against denying signature or capacity of prior party. No indorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity to contract of any prior party to the instrument.

1.17 OF CROSSED CHEQUES Cheque crossed generally. Cheque crossed generally. Where a cheque bears across its face an addition of the words "and company " or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words " not negotiable," that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. Cheque crossed specially. Cheque crossed specially. Where a cheque bears across its face an addition of the name of a banker, either with or without the words " not negotiable," that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. Crossing after issue. Crossing after issue. Where a cheque is uncrossed, the holder may cross it generally or specially. 62

Where a cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed generally or specially, the holder may add the words"' not negotiable".

Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker. his agent, for collection. Payment of cheque crossed generally. Payment of cheque crossed generally. Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Payment of cheque crossed specially. Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection.

Payment of cheque crossed specially more than once. Payment of cheque crossed specially more than once.Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.

Payment in due course of corssed cheque.

63

Payment in due course of corssed cheque.Where the banker on whom a crossed cheque is drawn- has paid the same in due course, the banker paying the cheque, and in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque bad been paid to and received by the true owner thereof. Payment of crossed cheque out of due course. Payment of crossed cheque out of due course.Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.

Cheque bearing "not negotiable". Cheque bearing "not negotiable". 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. Non-liability of banker receiving payment of cheque.

64

Non-liability of banker receiving payment of cheque. A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to, the true owner of the cheque by reason only of having received such payment. [Explanation.-A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding -that he credits his customer's account with the amount of the cheque before receiving payment thereof.] [131A.Application of Chapter to drafts. The provisions of this Chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque.]

1.18 OF BILLS IN SETS Set of bills. Set of bills. Bills of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All the parts together make a set ; but the whole set constitutes only one bill, and is extinguished when one of the parts, if a separate bill, would be extinguished.

65

Exception.-When a person accepts or indorses different parts of the bill in favour of different persons, he and the subsequent indorsers of each part are liable on such part as if it were a separate bill.

Holder of first acquired part entitled to all.

Holder of first acquired part entitled to all. As between holders in due course of different parts of the same set, he who first acquired title to his part is entitled to the other parts and the money represented by the bill.

1.19 OF INTERNATIONAL LAW

Law governing liability of maker, acceptor or indorser of foreign instrument. Law governing liability of maker, acceptor or indorser of foreign instrument. In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liabilities 66

of the acceptor and indorser by the law of the place where the instrument is made payable.

Illustration

A bill of exchange was drawn by A in California, where the rate of interest is 25 per cent., and accepted by B, payable in Washington, where the rate of interest is 6 per cent. The bill is endorsed in 3[India], and is dishonoured. An action on the bill is brought against B in 3[India]. He is liable to pay interest at the rate of 6 per cent. only ; but if A is charged as drawer, A is liable to pay interest at the rate of 25 per cent.

Law of place of payment governs dishonour.

Law of place of payment governs dishonour. Where a promissory note, bill of exchange or cheque is made payable in a different place from that in which it is made or indorsed, the law of the place where

67

it is made payable determines what constitutes dishonour and what notice of dishonour is sufficient. Illustration

A bill of exchange drawn and indorsed in 1[India], but accepted payable in France, is dishonoured. The indorsee causes it to be protested for such dishonour, and gives notice thereof in accordance with the law of France, though not in accordance with the rules herein contained in respect of bills which are not foreign. The notice is sufficient. Instrument made, etc., out of India, but in accordance with the law ofIndia.

If a negotiable instrument is made, drawn accepted or endorsed 1[outside India], but in accordance with the 1[law of India] the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or endorsement made thereon 1[within India] 1. The words out of British India were successively amended by the A.O. 1948, the A.O. 1950 and Act 3 of 1951, sec. 3 and Sch to read abobe.

Instrument made, etc., out of India, but in accordance with the law of India. If a negotiable instrument is made, drawn, accepted or indorsed outside India, but in accordance with the law of India, the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or indorsement made thereon 4[within India]. 68

Presumption as to foreign law. Presumption as to foreign law. The law of any foreign country regarding promissory notes, bills of exchange and cheques shall be presumed to be the same as that of India, unless and until the contrary is proved.

1.20 OF NOTARIES PUBLICOF PENALTIES IN CASE OF DISHONOUR OF CERTAIN CHEQUES FOR INSUFFICIENCYOF FUNDS IN THE ACCOUNTS Dishonour of cheque for insufficiency, etc., of funds in the account. Dishonour of cheque for insufficiency, etc., of funds in the account. Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid. either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice. to any other provision of this Act, be punished 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 with both: Provided that nothing contained in this section shall apply unless69

(a)the cheque has been, presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b)the payee or the holder in due course. of the cheque as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within fifteen days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c)the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Explanation.-For the purposes of this section, "debt or other liability" means a legally enforceable debt or other liability.

Presumption in favour of holder.

70

Presumption in favour of holder. It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability.

