Negotiable Instrument Act

Transcription

1 Negotiable Instrument Act Promissory Note : SEC.4 Bill of Exchange : SEC.5 Cheque : Sec. 6 Crossed Cheque Type of Crossing Payment of Crossed Cheque - Sec. 126 to 129 Acceptance Holder : Sec 8 Holder in due Course : Sec. 9 Rights and Privileges of a Holder in due course Nego a on : Sec 14 Endorsement : Sec 15 Conversion of Endorsement in blank into Endorsement in full Other Terms Maturity : Sec 22 Calcula on of Maturity Based on Transfer Procedure, Based on Loca on, Others Liablility of Agent Signing : Sec 28, Liability of Legal Representa ve : Sec 29, Minor Dishonour of Cheque : Case 138 Discharge of Endorser's Liability : Sec 40 Liability under Accommoda on Bills / Without Considera on Failure of Considera on Presentment of Promissory note for Sight/Instrument for payment : Sec 131 Mode of Discharge of Instrument Discharge of Party Nothing and Protes ng Amendments, Extra Notes Acceptor for honour etc. Notes Questions Answer Examples 83

2 UNIT-V NEGOTIABLE INSTRUMENT ACT De ni on The Nego able Instrument has not been de ned under the Nego able Intruments Act 1881.However, Sec on 13 of the Act describes a nego able instrument to mean a promissory note or a bill of exchange or a cheque payable to order or to bearer. Features a. Considera on It is presumed that every Nego able Instrument is made or drawn for considera on. The considera on need not be men oned in the Nego able Instruments. b. Transferability A Nego able instrument may be transferred by: (i) (ii) c. Title endorsement and delivery, if it is an instrument payable to order, and mere delivery, if it is a bearer instrument. The transferee, who takes the instrument bona de and for valuable considera on, obtains a good tle inspite of any defects in the tle of the transferor. To this extent, Nego able instrument is an excep on to the maxim of law ie. nemo dat quod non-habet (no one can transfer a be er tle than he himself has). PROMISSORY NOTE : SEC.4 A promissory note is an instrument in wri ng (not being a bank-note or a currency-note) containing an uncondi onal undertaking, signed by the maker, to pay a certain sum of money only to the person men oned therein, or to the order of a certain person or to the bearer of the instrument. The words or to the bearer of the instrument is inopera ve in View of Sec on 31 of the Reserve Bank of India Act, 1934, which provides that no person in India other than Reserve Bank of India or Central Government can make or issue promissory note payable to bearer of the instrument. Characteris cs of Promissory Note a. In wri ng It must be in wri ng. An oral promise does not result in an instrument. Example: A promises to pay ` 70,000/- to B, over telephone. This promise is not a promissory note as it is not in wri ng. b. Promise to pay A mere acknowledgement of debt is not a promissory note. a) A receipt of ` 50,000/- Not a Promissory Note. b) A receipt of ` 50,000/- with a promise to pay in 5 monthly instalments beginning 1st April It is a Promissory Note. 84

3 UNIT-V Amit Bachhawat c. Uncondi onal It is to be noted that a promise to pay will be uncondi onal where it depends upon an event which is certain to happen but the me of its occurrence may be uncertain. I promise to pay to A ` 1,000/- 10 days a er the death of B. This is not condi onal as it is certain that B will die though the exact me of his death is uncertain. The promissory note does not lose its character as such merely because it contains a promise to pay at a certain place. "I promise to pay to 'A' ` 1 Lac a er the death of 'B' provided 'B' leaves enough money to pay." d. Certain sum of money only Amount promised must be certain and should be in terms of money. The instrument must be payable in money and money only. If the instrument contains a promise to pay something other than money or something in addi on to money, it will not be a promissory note. I promise to pay ` 350 and all other sums which shall be due It is not a valid promissory note. 'I promise to pay ` 1 Lac and 500 bags of rice is not a valid promissory note.' In the event of rate of interest not being speci ed, the amount which would be due on the due date would not be certain. e. Signed by the Maker The maker must sign the instrument and it is incomplete ll it is so signed. The signature may be made on any part of the document. f. Certainty of Par es The person by whose order and to whom the payment is to be made must be de nite. The payee must be a certain person and where the name of the payee is not men oned as a party, the instrument becomes invalid. g. Not payable to maker himself A promissory note cannot be made payable to the maker himself. However, it would become valid when it is endorsed to the maker. This is so because it becomes payable to bearer, if endorsed in blank or it becomes payable to endorsee or his order, if endorsed speci cally. BILL OF EXCHANGE : SEC.5 A Bill of Exchange is an instrument in wri ng containing an uncondi onal order, signed by the maker, direc ng 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. The words or to the bearer of the instrument is inopera ve in view of Sec on 31 of the Reserve Bank of India Act, 1934, which provides that no person in India other than Reserve Bank of India or Central Government make or issue promissory note payable to bearer of the instrument. Characteris cs of Bill of Exchange 1. In wri ng It must be in wri ng. 85

