Negotiable Instruments –Law & Procedure

Dr. Prashant S. Desai,Assistant Professor of Law,

NLSIU

Module contents

• Justification for study of ‘negotiable instruments’• Understanding negotiable instruments• Parties to negotiable instruments• Presentment• Special provisions relating to cheques• Discharge from liability• Noting and protest• Presumptions and estoppels• Offences under the act• Foreign instruments

Understanding the ‘context’ (at macro level)• Growing concept of ‘securitization’ – as a mode of

finance• What is securitization?

– “securitization is a process in which pools of individual loans or receivables or actionable claims are packaged, under written and distributed to investors in the form of securities”

-- Kenneth Cox

POOLS OF ASSETS1. LOANS & ADVANCES2. BILLS3. OTHER RECEIVABLES4. DEBTORS

CREATION OF SPVPOLLED ASSETS ARE BEING TRANSFERRED TO THE SPV FOR CONSIDERATION

ASSET VALUE IN THE POOL IS DIVIDED ‘NOTINALLY’ INTO SMALLSHARE OR SECURITY

BELONGS TO THE ORIGINATOR(SUPPOSE A ‘BANK’ OR A‘FINANCIAL INSTITUION’)

THE SPV MAY BE A BANK OR A FINANCIAL INSTUTIONSGENERALLY

SHARES / SECURITIESARE SOLD FURTHER TOVARIOUS INVESTORS

RECEIVE THE LOAN AMOUNT

POOLED ASSETS AREPASSED ON TO THE SPECIAL PURPOSE VEHICLE (SPV)

SHARES / SECURITIES PAID BY THE SPECIALPURPOSE VEHICLE

Justification for study

• Negotiable instruments form the backbone of today’s complex commercial world

• Tradesmen prefer to use cheques, drafts, promissory notes etc., in their day to day transactions, rather than ready cash

• These instruments are used as mode of payment for almost all human activities (payment of salary, application cost, payment of fees etc.,)

• Necessity of such instruments – make the wheels of economy turn and transact-ability increases

Negotiable instruments – an introduction

• Might have originated from ‘negoce’ (French word) meaning business, trade or management of affairs

• “negotiable is something which is legally capable of being transferred by endorsement or delivery, and negotiability is the legal character of being negotiable” – Black’s Law Dictionary

• “A ‘negotiable instrument’ means a promissory note, bill of exchange or cheque payable either to order or to bearer” – S. 13 of NIAct, 1882

Special indicators

• It gives certain rights to the person in lawful possession of such an instrument – which no other instruments can ever give

• It represents money to a great extent; and– Does not get tainted by any defect in title at the source so

long as its acquisition is lawful – Ex: if the maker of the instrument commits fraud or forgery – the bona fide payee of the instrument is not affected

– It passes by delivery like cash– Person in lawful possession of it can sue in his own name

Kinds of negotiable instruments

• The Act deals in three kinds of instruments1. Promissory Note;2. Bill of Exchange; and3. Cheque.

• Application– Indian Paper Currency Act, 1871;– Any local usage relating any instrument in an oriental

language • Hundis;• Rukka

Hundi

• The saving clause does not render the act altogether inapplicable to hundis

• local custom overrides the statute – provided – It is established by the party relying on it; and– Such local usage is not specifically nullified by the

instrument specifically (indicating the intent of the parties)

“By excluding the applicability of the Act to instruments in oriental languages, necessary confusion in the state of law has been established. The law of negotiable instruments being closely related to the commercial world should be, by and large, uniform in its application” – Khergamvala on Negotiable Instruments Act

• Eleventh Report of the Law Commission of India (1958)

• Punjab National Bank v Britannia India Ltd., [(2001) 106 Comp Cas 293 DB]– “the Negotiable Instruments Act, 1881 has been framed in

order to assimilate and record the mercantile trade practices, prevailing as the law merchant in England and therefore any usage contrary to the provisions of the said Act may not be upheld by a court. It is presumed that the Act has taken into account, all the prevailing mercantile usages and any usage, contrary to the provisions of the Act cannot be given effect to”

Promissory notes

“an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument” – Sec. 4

‘two parties’

DRAWER DRAWEE

PERSON WHO DRAWS THE PROMISSORY NOTE

THE PERSON TO WHOSE FAVOUR THE PROMISSORYNOTE IS DRAWN

Pro Note for a loan

Bangalore , March 24, 2007

In consideration of loan of Rupees Five Thousands (Rs.5,000) advanced by Mr. Avtar Singh to me, I promise to repay the said loan of Rupees Five Thousand with interest at 6.5% per annum to Mr. Avtar Singh or order

Pratap Singh s/o Biswas Singh,

Resident of 222, 72 cross, 4th Main,Rajajinagar, 6th Block,

Bangalore-560 012

Pro Note payable on fixed date

Dharwad, March 24, 2008

I, Anand Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay, Shri. Chandrakant P Bellad, or order the sum of Rs.50,000(Rupees Fifty Thousand only) on the Seventh day of November two thousand eight.