Defence which may not be allowed in any prosecution under section 138. Defence which may not be allowed in any prosecution under section 138. It shall not be a defence in a prosecution for an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. Offences by companies:

(1) If the person committing an offence under section 138 is a 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 the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence Was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence. 71

(2)Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.-For the purposes of this section,-

(a)"company" means any body corporate and includes a firm or other association of individuals; and

(b) "director", in relation to a firm, means a partner in the firm.

Cognizance of offences: Cognizance of offences. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),(a)no court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque; (b)such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to section 138; 72

(c)no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.

1.21 SUMMARY
A negotiable instrument is a piece of paper which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by endorsement and delivery. The characteristics of a negotiable instrument are easy negotiability, transferee gets good title, transferee gets a right to sue in his own name and certain presumptions which apply to all negotiable instruments. There are two types for negotiable instruments (a) Recognised by statue: Promissory notes, Bill of exchange and cheques and (b) Recognised by usage: Hundis, Bill of lading, Share warrant, Dividend warrant, Railway receipts,Delivery orders etc. The parties to bill of exchange are drawer, drawee, acceptor,payee, indorser, indorsee, holder, drawee in case of need and acceptor for honour. The parties to a promissory note are maker, payee, holder, indorser and indorsee while parties to cheque are drawer, drawee, payee, holder, indorser and indorsee. Negotiation of an instrument is a process by which the ownership of the instrument is transferred by one person to another. There are two methods of negotiation: by mere delivery and by endorsement. In its literal sense, the term indorsement means writing on an instrument butin its technical sense, under the Negotiable Instrument Act, it means the writing of a persons name on the face or back of a negotiable instrument or on a slip of paper annexed thereto, for the purpose of negotiation. A bill may be dishonoured by nonacceptance (since only bills require acceptance) or by non-payment, while a promissory note and cheque may be dishonoured by non-payment only. Noting means recording of the fact of dishonour by a notary public on the bill or paper or both partly. Protest is a formal notarial certificate attesting the dishonour of the bill. The term discharge in relation to negotiable instrument is used in two senses, viz., (a) discharge of one or more parties from liability thereon, and (b) discharge of the instrument.

73

THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) BILL, 2002

A BILL further to amend the Negotiable Instruments Act, 1881, the Bankers' Books Evidence Act, 1891 and the Information Technology Act, 2000. BE it enacted by Parliament in the Fifty-third Year of the Republic of India as follows:

74

CHAPTER I PRELIMINARY 1. Short title and commencement.-(1) This Act may be called the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002. (2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act.

CHAPTER II AMENDMENTS TO THE NEGOTIABLE INSTRUMENTS ACT, 1881 2. Substitution of new section for section 6.-For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881) (hereinafter referred to as the principal Act), the following section shall be substituted, namely: 6. Cheque.-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 the electronic form. Explanation I.For the purposes of this section, the expression (a) a cheque in the 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 the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system; (b) 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, immediately on generation 75

of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Explanation II.For the purposes of this section, the expression clearing house means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.. 3. Amendment of section 64.-Section 64 of the principal Act shall be renumbered as sub-section (1) thereof, and after sub-section (1) as so renumbered, the following sub-section shall be inserted, namely: (2) Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification: Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly.. 4. Amendment of section 81.-Section 81 of the principal Act shall be renumbered as sub-section (1) thereof, and after sub-section (1) as so renumbered, the following sub-sections shall be inserted, namely: (2) Where the cheque is an electronic image of a truncated cheque, even after the payment the banker who received the payment shall be entitled to retain the truncated cheque. (3) A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument, shall be prima facie proof of such payment.. 5. Amendment of section 89.-Section 89 of the principal Act shall be renumbered as sub-section (1) thereof, and after sub-section (1) as so renumbered, the following sub-sections shall be inserted, namely: (2) Where the cheque is an electronic image of a truncated cheque,

any difference in apparent tenor of such electronic image and the truncated 76

cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image. (3) Any bank or a clearing house which receives a transmitted

electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.. 6. Amendment Act, Explanation shall after Explanation I inserted, namely: Explanation II.It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.. 7. Amendment of section 138.-In section 138 of the principal Act, (a) for the words a term which may be extended to one year, the words a term which may be extended to two years shall be substituted; (b) in the proviso, in clause (b), for the words within fifteen days, the words within thirty days shall be substituted. 8. Amendment of section 141.-In section 141 of the principal Act, in subsection (1), after the proviso, the following proviso shall be inserted, namely: Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.. 9. Amendment of section 142.-In section 142 of the principal Act, after clause (b), the following proviso shall be inserted, namely: as of section be so 131.-In section the 131 of the principal and be

re-numbered re-numbered,

as Explanation I

thereof,

following Explanation shall

77

Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.. 10. Insertion of new sections after section 142.-After section 142 of the principal Act, the following sections shall be inserted, namely: 143. Power of Court to try cases summarily.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials: Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees: Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code. (2) The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing. (3) Every trial under this section shall be conducted as expeditiously as possible and an endeavour shall be made to conclude the trial within six months from the date of filing of the complaint. 144. Mode of service of summons.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the 78

purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session. (2) Where an acknowledgement purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorised by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served. 145. Evidence on affidavit.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be read in evidence in any enquiry, trial or other proceeding under the said Code. (2) The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein. 146. Banks slip prima facie evidence of certain facts.-The Court shall, in respect of every proceeding under this Chapter, on production of banks slip or memo having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved. 147. Offences to be compoundable.-Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), every offence punishable under this Act shall be compoundable. CHAPTER III AMENDMENT TO THE BANKERS BOOKS EVIDENCE ACT, 1891 11. Amendment of section 2.-In section 2 of the Bankers Books Evidence Act, 1891 (18 of 1891),

79

(a) for clause (3), the following clause shall be substituted, namely: (3) bankers books include ledgers, day-books, cash-books, account-books and all other records used in the ordinary business of the bank, whether these records are kept in written form or stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism, either onsite or at any offsite location including a back-up or disaster recovery site of both. (b) in clause (8), after sub-clause (b), the following sub-clause shall be inserted, namely: (c) a printout of any entry in the books of a bank stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism obtained by a mechanical or other process which in itself ensures the accuracy of such printout as a copy of such entry and such printout contains the certificate in accordance with the provisions of section 2A.. CHAPTER IV AMENDMENTS TO THE INFORMATION TECHNOLOGY ACT, 2000 12. Amendment of section 1.-In the Information Technology Act, 2000 (21 of 2000) (hereinafter referred to as the principal Act), in section 1, in subsection (4), for clause (a), the following clause shall be substituted, namely: (a) a negotiable instrument (other than a cheque) as defined in section 13 of the Negotiable Instruments Act, 1881 (26 of 1881);. 13. Insertion of a new section 81A.-After section 81 of the principal Act, the following section shall be inserted, namely: 81A. Application of the Act to electronic cheque and truncated cheque.(1) The provisions of this Act, for the time being in force, shall apply to, or in relation to, electronic cheques and the truncated cheques subject to such modifications and amendments as may be necessary for carrying out the purposes of the Negotiable Instruments Act, 1881 (26 of 1881) by the Central Government, in consultation with the Reserve Bank of India, by notification in the Official Gazette. 80

(2) Every notification made by the Central Government under subsection (1) shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the notification or both Houses agree that the notification should not be made, the notification shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that notification. Explanation.For the purposes of this Act, the expressions electronic cheque and truncated cheque shall have the same meaning as assigned to them in section 6 of the Negotiable Instruments Act, 1881 (26 of 1881)..

81

STATEMENT OF OBJECTS AND REASONS The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourge the culture of use of cheques and enhancing the credibility of the instrument. The existing provisions in the Negotiable Instruments Act,1881, namely, sections 138 to 142 in Chapter XVII have been found deficient in dealing with dishonour of cheques. Not only the punishment provided in the Act has proved to be inadequate, the procedure prescribed for the Courts to deal with such matters has been found to be cumbersome. The Courts are unable to dispose of such cases expeditiously in a time bound manner in view of the procedure contained in the Act. 2. A large number of cases are reported to be pending under sections 138 to 142 of the Negotiable Instruments Act in various courts in the country. Keeping in view the large number of complaints under the said Act pending in various courts, a Working Group was constituted to reveiw section 138 of the Negotiable Instruments Act, 1881 and make recommendations as to what changes were needed to effectively achieve the purpose of that section. 3. The recommendations of the Working Group along with other

representations from various institutions and organisations were examined by the Government in consultation with the Reserve Bank of India and other legal experts, and a Bill, namely, the Negotiable Instruments (Amendment) Bill, 2001 was introduced in the Lok Sabha on 24th July, 2001. The Bill was referred to Standing Committee on Finance which made certain recommendations in its report submitted to Lok Sabha in November, 2001. 4. Keeping in veiw the recommendations of the Standing Committee on Finance and other representations, it has been decided to bring out, inter alia, the following amendments in the Negotiable Instruments Act,1881, namely: (i) to increase the punishment as prescribed under the Act from one year to two years; (ii) to increase the period for issue of notice by the payee to the drawer from 15 days to 30 days; 82