4 UNIT-V 2. Order It must contain an order to pay. Order to be made by drawer to drawee to pay money. 3. Uncondi onal Order The order must be uncondi onal, ie., the order must not make the payment of the bill dependent on a con ngent event. Where a bill of exchange is in this form: Three months a er date pay to my order the sum of ` for value received. This is not condi onal. 4. Money only Certain sum The Order must be to pay money and money only. The instrument must be payable in money and money only. The sum of money payable must also be certain. In the absence of the rate of interest, the amount which would be due on the due date would not be certain or de nite. 5. Acceptance The drawee must sign the instrument, without which the document is ine ec ve. 6. Three Par es The three par es to a bill viz., drawer, drawee and payee are to be speci ed in the instrument with reasonable certainty. All three persons need not speci cally be di erent persons. One can play the role of two persons, ie., a drawer can be a payee. 7. Stamping It must be stamped. Note : The maker of the bill of exchange is called the Drawer (Creditor). The person who is directed to pay is called the Drawee (debtor). The person who will receive the money is called Payee. When the Payee has the Custody of the bill he is called the holder. CHEQUE : SEC.6 A Cheque is a bill of exchange drawn on a speci ed banker and not expressed to be payable otherwise than on demand and it includes the electronic image of truncated cheque and a cheque in the electronic form. A Cheque, prima facie, is a bill of exchange and hence must sa sfy the essen al condi ons of bill of exchange under Sec on 5. A Cheque is an excep on to the general rule that a bill of exchange cannot be drawn payable to bearer on demand - Sec.31 of Reserve Bank of India Act, ie., payable only on demand. A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or bank whether paying or recovering payment immediately on genera on of an electronic image for transmission, subs tu ng the further physical movement of cheque in wri ng. A physical cheque deposited at Bank, scanned electronically for processing. 86

5 UNIT-V Amit Bachhawat A cheque in electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, wri en and signed in a secure system ensuring the minimum safety standards with the use of digital signature and asymmetric crypto system. On line payment instruc ons in net banking, CROSSED CHEQUE When a cheque bears across its face two parallel transverse lines, (usually on the top le corner of cheque) the cheque is said to be crossed. 1. Crossing a ects mode of payment of cheque. Cheque is not payable to payee or holder at Bank. Payment is to be obtained only through Bank. Crossed Cheque can be nego ated. 2. The objec ve of crossing is to help tracing the recipient of money, if an unauthorized person receives it. Difference between Bill Of Exchange & Promissory note? 114 Difference between Bill Of Exchange & cheque? 115 Types of Crossing 1. General Crossing : Sec. 123 Where a cheque bears across its face an addi on of the words and company or any abbrevia ons thereof between two parallel transverse lines, or two parallel transverse lines simply. 2. Special Crossing : Sec. 124 Where a cheque bears across its face an addi on of the name of a banker, either with or without the words not nego able, that addi on shall be deemed a crossing, and the cheque shall be deemed to be crossed specially. Where a cheque is crossed specially, the banker on whom it is crossed shall not pay it, otherwise than to the banker to whom it is crossed or his agent for collec on. Di erence : In general crossing the Name of the Bank is not men oned whereas in special crossing the Name of the Bank is men oned. 3. Not Negotiable Crossing : Sec.130 A person taking a cheque crossed generally or specially, bearing in either case the words not nego able, shall not have, and shall not be capable of giving a be er tle to the cheque other than that which the person from whom he took it had. The tle of transferee of the cheque cannot be be er than tle of transferor of the cheque. It means that even if transferee has acquired in good faith s ll his tle cannot be defect free if transferor s tle is defec ve. It may be noted that though it is men oned Not Nego able, the cheque can be transferred. The only restric on is with regard to the tle passed. In other words, the principle of nemo dat quod non habet (nobody can pass on a tle be er than what he himself has) will be applicable to a cheque with a not nego able crossing, even though the cheque is in the hands of a holder in due course. 87