Anand R. Patil,

s/o Ramappa Chendrashekhar Patil,

Resident of No. 227 “Pratap Chendra Nilaya”

College Road,

Dharwad-580 001.

Pro Note payable on instalments

Dharwad, March 24, 2008

I, Anand Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay, Shri. Chandrakant P Bellad, or order in ten equal instalments of Rs.30,000 (Rupees Thirty Thousand) each payable on the first day of every month commencing from the first day of every month of May 2008.

Anand R. Patil,

s/o Ramappa Chendrashekhar Patil,

Resident of No. 227 “Pratap Chendra Nilaya”

College Road,

Dharwad-580 001.

Essentials

• it must be in writing and signed by the maker;• it must contain an unconditional and definite

promise to pay a certain sum, and nothing more;• it must be payable either on demand or after the

efflux of a fixed or determinable time in future;• It must be payable to, or to the order of a

specified person named in the note or to the bearer of the note;

• most importantly, an instrument to be regarded as promissory note must show a prima facie intention to make such a note and it must be delivered.

Writing

• No particular form of writing– Pen, pencil, typed, etc.,– May be on paper or cloth etc.,

• No need to use specifically the word ‘promise’• Must be signed by the maker

Undertaking to pay

• Essential is express promise to pay• No Promissory notes

– Mr. X, I owe you Rs.100– I have received Rs.100 which I borrowed of you, and I have

to be accountable to you for the same with interest– Deposited with me Rs.100 to be returned on demand

• Good examples– Rs.1000 balance due to you I am still indebted and do

promise to pay– Received from X Rs.1000 which I promise to pay on

demand with interest– I do acknowledge myself to be indebted to X in Rs.1000 to

be paid on demand for value received

unconditional

• ‘Unconditionality’ is essential to achieve the objective of ‘certainty’ of promissory note

• It is indispensable statutory requisite [Black v Pilcher(1909)25 TLR 497]

• Notes that are payable on contingency are not negotiable

“it would perplex the commercial transactions of mankind if paper securities of this kind were issued out in to the world, encumbered with conditions and contingencies and if persons to whom they were offered in negotiation were obliged to inquire when these uncertain events would probably be reduced to certainty..”-- Lord Kenyon in Carlos v FAncourt, (1794) 5 TR 484

Examples

• I promise to pay X, Rs.5000 in installments with a proviso that no payment shall be made after my death

• I promise to pay X, Rs.500 on A’s death, provided he leaves me sufficient money to pay the said sum

• I promise to pay AB, Rs.500 out of money due to me from XY as soon as XY pays

• I promise to pay on demand at my convenience

Certainty regarding the sum

• Bad promissory notes– I promise to pay A, Rs.100 and all other sums which may be

due to him– I promise to pay A, Rs.100 after deducting any interest or

money which he may owe me– I promise to pay A the proceeds of a shipment of goods

value of Rs.2000– I promise to pay A Rs.1000 and all fines according to rule

Payee must be certain

• The payee’s name may be set out in any part of the instrument; and so long as it appears on a reading of the whole instrument that the payee is specified with certainty the instrument is a promissory note, assuming other requirements of the definition are satisfied

Other formalities

• Must be stamped• Although not obligatory –

– Generally dated – And the place of delivery is mentioned

• There are in general two parties to a pro-note – the maker and the payee.

• There can also be ‘Joint makers’ and ‘Joint Payees’

Bill of Exchange

• “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”- Sec. 5 of NI Act

Essentials

• Must be in writing• Must contain an order to pay• Order contained in the bill shall be unconditional• Must be signed by the drawer• Drawee must be certain• Sum payable must be certain• Order to pay ‘money and money only’• The payee must be certain

‘Three parties’

DRAWER DRAWEE/ACCEPTOR

PAYEE

PERSON WHO MAKES ANDGIVES THE ORDER TO PAY

ONE WHO IS DIRECTED TO PAY – AFTER SIGNING BECOMES ‘ACCEPTOR’

WHO OR TO WHOSE ORDERTHE AMOUNT OF THE INSTRUMENT IS PAYABLE

Typical BoE (payable on demand)

RUPEES FIFTY THOUSAND

Dharwad, March 24, 2008

Pay to Chandrakant R Bellad, or order on demand the sum of Rs.50,000 (Rupees Fifty Thousand only).

Anand R. Patil,

To

Bhavesh Solanki,

College Road,

Dharwad-580 001.