(iii) to provide discretion to the Court to waive the period of one month, which has been prescribed for taking cognizance of the case under the Act; (iv) to prescribe procedure for dispensing with preliminary evidence of the complainant; (v) to prescribe procedure for servicing of summons to the accused or witness by the Court through speed post or empanelled private couriers; (vi) to provide for summary trial of the cases under the Act with a view to speeding up disposal of cases; (vii) to make the offences under the Act compoundable; (viii) to exempt those directors from prosecution under section 141 of the Act who are nominated as directors of a company by virtue of their holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government, or the State Government, as the case may be; (ix) to provide that the Magistrate trying an offence shall have power to pass sentence of imprisonment for a term exceeding one year and amount of fine exceeding five thousand rupees; (x) to make the Information Technology Act, 2000 applicable to the Negotiable Instruments Act,1881 in relation to electronic cheques and truncated cheques subject to such modifications and amendments as the Central Government, in consultation with the Reserve Bank of India, considers necessary for carrying out the purposes of the Act, by notification in the Official Gazette; and (xi) to amend definitions of "bankers' books" and "certified copy" given in the Bankers' Books Evidence Act,1891. 5. The proposed amendments in the Act are aimed at early disposal of cases relating to dishonour of cheques, enhancing punishment for offenders, introducing electronic image of a truncated cheque and a cheque in the electronic form as well as exempting an official nominee director from prosecution under the Negotiable Instruments Act,1881. 6. The Bill seeks to achieve the above objects.

83

Legal proceeding under section 138 of the Negotiable Instruments Act, 1881
Introduction: In this age of globalization and commercialization, the transfer and settlement of payment has been made more flexible to facilitate and boost up the business dealings and transactions. To this context cheque is considered to be the most recognized and convenient instrument which can be issued more quickly to settle payments and obligations in a contract more. The cheque is currently the most visible and significant mode of payment all over the world. Cheques are the creation of ancient business people or western business world. Advent of cheques in the market have given a new dimension to the commercial and corporate world, its time when people preferred to carry and execute a small piece of paper called cheque than carrying the currency worth the value of cheque. Dealings in cheque are vital and important not only fro banking proposes but also for the commerce and industry and the economy of the country. But pursuant to the rise in dealings with cheques also rises the practice the practice of giving cheques without any intention. Prior to 1988 there was no fruitful legal provision to restrain people from issuing cheque without having adequate amount in their account or any stringent provision to punish them in the vent of such cheque not being honored by their bankers and returned unpaid. In case of dishonor of cheque, there is definitely a a civil liability accrued. However in practice the procedure of seeking civil justice becomes a long drawn process and recovery by way of civil suit takes an inordinately long time. To ensure prompt remedy against defaulters and to ensure credibility to the holders of the negotiable instruments a criminal remedy of penalty was inserted in Negotiable Instruments Act. Section 138 is incorporated In Negotiable Instruments Act, 1881 in order to encourage the culture of use of cheques and enhancing the credibility of the instrument. Many issues under this section such as what happens in case of default, who will be liable to the holder of the cheque, what are the procedures involved to make the case adept in the eyes of the court. The NI Act contains sufficient safe guards to protect the drawer of cheques by giving him an opportunity to make good the payment of dishonored cheque when a demand is made by the payee.

84

History of the Act and objective of amendment: The Negotiable Instrument Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amednment) Act, 1988 to insert a new chapter XVII with sections 138-142. These new sections came into force in 1989.The Act was further amended in 2002 by inserting sections 143 to 147 w.e.f. 06.02.2003 to deal with certain deficiencies noticed in the Act. Salient features of amendment are acceptance of Bankers memo of dishonor as prima facie evidence, evidence of witness or accused on affidavit, serving of summons by post/courier for speedy trial/ prosecution, increase of period for issuance of notice by payee and enhancement of punishment. Nature of liability under section 138: The object of bringing in this section as mentioned above is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instrument. The ingredients which are to be satisfied for making out a case under S.138 of the Act are: The cheque is drawn on a bank for the discharge of any legally enforceable debt or other liability. This means that the cheque must have been drawn for payment of money to a person other than the drawer for the full or partial discharge [8] of any legally enforceable debt or liability. Thus what we see here is that if a cheque was given merely as a security, then a suit cannot be filed upon that and S.138 will not be attracted. Also to bring it under the ambit of this section, a cheque should have presumably been issued and not merely drawn for payment in discharge of a debt. The cheque so dishonored must have been presented to the drawee/ bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.[9] The cheque is returned by the bank unpaid. The cheque is returned unpaid because the amount available in the drawers account is insufficient for paying the cheque. The payee has given a notice to the drawer claiming the amount within 15 days of the receipt of the information from the bank.[10]

85

The drawer has failed to pay within 15 days from the date of the receipt of notice. The offence under this section is not complete till a statutory opportunity is offered to the drawer of the cheque for making the default good within 15 days of the receipt of notice to that effect. It is only the failure of the drawer to avail of this opportunity and meet the demand for the amount of the cheque that becomes the cause of action under the S.138. This position was laid down inMahalakshmi Enterprises v. Sri Vishnu Trading Co,[11] and has been deemed to be one of the essential ingredients of this section. The payee has a limitation period of 30 days, within which he can file a complaint.