6 UNIT-V Account Payee Crossing / Restric ve Crossing The purpose of this crossing bearing the words A/c Payee is to obviate the risk of a wrong person obtaining payment on a cheque. It is a direc on to banker to credit the proceeds only to the account of the payee. The cheque remains legally nego able but A/c payee crossing hinders the nego ability of the cheque in prac ce. Such cheque cannot be transferred further to any person. PAYMENT OF CROSSED CHEQUE - Sec. 126 to Banker is not liable if he pays in due course a cheque - crossed generally, then to any bank.; crossed specially, then to the banker to whom it is crossed or his agent for collection (also a banker); 2. Where the banker has paid in due course the bank and drawer shall have the same right and be placed in the same posi on in all respects as if the amount has been paid to and recovered by the true owner. 3. If the payment has been made out of due course, the banks shall be liable to the true owner of the cheque for any loss the true owner may sustain. ACCEPTANCE A. MEANING It is signifying one s assent to the order of the drawer by delivery or no ca on thereof. It is ordinarily made by the drawee by signing of his name across the face of the bill and by delivery. B. WHO CAN BE ACCEPTORS: SEC.33 & 34 a) Drawee i.e., person directed to pay. b) All or some of the several drawees, when bill is addressed to more than one. However, if the several drawers are partners, acceptance by one drawee would bind all other drawees, (as partnership is based on principle of mutual agency). c) Drawee in case of need. d) An acceptor for honour. e) When no drawee has been named in a bill but a person accepts it, then he may be estopped from denying his liability as an acceptor. f) Agent of any of the persons men oned above. C. ESSENTIALS OF VALID ACCEPTANCE 1. Capacity- Every person capable of legally entering into a contract may make, accept or endorse and nego ate a nego able instrument by himself or through a duly authorised agent. 2. Acceptance must be wri en. 3. Acceptance must be signed. 4. Acceptance must be on the bill. 88

7 UNIT-V Amit Bachhawat 5. Acceptance must be completed by delivery. 6. Acceptance may be general or quali ed. HOLDER : SEC. 8 he Holder of a promissory note, bill of exchange or cheque means any person en tled - (i) (ii) in his own name, to the possession thereof i.e., he must be named in the instrument as payee or endorsee or he must be the bearer of the instrument and to receive or recover the amount due thereon from the par es thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so en tled at the me of such loss or destruc on. HOLDER IN DUE COURSE : SEC. 9 Holder in due course means any person who for considera on became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount men oned in it became payable and without having su cient cause to believe that any defect existed in the tle of the person from whom he derived his tle. Essen als are - (i) (ii) (iii) (iv) The holder must have taken the instrument for value He must have obtained the instrument before its maturity The instrument must be complete and regular on its face He must have taken the instrument in good faith and without no ce of any defect either in the instrument or in the tle of the person nego a ng it to him RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSE 1. Presump on Every holder is deemed prima facie to be a holder in due course and the burden of proving his tle is not on him. if it is proved that the history of the bill is tainted with fraud or illegality the burden is shi ed to the holder to prove that he is a holder in due course. (Sec. 118) 2. Privilege against inchoate stamped instruments When one person signs and delivers to another, a stamped but otherwise inchoate (incomplete) instrument, he is stopped from asser ng, as against a holder in due course, that the instrument has not been lled in accordance with the authority given by him provided the amount lled is covered by the stamp a xed. (Sec. 20) 3. Fic ous drawer or payee In case a bill of exchange is drawn payable to the drawer's order in a c ous name and is endorsed the same that has drawer's signature, it is not permissible for the acceptor ling against the holder in the course that such name is c ous. (Sec. 42) 4. Instruments obtained by unlawful means or for unlawful considera on The person liable in a nego able instrument cannot set up against the holder in due course the defence that the instrument had been lost or obtained from him by means of an o ence or fraud or for an unlawful considera on. (Sec. 58) 89