BOE shall contain an order

• Essence of BOE is an order by the drawer to the drawee to pay the money to payee

• Polite assertion may also do– ‘Please pay affixed to the order’ will not be invalid– ‘Mr. AB will much oblige Mr. CD by paying to the order of

P’ was held to be good bill

BoE and Pro Note compared

• The liability of the maker– In Pro Note it is primary – In BOE it is secondary and conditional

• Parties – Pro Note – two– BOE – three

• BOE require specially– Acceptance by the drawee; and– presentment

cheque

• “Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise on demand and it includes the electronic image of the truncated cheque and a cheque in the electronic form”- Sec. 6 of NI Act

• There are two explanations – Explaining – ‘a cheque in the electronic form’ and ‘a

truncated cheque’; and– Clearing house for the purpose of this section

Broadening the definition of ‘cheque’ in 2002

• The definition broadened to include – electronic image of a truncated cheque; and– cheque in the electronic form

• The Information Technology Act, 2002 recognizes– electronic transfers; and – digital signatures

• The present amendment was intended to tune the NI Act with Information Technology law

‘Three parties’

DRAWER BANKER

PAYEE

PERSON WHO MAKES ANDGIVES THE ORDER TO PAY

ORDER IS TO A ‘BANKER’NO NEED OF ACCEPTANCE

WHO OR TO WHOSE ORDERTHE AMOUNT OF THE INSTRUMENT IS PAYABLE

Some other considerations

• No condition attached– Bevins v London & South Western Bank Ltd., (1900) 1 KB 270– A company issued a cheque to its bankers along with a

receipt appended thereto and with a note– ‘provided the receipt form at foot hereof is duly signed,

stamped and dated’– The cheque was held to be invalid because its payment

was made conditional

• Cheque must be drawn upon the ‘banker’– R. Pillai v S. Ayyar, (1920) 43 Mad. 816– A dist. Board had its funds in a Government Treasury and

used to withdraw money by issuing orders in the form of a cheque;

– Ayyar J, held that “Treasury is not a bank” and therefore, the order was not a cheque under Sec. 6 but a BOE u/s 5.

– The learned Judge cited the definition by Hart that, “a banker is one who in the ordinary course of his business honours cheques drawn upon him by persons from and for whom he receives money on current accounts”

• Cheque must be payable on ‘demand’– Therefore, a post-dated cheque is only a Bill of Exchange

and no cheque– But does become cheque on the date from which it

becomes payable on demand– A cheque may bear date of Sunday or a holiday

• Cheque is ‘peculiar’ BoE– “Cheque is a peculiar sort of instrument, in many respects

resembling a BOE, but in some entirely different. A cheque does not require acceptance, in ordinary course it is never accepted; it is not intended for circulation, it is given for immediate payment; it is not entitled to days of grace…”- Parke B in Ramchurn Mullick v LuchmeechundRadhakissen

‘Holder’ and ‘Holder in Due Course’

Meaning

• ‘Holder’ is one who is– Entitled in his own name to the possession of the instrument;

and– Have the right to receive or recover the amount due

thereon from the parties thereto.• Otherwise a ‘holder’ means –

– The payee; or– The bearer; or– The endorsee of an instrument

Sec. 8

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

Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction”

Holder in due course

• Holder in due course is a person – who takes an instrument in “good-faith and for value”

• And he becomes the true owner of the instrument and is known technically as ‘holder in due course’

Sec. 9

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

Ingredients of s.9

1. Holder must have taken the instrument for value [consideration]

2. Must have obtained the instrument before its maturity

3. Instrument must be complete and regular on its face; and

4. Must have taken the instrument in good faith and without notice of any defect either in the instrument of the title of the person negotiating it to him

Consideration

• Negotiable instrument contains a contract – hence to be supported by valid consideration

• A person who takes a bill or note without consideration cannot enforce it

However…

• For the ‘free circulation’ the following are to be noted– Consideration is presumed – if the defendant intends to set

up the defence that value has not been given – the burden lies upon him

– In simple contract – only a person who can sue is one from whom the consideration moves; but in case of Negotiable instruments if there be a consideration for it, it does not matter from whom it moves

Before maturity

• Once an instrument reaches its maturity, it has exhausted its life and is no more negotiable –No one can become its holder in due course [Sec. 59]– “negotiation after that maturity is out of the usual and

ordinary course of dealing, that circumstance is sufficient of itself, to excite so much suspicion… that the indorsee… can stand in no better position than that of the indorser”

• An instrument payable on demand is current at least as long as no demand for payment is made

• S. 19 – states that a note or bill or cheque where no time for payment is specified are payable on demand

• “a promissory note payable on demand is current for any length of time”

• In Brooks v Mitchell, [(1841) 152 ER 7] – a promissory note made in 1824 was received by the

defendant in 1838;– He acted in good faith and gave value for it. In an

action against him to recover the note it was argued that a bill or note payable on demand must not be kept locked up for an unreasonable time;

– PARKE B, however, said that promissory note payable on demand could not be treated as overdue as long as payment was not demanded, because it “is intended to be a continuing security”

• Following the opinion – the English Act was amended

• Now Sec. 86(3) provides that – “where a note payable on demand is negotiated, it is not

deemed to be overdue, for the purpose of affecting the holder with defects of title of which he had no notice, by reason that it appears that a reasonable time for presenting it for payment has elapsed since its issue”

• Suppose a demand instrument, which is dishonored; and then the note is negotiated to a bona fideholder for valueDoes he become a holder in due course? – If the demand or dishonor is apparent from the face of the

note or from other circumstances he cannot become the holder in due course;

– But he is not to be prejudiced by any dishonor of which he had no notice.