Procedure and Practice: The offence under S.138 is a non-cognizable offence by virtue of S.142 of the Act on account of the non-obstante clause as comprised in section 142 of the Act, the magistrate must proceed immediately on complaint. For a complaint however, first a statutory notice must be sent to the drawer and if the drawer does not reply accordingly within 15 days, it opens itself for prosecution. Notice: A notice is one of the essential characteristic of S.138. The period for cause of action is to be counted from the date of receipt of notice by the accused. Notice has to be sent to the drawer within 30 days of the receipt of information from the bank about the dishonor.[44] As regards liability of dishonor of cheques it is essential to prima facie show that after 15 days of receipt of notice, the accused failed to pay the amount. In the case of Padmini Polymers Ltd v. Unit Trust of India,[45] it has been held that a notice is must and mandatory. Unless and until the intention is clear on the part of the part of the person giving notice that the payment by the drawer of the cheque should be made within 15 days of receipt thereof, any communication between the parties insisting for making the payment cannot be termed as notice under S.138 of the Act. Otherwise the 86

purpose of presenting the cheque time and again during the period of validity would have no meaning. So far as the question of giving notice is concerned, it is stated that every person who becomes liable upon an action for dishonor of the instrument and only by such dishonor either the holder thereof or some party thereto who remains liable thereon may give notice to such parties as entitled to immediate notice. But the holder may give notice to such parties as he desires to charge; but he cannot by giving notice make a person liable who is not otherwise liable under law, e.g., drawee in the case of dishonor of cheques.[46] Serving the notice: An important question that arises here is that when is a notice deemed to be served and upon who is the burden of proving service? The problem that arises is that the section does not only say delivery of notice, but receipt of the notice, such wordings in the section can be put to numerous interpretations. The question is if receipt of notice, postulates actually delivery, then the drawer can easily preempt action against him by deliberately staying away from his premises and the likes. It would be inequitable that such a person be let off the hook, while another drawer who stays on and accepts the notice would subject himself to prosecution. In the case of V.Raja Kumari v. P.Subbarama Naidu and Anr[47] the question that came up was what is meant by a proper notice and if there is no proper would the complaint be quashed. In Clause (c) of the proviso the drawer of the cheque is given fifteen days from the date of receipt of said notice for making payment. This affords clear indication that giving notice in the context is not the same as receipt of notice. Giving is the process of which receipt is the accomplishment. The payee has to perform the former process by sending the notice to the drawer in his correct address, if receipt or even tender of notice is indispensable for giving the notice in the context envisaged in Clause (b) an evader would successfully keep the postal article at bay at least till the period of fifteen days expires. Law shall not help the wrong doer to take advantage of his tactics. Hence the realistic interpretation for the expression giving notice in the present context is that, if the payee has dispatched notice in the correct address of drawer reasonably ahead of the expiry of fifteen days, it can be regarded that

87

he made the demand by giving notice within the statutory period. Any other interpretation is likely to frustrate the purpose for providing such a notice. Thus from here we see that there can be deemed notice even where actual notice has not been given. However this is a rebuttable presumption and its for the complainant to prove that the notice was served and that the person either refused to accept the notice or was unavailable. Though this is the popular position yet, many courts differ in opinion and it has been held that where the delivery is done by post, then reading S.138 with S.27 of the General Clauses Act Ingredients: Though no form of notice is prescribed, the requirement is that the notice shall be given in writing within fifteen days (now thirty with the amendment). Secondly when a notice is served, it must demand the said amount i.e. the cheque amount in it. If no such demand is made the notice falls short of legal requirement.[48] However if apart from the said amount other amounts by way of interest, costs, etc is mentioned, such a notice would be a valid notice under the Section. The legislative intent of the Section is quite clear, the drawer of the cheque will be liable for conviction if the demand is not met within 15days of the receipt. Thus if the cheque amount is paid within the statutory period or before a complaint is filed the legal liability under S.138 will cease and for recovery of additional costs, a civil suit will lie. Also the stating of the cheque number, though seems essential so that the drawer should know of which cheque the notice relates to, yet it has been held that S.138 does not lay down any such condition and if the cheque number is absent or wrong, depending on the facts and circumstances, the notice will deemed good or bad in law.[49] PENALTIES AND LIABILITIES FOR DISHONOUR:

Dishonoring of a cheque: In order to begin a discussion on the issue of dishonor under the Act, it is important to first consider the meaning of the term dishonor and what does it constitute. This finds mention in S.91 and S.92 of the Act. 88

Dishonor of negotiable instruments may be of two kinds: Dishonor by non-acceptance. Dishonor by non-payment is said to be dishonoured.[13]