8 UNIT-V 5. Prior defects A holder of a nego able instrument who derives tle from a holder in due course has the rights thereon of that holder in due course. Once a nego able instrument passes through the hands of a holder in due course, it gets cleared of its defects. (Sec. 53) 6. 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 permi ed to deny the validity of the instrument as originally made or drawn. (Sec. 120) 7. Estoppel against denying capacity of payee to endorse No maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a suit thereon by a holder in due course, be permi ed to deny the payee s capacity, at the date of the note or bill, to endorse the same. (Sec. I 21) 8. Liability of prior par es Every prior party to a nego able instrument is liable thereon to a holder in due course un l the instrument is duly sa s ed. (Sec. 36) 9. Nego able Instruments without considera on A Nego able Instrument made, drawn or accepted without considera on does not create any obliga on on the par es to the transac on. But if the Nego able Instrument gets into the hands of a holder in due course he can recover the amount from par es. The plea that there was no considera on cannot be set up against him. Even HIDC CANNOT Recover if the acceptance to instrument is FORGED. Dis nc on Between Holder and Holder in Due Course Particulars Holder Holder in due course Consideration Time of possessing instrument Good faith Holder may become possessor or payee of instrument even without consideration No restriction as in case of holder in due course No restriction as in case of holder in due course Holder acquires possession only for consideration Must possess instrument before amount thereon becomes payable Must become payee of instrument in good faith ie. without sufficient cause to believe that any defect existed in the transferor s title. Every holder is due course is a holder but every holder is not in due course. Do example from page No. 198, 199. A. NEGOTIATION: SEC.14 When a promissory note, bill of exchange or cheque is transferred to any person, so as to cons tute that person the holder thereof, the instrument is said to be nego ated. 90

9 UNIT-V Amit Bachhawat B. ENDORSEMENT: SEC.15 When the maker or holder of a nego able instrument signs the same, otherwise than as such maker, for the purpose of nego a on, on the back or a slip of paper a ached thereto, Known as allonge or so signs for the purpose as a stamped paper intended to be a nego able instrument, he is said to endorse the same, and is called the Endorser. The person in whose favour the endorsement made is called Endorsee. 1. Endorsement in blank It is an endorsement wherein the endorser signs his name only. A nego able instrument endorsed in blank is payable to the bearer thereof. (Sec. 16 & 54). But name of endorsee is not wri en. 2. Endorsement in full It is an endorsement where the endorser signs his name and adds a direc on to pay the amount men oned to, or to the order of, a speci ed person and the person so speci ed is called as endorsee of the instrument. (Sec. 16) 3. Restric ve endorsement It is an endorsement which has the e ect of restric ng further nego a on and transfer. (Sec. 50) B signs the following endorsements on di erent nego able instruments payable to bearer: (a) (b) Pay to Z only. For the account of Y only. 4. Quali ed Endorsement (Sec. 52) B C D E F (Some Recourse) a. Sans recourse endorsement : (Without Liability) It is an endorsement where the Endorser excludes his own liability or makes it condi onal. The endorser of a nego able instrument may, by express words in the endorsement, exclude his own liability thereon or make such liability or the right of the endorsee to receive the amount due thereon depend upon the happening of a speci ed event, although such event may never happen. (i) (ii) (iii) Pay F or order Sans Recourse. Pay F or order without recourse to me. Pay F or order at his own risk. Where an endorser so excludes his liability and a erwards becomes the holder of the instrument, all intermediate endorsers are liable to him. A is the payee and holder of a nego able 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 is not only reinstated in his former rights, but has the rights of an endorsee against B and C. b. Sans Frais endorsement Such an endorsement indicates that endorser is not liable for expenses incurred on account of the bill. Pay X or order San Frais 91