An ‘extreme’ instance

• If the instrument is not withdrawn from circulation, even after it is paid off; and a person bona fidecomes in possession of the same (and it is endorsed to him for value)

• He is a holder in due course and is entitled for payment

• See S B Asirvatham v G Palaniraju Mudaliar, AIR 1973 Mad. 349

Complete and regular

• In Hogarth v Latham & Company [(1878) 3 QBD 643]– the plaintiff took two bills of exchange without any

drawer’s name and completed them himself; The court held that he could not recover upon the bills;

– “Anybody who takes such an instrument as this, knowing that when it was accepted the bill had no name of any drawer upon it, takes it at his peril”.

• An instrument may also be incomplete because it is not properly dated or stamped

• But a bill of exchange does not need acceptance to make it complete and regular

• Some unusual marks on the instrument may make it defective, such as the marks of dishonour, blanks, or restrictive or conditional indorsements

• Chalmer’s Digest of Bills of Exchange stated – “If the bill itself conveys a warning, caveat emptor. Its

holder, however honest, can acquire no better title than that of his transferor. The holder takes at his peril a blank acceptance, or a bill wanting in any material particular; so also a bill which has been torn and the pieces pasted together, at least if the tears appear to show an intention to cancel it. A post dated cheque is not irregular”

‘Good faith’

• ‘subjective’ test –– court has to see the holder’s own mind; and – the only question is “did he take the instrument honestly”?

• ‘objective’ test –– the court has to go beyond the holder’s mind and see

whether he exercised as much care in taking the security as a reasonably careful person ought to have done; and

– The subjective test requires ‘honesty’, ‘due care and caution’.

1758 – The rule of ‘honesty’ as ‘good faith’ originated

1824 to 1836 – the rule of honesty was replaced by ‘due care and caution’

1836 – rule of ‘honesty’ was reinstated

Bills of Exchange Act, 1882 (sec. 90) put the controversy to rest

1758 – Miller v Race, (1758) 1 Sm LC 524 was decided

1824 – Gill v Cubit 

1836 – Goodman v Harvey [per Lord Denman CJ]

“ A thing is deemed to be done in good faith … where it is in fact done honestly, whether it is done negligently or not”

Good faith as ‘honesty’ established

• In Miller v Race [(1758) 1 Sm LC 524] – A bank note sent by general postage was taken and

carried away by a robber;– The next day the same note came into the hands of

the Plaintiff. He received it for full and valuable consideration in the usual course of his business and without any notice of the banknote being taken out of the mail;

– Lordship said – “here an innkeeper took it bona fide, in his business, from a person who made the appearance of a gentleman. Here is no pretence or suspicion of collusion with the robber. He took it for full and valuable consideration and in the course of business”.

• This is the point of origination of the rule of ‘honesty’

• In Lawson v Weston [(1801) 170 ER 640] – the plaintiff had discounted a bill of £500 in the usual

course of their business for a person who was unknown to them;

– It was insisted upon by the defendants that “a banker or any other person should not discount a bill for person unknown without using due diligence to inquire into the circumstances”;

– But Lord Kenyon rejected the argument and said –“to adopt the principle of the defence…would be at once to paralyze the circulation of all the paper in the country, and with it all its commerce. The circumstance of the bill having been lost might have been material if they could bring knowledge of that fact home to the plaintiff”.

Good faith as ‘due care & caution’

• Gill v Cubit – In this case a bill broker had instructed his assistant to

discount bills for anyone of familiar features. A stolen bill was brought to him by a person having a respectable appearance and whose features were familiar;

– He discounted it without enquiring his name or address; The question was whether he had acted in ‘good faith’?

– Court felt that “it is the duty of the court to lay down such rules as will tend to prevent fraud and robbery and not give encouragement to them”.

– And therefore no ‘person should take a security of this kind from another without using reasonable caution’.

Test of ‘honesty’ reestablished 

• In Goodman v Harvey, Lord Denman CJ, said– “I believe we are all of the opinion that gross negligence

only would not be a sufficient answer, where the party has given the consideration for the bill. Gross negligence may be evidence of mala fides, but it is not the same thing. We have shaken off the last remnant of the country doctrine. Where the bill has passed to the plaintiff without any proof of bad faith there is no objection to his title”.

• And thus the rule of ‘honesty’ was re-established.

Re‐affirmation 

• Proposition was confirmed by the House of Lords; and

• Later on codified in the Bills of Exchange Act, 1882, Sec. 90 – “A thing is deemed to be done in good faith… where it is in

fact done honestly, whether it is done negligently or not”. • In addition to good faith, Sec. 29 of the same Act

provides that – the holder should have no notice of any defect in the title

of the person who negotiated it.