S.91 [14] of the Act speaks of dishonor by non-acceptance. What we see from this definition is a condition of presentment of the negotiable instrument, however presentment for acceptance is required only in the case of a bill of exchange. Usually acceptance and payment go together and this usually happens in case an instrument is payable after sight, thus often it is difficult to distinguish the two because dishonour by non-payment is usually dishonor by non-acceptance,[15] and thus it is only this bill of exchange which can be dishonored by non-acceptance and not a cheque as in the case of a cheque no acceptance is required to be taken to the banker and cheques are mainly instruments payable at sight .[16] The second kind of dishonor is that of dishonour by non-payment. A negotiable instrument is said to be dishonored by non-payment when the drawee of a cheque makes default in payment upon being duly required to pay the same.[17] A drawee can dishonor a cheque Thus it is well established that cheques are always dishonored only for the reason of non-payment and not non-acceptance. Apart from the broad heads mentioned above, cheques can be dishonored by the banker for several reasons. (i) payment countermanded, (ii) insufficiency of funds, (iii) non-applicability of funds, (iv) improper presentation, (v) notice of death of account holder, (vi) courts order prohibiting payment, (vii) post-dated cheques, (viii) stale cheques, (ix) lunacy, (x) insolvency, etc. the researcher will proceed to deal with only few of these instances. Payment countermanded: When the drawer of the cheques issues instructions to the bank not to make any payment of a particular cheque issued by him, the bank then stands revoked from making payment on that cheque, this is known as countermand of cheques by the drawer.[18] It must be noted here that any payment by the bank after such notice will not be considered as good payment. When a drawer wishes to 89

stop payment he must give notice to the Bank, though it is usually the drawer who gives such notice, however a payee can give a notice to the banker that the cheque is stolen or lost. In such a case the banker must inform the drawer, so that the latter can give necessary instructions.[19] Insufficiency of funds: When there are no funds to meet the cheque or the account of the drawer does not hold sufficient funds to meet the whole credit amount of the cheque, the banker is then justified in refusing the payment of such a cheque. However where the account has sufficient funds, the banker is under an obligation to its customer of honoring the cheque presented to it. A cheque when dishonored for the purpose of insufficiency of funds, the drawer of such cheque is liable to penal consequences as under S. 138 of the Act. However there maybe an agreement to the contrary whereby the banker has undertaken to meet the customers cheques even though there may not be sufficient funds in his account, then in such a case the banker is bound to honor the cheque failing which the banker would be liable by way of breach of contract for an overdraft facility[20] and the necessary legal consequences will ensue. One issue that arises here and has been under constant debate, is that whether a cheque returned by the banker endorsed with the words refer to drawer would amount to a dishonor under S.138. after a number of decisions on the point, there has been a sort consensus on the point and courts have often said that refer to drawer meant nothing but that the drawer lacked sufficient funds in his account and therefore S.138 would be attracted in certain circumstances. Non-applicability of funds: Under S.31 of the Act it is the bankers duty to honour the cheque when funds which are lying in the account of the drawer are applicable for the purpose. Thus when the funds in the account are lying for other purposes, the will necessarily dishonour the cheque presented before it for payment. An example of such a situation is when the banker may have a lien over the funds lying in the account of the drawer under S.171 of the Indian Contract Act. Another situation might be where the funds in the account of the drawer is meant for a trust and a cheque is drawn in breach of a trust.[21] 90

Effects of dishonor of cheque: Firstly, taking of a legal action. The payee/holder can take action against the drawer of such a bill may take action on the exact time of dishonoring of the bill. Thus the holder need not wait for the bill to mature and then to take action for dishonoring the same.[22] Secondly, when a cheque is said to be dishonored it loses its basic characteristic of negotiability with immediate effect. Thirdly, on the dishonoring of a cheque, nothing prevents the holder thereof to present it again particularly on being asked by the drawer of the cheque. Lastly, under S.138, mere dishonoring of cheques does not give rise to a cause of action in favour of the complainant but it accrues only after the issue of demand notice and failure of the drawer to make the payment.[23] The payee or holder of a cheque has the right to present the cheque for payment for any number of times and he may have it repeatedly dishonored, but he can prosecute the drawer only once.[24] Burden of proof: Under this law all presumptions are made against the drawer of such cheques and thus the onus of proof is left on the accused rather than the prosecutor. Conclusion Though insertion of the penal provisions have helped to curtail the issue of cheque arising out of its dishonor either honestly or with dishonest intention and the trading community now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonored cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine, the only option left with the complainant is to file civil suit. The provisions of the Act do not permit any other alternative method of realization of the amount due to the complainant on the cheque being dishonored for the reasons of insufficient fund in the drawers account. The proper course to be adopted by the complainant in such a situation should be by filing a suit before the competent civil court, for realization/ recovery of the amount due to him for the reason of dishonored cheque which the complainant is at liberty to avail of if so advised in accordance with law. Thus what we see is that the section is not 91

full proof, however there is no denying that this provision has done away with the rigorous and time consuming methods of criminal law. In support of this we can see that the section also provides for summary proceedings, making the issue penalty a lot simpler, because if a cheque gets dishonored today and proceedings go on as usual, then the person may only get relief after say three or four years, this defeats the purpose of a cheque which is meant for immediate acceptance and distribution of cheque amount.