10 UNIT-V 92 c. Faculta ve endorsement It is an endorsement wherein certain rights are waived and suitable words to this e ect are indicated. Waiver of a right to receive no ce of dishonour, wherein the endorsement would include the words no ce of dishonour dispensed with. Pay Y or order, No ce of dishonour waived. d. Con ngency based endorsement Such endorsement combines an order to pay upon the happening or non happening of an event. Pay to A on safe receipt of goods. Comment Once an instrument is bearer it always remain bearer. Statement is false because blank endorsement is the a bearer instrument but lateron blank endoresement can be converted into full endorsement. E. CONVERSION OF ENDORSEMENT IN BLANK INTO ENDORSEMENT IN FULL The holder of a nego able instrument endorsed in blank, may, without signing his own name, by wri ng above the endorser s signature a direc on to pay any other person as endorsee, convert the endorsement in blank into an endorsement in full; and the holder does not thereby incur the responsibility of an endorser. The holder does not himself sign, but only adds the name of a person before an endorsement in blank. The holder may then transfer the instrument to the person whose name be so speci ed, but will not incur the liability of an endorser. Where A, the payee of a bill of exchange, endorsed it in blank and delivered it to B, and B wrote above A s endorsement, pay the contents to C, but did not sign the bill, B was held not liable to C as an endorser of the bill. F. OTHER TERMS 1. Par al Endorsement: Sec.56 Par al endorsement refers to endorsement of a bill partly paid. An endorsement purpor ng to transfer only a part of the amount of instrument is invalid and the endorsee therefore cannot nego ate it. But when the amount due has been paid in part and a note to that e ect has been made on the instrument, then the instrument may be nego ated for the balance. An instrument of ` 100/- cannot be endorsed for ` 50/- only. But if the amount due has already been partly paid say ` 60/-, a note to that e ect may be endorsed on the instrument and it may then be nego ated for the balance of ` 40/-. 2. Nego a on Back An instrument is said to have been nego ated back to him and he is said to have taken up or taken back the nego able instrument when a person who has been a party to the nego able instrument takes it again. The endorsements on a nego able instrument are as under : P, A, B, X, Y, A

11 UNIT-V Amit Bachhawat Here A is a person who is a prior party to the instrument. He nego ated it to B, B to X, X to Y and Y again to this very A resul ng in nego a on back. This will lead to a circuity of ac on. Thus A, in the above case cannot sue Y, X or B. But A can sue P since the la er is prior to A s original endorsement. If however A, in original endorsement, had signed sans recourse there could be no circuity of ac on and A could sue Y, X or B. What will be your answer if endorsement are P, A, B, X, Y, P? Instrument is discharged. 3. Nego a on of Dishonoured or Overdue Instruments: Sec.59 The holder of a nego able instrument, who has acquired it a er dishonour, whether by nonacceptance, or non-payment, with no ce thereof, or a er maturity, has only, as against the other par es, the right thereon of his transferor. 4. Accommoda on note or bill Any person who, in good faith and for considera on, becomes the holder, a er maturity, of a promissory note or bill of exchange made, drawn or accepted without considera on, for the purpose of enabling some party thereto to raise money thereon, may recover the amount of the note or bill from any prior party. 5. Period of Nego a on: Sec. 60 Instruments remain nego able ll they are discharged by payment or by some other sa sfac on. The e ect is that where an instrument has reached its maturity, but has not been paid, it remains nego able. It is not the maturity, but the fact of actual payment at or a er maturity which puts an end to the nego ability of an instrument. Even payment will not end the life of an instrument if it is not a payment at or a er maturity. Where payment is made before maturity, the instrument remains valid for further nego a on unless the fact of payment is noted on it or it is withdrawn, cancelled or destroyed. Assignment means transferring rights to another person. Di erence Between Nego a on and Assignment Basis Negotiation Assignment Notice of Transfer Consideration for Transfer Mode Rights Title Not Necessary Presumed Bearer Instruments - Delivery, Order Instrument - endorsement & Delivery Transferee acquires all rights of a holder in due course. The title of the transferee (i.e., the holder in due course) is better than that of the transferor Notice must be served by assignor on his debtor To be proved Document to be reduced into writing and signed by transferor Assignee. has only the right, title and interest of the assignor. The title of the assignee is subject to the defects in the title of the assignor. 93