Final position

• To defeat the title of a holder for value there must be bad faith or dishonesty it must be shown that he had either knowledge or suspicion of something wrong

• Ordinarily he need not inquire but if circumstances are clouded with suspicion he must not take without inquiry

The Indian position

• Sec. 9 of the Indian act does not use the words ‘good faith’

• It provides that – “without having sufficient cause to believe that any

defect existed in the title of the person from whom he derived his title”

• In other words, to defeat the title of a holder for value it must be shown that when he took the instrument he had some ‘cause to believe’ that there was something wrong

• The court has to see the holder’s own mind

• Whitley Stokes [the first great commentator on the Act]– “Mere negligence in taking a bill seems immaterial… if a

man takes honestly an instrument made or become payable to the bearer he has a good title, with whatever degree of negligence he may have acted, unless his gross negligence induce the jury to find fraud”

Khergamwala’s view point

“However, under the Act, the words used in sec. 9 are ‘without having sufficient cause to believe’ therefore, the legislature seems to have intended to make due care and caution on the part of the holder, a test of his bona fides and that mere good faith on his part would not suffice. Accordingly, it seems negligence on the part of a holder at the time of taking a negotiable instrument, would disentitle him to the rights of a holder in due course. There will be sufficient cause to believe in the existence of defects if the holder was in fact negligent or careless, though he was acting honestly and in good faith….”

Rights and Privileges of holder in due course

• PRESUMPTIONS [S. 18] – The first privilege is that ‘every holder is deemed prima

facie to be a holder in due course’– If the defendant intends to set up the defence that there

was something wrong in the inception or subsequent negotiations of the bill the burden of proving that lies on him

– Once it is shown that the history of a bill is tainted with fraud or illegality the burden is shifted to the holder to prove that he is a holder in due course

• PRIVILEGE AGAINST INCHOATE STAMPED INSTRUMENTS [S. 20]– the logical order of operations with regard to a bill is,

• the bill should be first filled up, • then it should be signed by the drawer, • then it should be accepted, • then it should be negotiated, and • then it should be indorsed by the persons who

become successively holders; – but it is common knowledge that parties very often

vary, in a most substantial manner, the logical order of those proceedings,

– Sec. 20 is intended to deal with those cases

“from reading of the provision, it is clear that Sec. 20 is itself authority to the holder of the inchoate stamped and signed instrument to fill up the blanks and to negotiate the instrument. The instrument may be wholly blank or incomplete in particulars and in either case the holder has the authority to make or complete the instrument as a negotiable one” – Madras High Court

The section may be illustrated

• Suppose A signs his name on the blank but stamped instrument. He gives the paper to B with authority to fill it up as a promissory note for Rs. 250 only. But B fraudulently fills the paper for Rs.1000, the stamp put upon it being sufficient to cover the amount. He then hands it to H for Rs.1000, who takes it without notice of fraud

• A will be bound to pay the full amount to H, because under this section it does not lie in the mouth of the signer to say that in filling the instrument his authority has been exceeded.

Sec. 20 and cheques

• Sec. 20 does not squarely apply to cheques because they are not required to be stamped

• The court does not apply S. 20 to incomplete cheques. [C T Joseph v I V Philip, AIR 2001 Ker 300].

• PRIOR DEFECTS [S. 58]• The party liable to pay an instrument cannot,

contend that – he had lost the instrument or – that it was obtained from him by means of an offence or

fraud, or – for an unlawful consideration

Dishonour of a Cheque and the Law

Dr. Prashant Desai,Assistant Professor of Law,

NLSIU

Definition

• "Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of certain person or to the bearer of instrument."

• Section 6 of the Indian Negotiable Instrument Act of 1881 defines the Cheque as “A Bill of Exchange drawn specially on a specified Banker and not on expressed to be payable otherwise than on demand”...

Specimen of Cheque

Essentials of Cheque

• It is an Instrument in writing, i.e., it must be written in Ink and not by pencil.

• It must be Drawn on Particular Bank. It is drawn by a customer who has deposited money with the Bank.

• It must not contains any conditions. • It must be signed by the Account holder.• It is always payable on demand.• It must contain an order to pay certain sum of

money• A Cheque is payable to a Specified Person Only

Types of Cheque

• Bearer Cheque• Order Cheque• Open Cheque• Crossed Cheque• Anti-Dated Cheque• Post-Dated Cheque• Stale Cheque• Mutilated Cheque

Bearer Cheque

• The words “or bearer” printed on the cheque, & it is not cancelled, then the cheque is called a bearer cheque.

• A bearer cheque is made payable to the bearer i.e. it is payable to the person who presents it to the bank for encashment.

• In simple words a cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’

Order Cheque

• The word "or order" is written on the face of the cheque, the cheque is called an order cheque.

• Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed (transferred).

Open Cheque

• When a cheque is not crossed, it is known as an “Open Cheque” or an “Uncrossed Cheque”.

• These cheques may be cashed at the bank and the payment of these cheques can be obtained at the counter of the bank or transferred to the bank account of the bearer.

• An open cheque may be a bearer cheque or an order cheque.

Crossed Cheque

• Crossed cheque means drawing two parallel lines on the left corner of the cheque with or without additional words like “Account Payee Only” or “Not Negotiable”.

• A crossed cheque cannot be en-cashed at the cash counter of a bank but it can only be credited to the payee’s account. This is a safer way of transferring money then an Uncrossed or open cheque.

Anti-Dated Cheque

• Cheque in which the drawer mentions the date earlier than the date on which it is presented to the bank, it is called as “anti-dated cheque”.

• Such a cheque is valid up to three months from the date of the cheque drawn.

Post-Dated Cheque

• Cheque on which drawer mentions a date which is yet to come (future date) to the date on which it is presented, is called post-dated cheque.

• For example– If a cheque presented on 10th Jan 2012 bears a

date of 25th Jan 2012, it is a post-dated cheque. The bank will make payment only on or after 25th Jan 2012.

Stale Cheque

• If a cheque is presented for payment after three months from the date of the cheque, it is called stale cheque. After expiry of that period, no payment will be made by banks against that cheque.

• A stale cheque is not honored by the bank.

Mutilated Cheque

• When a cheque is torn into two or more pieces and presented for payment, such a cheque is called a mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer.

Crossing of Cheque

• Crossing of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. Thus, crossing is necessary in order to have safety.

• Crossed cheques must be presented through the bank only because they are not paid at the counter.

• Crossing is a popular device for protecting the drawer and payee of a cheque.

• Types of Crossing :-1. General Crossing 2. Special or Restrictive Crossing

General Crossing

• There are two transverse parallel lines, marked across its face, or– The cheque bears an abbreviation "& Co. "between

the two parallel lines, or– The cheque bears the words "Not Negotiable"

between the two parallel lines, or– The cheque bears the words "A/c. Payee" between

the two parallel lines.

Special or Restrictive Crossing

• Crossing is that the bank makes payment only to the banker whose name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques.

Material Alteration

• Any alteration made in the cheque is Material Alteration.

• These cheque are not honored by Banks, for making This as a valid cheque then the drawer has to sign at every correction made.

• Alterations' Like: – Date,– Amount,– Payee Name,– Converting order into bearer cheque, etc.

Altered Cheque

Endorsement

• Signature included on the front or back of a cheque acknowledging that both parties have agreed to exchange the specified amount on the document.

• The signature or account information included on the back of a cheque acknowledges that the intended recipient received the document and deposited it.

• To cash a cheque, the issuer and the recipient must endorse the document.

• Negotiation of an instrument is the process by which the ownership is transferred from 1 person to another person.

Contd…

• There are 2 parties in Endorsement– Endorser– Endorsee

• Endorser – The Person who signs the instrument with an

instrument of transferring his ownership. • Endorsee

– The person in who’s favor the instrument is transferred.

Dishonour and the Law

• 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 non-acceptance or by non-payment.

• A cheque and a promissory note can only be dishonoured by non-payment but a bill of exchange can be dishonoured either by non-acceptance or by non-payment.

Dishonour by non-acceptance (Section 91)

• 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.

• When the drawee is a fictitious person or if he cannot be traced after reasonable search.

• When the drawee is incompetent to contract, the bill is treated as dishonoured.

• When a bill is accepted with a qualified acceptance, the holder may treat the bill of exchange having been dishonoured.

• When the drawee has either become insolvent or is dead.

• 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 endorsement 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

• Notice of dishonour: 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(Section 93).

• Mode of notice: the notice may be oral or written. 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 dishonoured and in what way it has been dishonoured and that the person served with the notice will be held liable thereon.

Noting and Protesting

• 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.

• 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 notary’s charges, (e) a reference to the notary’s register and (f) the notary’s initials.

• 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.

Liability of parties

Liability of acceptor or maker

• Sec. 32• The liability of the acceptor of a bill of

exchange and of the maker of a promissory note is the same

• They are liable to pay the instrument on its maturity

• In default, they become liable to compensate any subsequent party for the loss caused to him by the dishonour

Liability of the drawer of the bill

• Sec. 30• The drawer of a bill of exchange is primarily liable

until the bill has been accepted by the drawee• After the acceptance the acceptor becomes

primarily liable• Thus the liability of the drawer of a bill can be put in

terms of the following propositions –– by drawing and issuing the bill he engages that,

it shall be accepted and paid by the draweeaccording to its apparent tenor; and

– that if it is dishonoured either by non-acceptance or by non-payment, he shall compensate the holder or every endorser who has been compelled to pay the loss suffered by him