Procedure For filing Complaint Under Section 138 Negotiable Instrument Act

a)Under provisions of negotiable instruments act.sec.138 a legal notice on behalf of complainant is issued to the defaulter whose cheque is dishonored. It should be issued within 15 days of dishonor of cheque by RPAD. All facts including the nature of transaction, amount of loan and or any other legally enforceable debt against which the said cheque was issued and the date of deposit in bank and date of dishonor of cheque should be mentioned in the notice.

b) The person who has issued cheque is directed to make the payment of amount of dishonored cheque within 15 days. In case the said payment is made within 15 days of service of notice then the matter ends.

c) But in case the said payment is not made within 15 days then the complainant has to file a criminal case in the court within 30 days from the expiry of notice period of 15 days.

d) The court will hear arguments of complainant/ advocate for complainant and issue process under section 138 of N.I. Act. 92

e) The summons are sent and served through police station where accused is residing.

f) Kindly note that in N.I. Act. Sec.138 cases, police is limited to only service of summons and in case accused remains absent on court date after service of summons then only warrant is sent to police station to produce accused in court.

g) But it is observed in several cases that accused persons are harassed by concerned persons who are directed to serve notice/warrant.

h) Hence it is advisable that accused should not be afraid of this court case and regularly attend court dates so that warrant will not be issued and further unnecessary harassment will be prevented.

i) Kindly note that offence under section 138 of N.I. Act is a bailable offence as the punishment provided for said offence is two years.

j) Accused has to submit surety with all surety documents including ownership documents of house or land owned by surety, his address proof including ration card, election identity card, photo and address proof of surety and accused. On receiving summons from the court the accused and surety should remain present in court with all abovementioned documents and court will accept the surety and on signing bonds by accused and surety, the bail will be granted and accused will be released by court.

93

k) Then the complainant will file the affidavit for his evidence with all original documents in support of his complaint. This is called exam in chief of complainant. Then accused/his advocate will cross examine the complainant.

l) Complainant can submit additional witnesses in support of complaint.

m) Then once witnesses of Complainant are over then statement of accused is recorded under sec.313 of Crpc .Accused will be asked to give reply to the questions and allegations against him.

n) Then witnesses of accused to prove his innocence will be produced and the evidence will be recorded by the court.

o) Last stage is of arguments of advocate of complainant and argument of advocate of accused

p) Court will pass the Judgment. In case accused is acquitted then matter ends. But in case accused is convicted then immediately accused should submit bail application and give surety and pray for time to appeal to sessions court. Court will direct him to deposit fine as per judgment in the court immediately then he will be released. He should appeal to sessions court within one month from the date of judgment of lower court.

q) Criminal appeal with application for suspension of sentence and for bail will be given hearing by the dist and sessions court and on furnishing surety as per directions of court including deposit of some amount towards compensation ordered as per judgment the accused will be released on bail.

94

r). Kindly note that the dispute may go on from district and sessions court to high court and then to supreme court.

s). Kindly note that there is amendment in the negotiable instruments act. The offence is made compoundable. Hence in case the matter is settled between the parties , then on an application in the court , the court may allow to compound the case and close the case.

t) Kindly note that these are general guidelines for knowledge and reference of all concerned who are harassed by the complainants by forcing the borrowers to issue blank signed cheques in advance at the time of sanction of loan.

u) If a complainant withdraws the case under sec.138 of the NI Act, court fee will be refunded as:

In India, the Negotiable Instruments Act regulates commercial transactions which take place through cheques, promissory notes and bills of exchange.

The Maharashtra government announced in a gazette notification in May 2011 that a claim for refund of court fees can be made after the withdrawal of the complaints for the cases, which are filed under section 138 of the Negotiable Instruments Act, 1881.

According to the Maharashtra government resolution (GR), the state government, in exercise of its powers conferred by section 43(2) of the Bombay Court Fees Act, 1959 will provide part of the court fees paid by the complainant under article 18 of schedule I, appended to the Act.

Such refund will be paid to the complainant under two broad circumstances and conditions.

95

First, under section 138 of the Negotiable Instruments Act, 1881, a refund of 50% of the total court fees will be made when the complainant withdraws a complaint, or when the offence was compounded, before framing of particulars/charges, provided the claim is made within one year from the date of withdrawal of the complaint.

Similarly, 25% of the court fee will be refunded provided the complaint is withdrawn, or the offence is compounded, after farming of particulars/charges, or any subsequent stages of the complaint. Here again, a claim has to be made within a year.