12 UNIT-V A. MATURITY - SEC. 22 The maturity of a promissory note or bill of exchange is the date at which it falls due. 1) Instruments payable on demand a. A cheque is always payable on demand. b. A promissory note or a Bill of Exchange is payable on demand 2) Time Instrument when no me for payment is speci ed in it or when it is expressed to be payable on demand or at sight or on presentment. Demand does not imply that any actual demand is to be made. It means immediately payable. Such a bill or note may be presented for payment at any me at the op on of the holder but within a reasonable me a er issue. This would become overdue when it remains in circula on for unreasonable length of me. A me Instrument is a Bill or Note which is payable (i) (ii) (iii) (iv) a er a xed period, or on a speci ed day, or a er sight, or on the happening of an event which is certain to happen i. I promise to pay a er 6 months ii. iii. iv. I promise to pay a er 90 days I promise to pay X ` 5000/- a er sight I promise to pay Y a er Z s death 3) Grace days 94 In the case of a Note or Bill payable on demand, sight, presentment, Grace days are not allowed. A Note or Bill, p.lpayable on demand, at sight or on presentment is at maturity on the third day a er the day on which it is expressed to be payable. Three days are allowed as days of grace. 4) Calcula on of maturity The expression a er sight in a promissory note means a er presentment for sight. This means that payment cannot be demanded on a Note ll it has been shown to the maker. Where a bill is payable a er a xed period a er sight, the me is to be calculated - from the date of acceptance, if the billed, and from the date of noting or protest, if the bill is noted or protested for non- acceptance. B. CALCULATION OF MATURITY 1. Maturity of bill or note payable so many months a er date or sight: Sec.23 The Bill or Note shall be at maturity on the third day a er the date on which the period of Bill or Note expires. The period of Bill / Note shall expire on that day of the month which corresponds with the day on which the bill is dated or accepted for honour.

13 UNIT-V Amit Bachhawat 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. a) A nego able instrument, dated 29th January, 200X, is made payable one month a er date. The instrument is at maturity on the third day a er February, 200X b) A nego able Instrument, dated 30th August, 200X is made payable three months a er date. The instrument is at maturity on the 3rd December, 200X. c) A promissory note or bill of exchange, dated 31st August, 200X, is made payable three months a er date. The instrument is at maturity on 3rd December 200X. d) If the date of the instrument is 15th February and is payable a er three months, it shall mature on 15th May and its payment can be demanded on the third day a er that date. 2. Maturity of bill or note payable so many days a er date or sight: Sec.24 The Bill or note shall be at maturity on the third day a er the second day. In calcula ng the date at which a promissory note or Bill of exchange made payable a certain number of days a er date or a er sight or a er a certain event is at maturity, the day of the date of presentment for acceptance or sight, or of protest for non-acceptance, or on which the event happens, shall be excluded. A bill drawn on 12th January payable a er 30 days would be due on 14th February ( ). 3. When day of maturity is a holiday: Sec. 25 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 immediate preceding business day ie., the working day earlier to the holiday. Explana on The expression public holidays includes Sundays and any other day declared by the Central Government, by no ca on in the O cial Gaze e, to be a public holiday. If the instrument matures on a day which is a emergency holiday (eg : death of national leader) the instrument shall be due on the next succeeding business day. Classi ca on of Instruments Based on Transfer Based on Loca on Based on payment Others Bearer Instrument Order Instrument Demand Instrument Time Instrument Inland Foreign Ambiguous Instrument Inchoate Instrument 95