Drawer of a cheque

• The drawer of a cheque gives a guarantee to the holder that, it shall be paid by the banker when it is duly presented for payment

• If the cheque is dishonored, the drawer is liable to compensate the holder provided that he has received notice of dishonor

• however – The liability of the drawer of a cheque is primary

and not secondary– This is so because the holder of a bill can sue the

acceptor, but the holder of a cheque has no remedy against the banker

– His remedy is only against the drawer

Criminal liability (drawer of a cheque)

• Ss. 138 to 147• The amendment of 1988 added a new

chapter to the Act• Vide Sec. 4 of Banking, Public Financial

Institutions and Negotiable Instruments Laws (Amendment) Act,1988 [Act 66 of 1988]– Came into effect on 01.04.1989– First edition Ss. 138 to 142– Latest addition Ss. 143 to 147 [vide

Amendment Act of 2002]

• ‘to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties, in case of bouncing of cheques due to insufficiency of funds in the accounts or for the reason that it exceeds the arrangement made by the drawer, with adequate safeguards to prevent harassment of honest drawers’

• The object is to – inculcate faith in the efficacy of banking

operations and – credibility in transacting business on the basis of

negotiable instruments

Ingredients (sec. 138)

1. The cheque should have been issued in discharge of a legally enforceable debt or liability;

2. The cheque should have been dishonored within the period of its validity;

3. The cheque should have been dishonored for want of funds in the account of the drawer;

4. The payee or holder of the cheque should have issued, within a specified time limit, a notice in writing to the drawer demanding the amount of cheque; and

5. The drawer must have failed to make payment within 15 days of receipt of the notice.

Dishonor of the cheque for want of funds

Notice of dishonor within 30 days to the drawer

Drawer fails to fulfill his obligation within 15 days

CAUSE OF ACTION HAS ARISEN

Whether mens rea is necessary?

• ‘…such person shall be deemed to have committed an offence’

• Thus, if the conditions stated therein are satisfied, the court has to deem that the offence has been committed, regardless of the state of mind of the drawer

• Sec. 140 excludes the defence of the belief of the person about the sufficiency of funds

• For offences by companies as envisaged in Sec. 141, also show the exclusion of mens rea

Civil remedies after Chapter XVII

• As earlier the civil remedy is always available • Both civil and criminal proceedings against the

drawer can continue simultaneously• Section 138 also provides for civil liability which

provides for fine twice the amount of dishonoured cheque.

Legally enforceable debt 

• A cheque should presumably have been issued for payment in discharge, wholly or partly, of a legally enforceable debt or liability

‘legally enforceable debt’

• Is a liquidated amount of money owed and payable to another whether in present or in future

• It is pecuniary liability recoverable by action in respect of money demand

• The provision includes not only debt but other liability as well

• The world ‘liability’ denotes the state of being liable

• Hence…the following are outside the purview of S.138– A cheque given as gift or donation– Discharge of mere moral obligation– For an unlawful or illegal consideration

Presumption of legally enforceable debt

• Sec. 139• The legal presumption – that the holder received it

for the discharge of debt or liability• The initial burden (very light one) is on the

complainant• Then the burden shifts upon the drawer

Rebuttal of presumption (by drawer)

• He may rely upon (generally) circumstantial evidence

• The rebuttal has to be by proof and cogent evidence and not by mere explanation

Liability of the ‘drawee’ (i.e. banker) of a cheque

Liability of the drawee of the cheque

• The drawee of a cheque is always a banker• The banker’s duty is only owed to the customer –

and not to the payee• Therefore, if the cheque is dishonored – the holder

has no remedy against banker [even if the cheque is been marked good for payment]

On marked cheque…

“….writers are of the opinion that marking or certification is neither in form nor in effect an acceptance. Their Lordships are of the opinion that the certification relied on as constituting acceptance of the cheque is not an acceptance within the meaning of the English and Indian Acts. It is not necessary to hold that a cheque can never be accepted; it is enough to say that it is done in very unusual and special circumstances … No cases is reported in England or in India of a banker being held liable or even sued, as an acceptor of a cheque drawn upon him…”-- Lord Wright

Liability of ‘unjustified dishonour’

“The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and in default of such payment, must compensate the drawer for any loss or damage by such default” – Sec. 31

ingredients

• Sufficient funds– There should be sufficient credit balance in the customer’s

account• Funds properly available

– & the funds are not ‘properly available’ if• The banker has exercised his right of set off for amounts due

from the customer;• There is an order passed by a court; restraining the bank from

making payment

Bankers liability (for wrongful dishonour)

• The banker is liable (only to the drawer and not the holder) for any loss of damage which might have occurred to the drawer

Protection to the ‘paying banker’

Three important provisions

PROTECTIONTO THE PAYINGBANKER

Sec. 10

Sec. 85 Sec. 89

Payment in due course  (generic)

Protection to the paying banker (specific)

Altered instrument and making payment (generic)