CHEQUES BOUNCING

Cheque is a negotiable instrument. Normally, cheques are issued either for the reason of statutory requirement or for the reason of securing proof of payment. Crossed and account payee cheques are not negotiable by any person other than the payee. It has to be deposited into his bank account. In legal parlance, author of the cheque is called drawer, the person in whose favour it is drawn is called payee and the bank who is directed to pay the amount is called drawee. It is always safe to issue crossed Account Payee Only cheques in order to avoid its misuse. Blank cheques are not safe. It is better to date the cheque invariably. A cheque is valid for payment only for six months from the date mentioned in the cheque. After the period of six months, such a cheque is called stale cheque. BOUNCING A cheque becomes due for payment on the date mentioned on it. Before issuing a cheque author of the cheque should ensure that he has sufficient funds in his account. Lest, it would bounce with remarks insufficient funds. Bouncing in common parlance is referred to dishonour of cheques. Bouncing of a ball is a fun but bouncing of a cheque is a criminal offence. The Negotiable Instruments Act, 1881 is applicable for the cases of dishonour of

96

cheque. This Act has been amended many times since 1881 and I am going to discuss the provisions of this Act as it stands today. WHAT HAPPENS WHEN A CHEQUE IS DISHONOURED? Immediately upon dishonour the drawee bank issues a Cheque Return Memo to the banker of the payee citing the reason for non-payment. In turn the payees banker shall handover the dishonoured cheque and the memo to the payee. WHAT IS TO BE DONE THEN? The payee has an option open to him either to re-present the cheque if and when he thinks the cheque could be honoured but within six months from the date of the cheque or proceed legally to prosecute the drawer. The payee may prosecute the drawer for dishonour of cheque only if the amount mentioned in the cheque is towards discharge of a debt or any other legal liability of the drawee towards payee. Mere issuance of a cheque say for the purposes of gift, or towards lending a loan or for unlawful purposes would not amount to legal liability and the drawer cannot be prosecuted in such cases. TO PROCEED LEGALLY If he decides to proceed legally, then the drawer should be given an opportunity of making good the cheque amount immediately. Such an opportunity has to be afforded only by means of a notice in writing. LEGAL PROVISIONS Under Section 138 of the Negotiable Instruments Act, 1881 as amended up to date, the notice has to be sent by the payee to the drawer in writing within thirty days from the date of receiving Cheque Return Memo from the bank and demand the cheque amount to be paid to him within fifteen days from the date of receipt of such a notice by the drawer. CONDITIONS FOR PROSECUTION Law prescribes certain conditions to be fulfilled in order to attract provisions of Section 138. A) The cheque should have been drawn by the drawer on an account

maintained by him.

97

B)

It should have been returned unpaid either because of the amount of

money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank. C) Cheque must have been issued towards discharge of a debt or legal

liability. D) If after receiving the notice, the drawer does not make payment within

fifteen days from the date of receiving such a notice, then he commits an offence punishable under Section 138 of the Negotiable Instruments Act. PUNISHMENT Punishment prescribed for such an offence is fine which may extend to twice the amount of the cheque or imprisonment for a term which may be extended to two years or both. FILING COMPLAINT If the drawer makes payment of the cheque amount within fifteen days from the date of receipt of the notice, then drawer does not commit any offence. Otherwise, the payee may proceed to file a complaint in the court of the jurisdictional magistrate within one month from the date of expiry of fifteen days prescribed in the notice. If the payee fails to file the complaint within thirty days, the complaint becomes barred by limitation of time. The jurisdictional magistrate court may refuse to entertain such a belated complaint. However, if the payee has sufficient reasons to justify delay in filing the complaint, he may make an application before the magistrate along with the complaint, to explain the reasons for delay and seek condoning of delay. Cognizance of the complaint may be taken if the Court is satisfied that the payee had sufficient cause for not making the complaint within the prescribed period. After the complaint is filed and taken on record the proceedings against the drawer being. CIVIL ACTION

98

The payee may also initiate money recovery procedure in a jurisdictional civil court apart from prosecuting the drawer for criminal offence. It is essential in this case to consult an advocate who is well versed and experienced in this area of practice to proceed further in the matter. FINER POINTS The procedure of filing complaint and prosecuting the drawer in a court of magistrate involves certain finer points like cause of action, preparation of legal notice and complaint in accordance with legal requirements, modes of sending the written legal notice, service of summons and non-bailable warrants, conducting the criminal case etc. It is advisable to consult an advocate who is well versed and experienced in this area of practice.

99

References:

1.Negotiable Instruments Act, 1881. 2.Commercial Law including Company Law and Industrial Law by Sen & Mitra 3.Mercantile Law by M.C Kucchal. 4.Elements of Mercantile Law by N.D. Kapoor 4.Initiation of legal proceeding for dishonor of cheque. Available: http://www.lawyersnjurists.com/resource/legal-documentationslitigations/legal-opinion/initiation-of-legal-proceedings-for-dishonour-of-chequeac-mr-x/ 5.Dishonor check-criminal-la/ 6.Legal 2060793.html 7.Critical study of the Dishonor of Cheque Under Negotiable Instruments Act, 1881 http://www.caclubindia.com/articles/critical-study-of-dishonour-of-chequesunder-negotiable-instruments-act-1881-10283.asp 100 Proceeding of dishonor of cheque. of Cheque. Available: http://www.amlaw.pk/pakistan-law-

site/criminal-law-dishonoring-of-cheque/faq-faqs-dishonor-dishonour-cheque-

Available: http://www.articlesbase.com/criminal-articles/dishonour-of-cheque-

101