S. 10 – payment in due course

“payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which does not afford a reasonable ground from believing that he is not entitled to receive payment of the amount therein mentioned”

Ingredients 

• The payment shall be– In accordance with the apparent tenor of the

instrument– Payment made in good faith – Payment made without negligence– To the person in possession of the instrument; and– No belief that the person in possession of the

instrument is not entitled to receive payment of the amount in the instrument

s. 85 – specific protection to the banker

1. where the cheque is payable to ‘order’ purports to be endorsed by or on behalf of the payee – the drawee is discharged by payment in due course

2. Where the cheque is originally expressed to be payable to ‘bearer’ – the drawee is discharged by payment in due course to the bearer thereof

• Bhutoria Trading Company v Allahabad Bank, AIR 1977 Cal. 363– BTC sold some jute to WFD (another limited

Company) in payment of which WFD issued an uncrossed cheque payable to BTC or order

– The same was delivered to one of the officials of the BTC

– That official used the official seal and endorsed the cheque as ‘manager’ and en-cashed over the counter

– BTC later sued the bank for recovery of the money

“the cheque is an uncrossed cheque payable to the plaintiff or order. The cheque was endorsed by the plaintiff through its Manager. The fact that Jethmall is the Manager is borne out of the seal of the Company which is unquestionably an authentic seal. The seal of the Manager is also equally authentic. That the payment was made in good faith has not been disputed for all practical purposes. There is not a grain of evidence before the court from which it remotely appears that the payment was not made in good faith…”

“… there was no circumstances which afforded any reasonable ground for believing that he was not entitled to receive payment of the cheque. It must be held that the bank made the payment in due course. The learned judge, in our opinion has rightly pointed out that payment in due course is necessarily payment in the ordinary course…”

• Bareilly Bank Ltd., v Naval Kishore, AIR 1964 All. 78– ‘N’ opened an account and made a cash

deposit of Rs.19,900; he was also issued a cheque book of 25 leaves

– After 17 months of operation ‘N’ drew a cheque for the first time for Rs.5,900 which was dishonoured by the bank

– ‘N’ was informed that, 11 months back 3 cheques aggregating to Rs.19,500 were paid by the bank, which ‘N’ denied (about their issuance)

– And he also sued the bank for recovery of the money

– In evidence it came out that 3 cheques used to withdraw, were not from the cheque book issued to ‘N’

– There was some difference between the ‘specimen signature’ and the signature on the cheques

– Held that banker’s are responsible

S. 89 – altered instrument and payment

• “Where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay, and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such person or banker from all liability thereon; and such payment shall not be questioned by reason of the instrument having been altered, or the cheque crossed.”

• This section provides statutory protection to the paying banker provided the following conditions are fulfilled:

1) The cheque does not appear to be crossed one at the time of presentation or the obliteration of the crossing is not apparent; and

2) The payment is made according to apparent tenor of the cheque and in due course.

Forged cheque & banker’s liability

Proposition

• When the cheque is forged – there is no mandate to the bank to pay

• Hence, banker is not entitled to debit the customer’s account (on the basis of that forged cheque)

• Canara Bank v Canara Sales Corporation and Others [(1987) 2 SCC 666]– The current account of the company was to be

operated by the MD– The accountant of the company had the

custody of the cheque book, who forged the signature on 42 cheque leaves and took out Rs.3,26,047.92 over a period of time

– Upon detection – demanded the amount back from the bank, which was denied

– Company filed the suit for recovery; this attempt was successful at the initial level

– The bank appealed to the Supreme Court, which dismissed the same

“since the relationship between the customer and the bank is that of creditor and debtor, the bank had no authority to make payment of a cheque containing a forged signature. The bank would be acting against the law in debiting the customer with the amount of the forged cheque as there would be no mandate on the bank to pay….”

Additional proposition

• In a joint account if one the signatures is forged –same consequence will follow

• As there is no mandate – banker cannot debit the customer’s account

Recent changes in Law

• In Dashrath Rupsingh Rathod v State of Maharashtra, theHon’ble SC has made it mandatory that the complaintrelated to cheque bouncing must be filed only wherethe drawee bank is located.

• The Negotiable Instruments Amendment Act, 2015provides that cheque bounce cases can be filed only ina court in whose jurisdiction the bank branch of thepayee (person who receives the cheque) lies.

• If a complaint against a person issuing a cheque hasbeen filed in the court with the appropriate jurisdiction,then all subsequent complaints against that person willbe filed in the same court, irrespective of the relevantjurisdiction area.

• If more than one case is filed against the same person before different courts, the cases will be transferred to the court with the appropriate jurisdiction.

• It seeks to amend the definition of cheque in the electronic form. While the parent act defines it as a cheque containing the exact mirror image of a paper cheque and generated in a secure system using a digital signature, the Amendment Act re-defines it as a cheque drawn in electronic medium using any computer resource and which is signed in a secure system with a digital signature, or electronic system.

Thanks