14 UNIT-V A. BASED ON TRANSFER PROCEDURE 1. Bearer Instrument. Sec. 13 An instrument expressed to be so payable or an instrument where the only or the last Endorsement on it, is an Endorsement in blank. As per Sec. 31 of Reserve Bank of India Act, 1934, a promissory note cannot be made payable to bearer and a bill of exchange cannot be made payable to bearer on demand. A bearer instrument is transferred by mere delivery. 2. Order Instrument - Sec. 13 : Pay to X or bearer. Instrument payable to the order of a speci ed person or an instrument payable to a speci ed person or his order. Order instruments can be transferred by endorsement and delivery. : Pay to Y or order; Pay to Y. If the words or order or or bearer are missing, the instrument will be deemed to be an order instrument. B. BASED ON LOCATION 1. Inland Instrument: Sec.11 An inland instrument is Promissory Note, Bill of Exchange or Cheque; a) Drawn or made in India; and b) Made payable in India, OR drawn upon a person resident in india. An inland instrument remains inland even if it has been endorsed to a foreign country. The protest of inland bill is optional. i. A bill drawn in Mumbai on a trader in Chennai and accepted payable in Japan. ii. A bill drawn in Paris on a trader in Kolkata and accepted payable in Kolkata. 2. Foreign Instrument is an instrument which is not an Inland Instrument. Protest : Sec. 104 Foreign bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn. In case of inland bills, protest is op onal. D. OTHERS 1. Ambiguous Instruments : Sec.17 Where an instrument may be construed either as a promissory note or as a bill of exchange, the holder may at his op on treat it as either, and the instrument shall be hence-forward treated accordingly, ie,, an ambiguous instrument treated as a bill of exchange or Note cannot be treated di erently a erwards. A bill drawn by a person on himself in favour of third person or where the drawee is a c ous person. 2. Incomplete inchoate Instruments: Sec.20 Where one person signs and delivers to another, a paper stamped in accordance with the law 96

15 UNIT-V Amit Bachhawat rela ng to nego able instruments then in force in lndia and either wholly blank or having wri en thereon an incomplete nego able instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a nego able instrument, for any amount speci ed therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount. But if such instrument reaches holder in due course then he can recover more than the amount speci ed but not exceeding the amount covered by the stamp. Stamping for a bill of exchange is say 0.5% and stamps a xed is ` 500/-. If the amount of bill is not men oned, the holder in due course alone has the privilege of entering the amount not exceeding ` 1 00,000/-. The provisions of this sec on are not applicable to a cheque since a cheque is not required to be stamped. 3. Accommoda on Bills : Sec. 59 An accommoda on bill means a bill which is drawn, accepted without considera on. Provisions rela ng to such bills: a) The accommodated party cannot, a er he has paid the amount of the bill, recover the amount from any person who became a party to the bill for his accommoda on b) The person who becomes the holder of such a bill in good faith and for considera on, a er maturity, may recover the amount from any prior party. X who needs funds. draws a bill on Y who accepts the bill and gets the bill discounted with his banker and on due date remits the requisite amount to V to enable him to meet the bill; such a bill is an accommoda on bill. 4. Fic ous Bill - Sec 42 A c ous bill is a bill in which the name of the drawer or the payee or both is c ous. When both the drawer and payee of a bill are c ous persons, the acceptor is liable to a holder in due course if the holder in due course can show that the signature of The supposed drawer and that of the rst endorser (payee) are in the same handwri ng. i) A bill drawn upon X in favour of P and the drawer is a c ous person. ii) A. LIABILITY OF AGENT SIGNING: SEC.28 X draws a bill upon V in favour of Z who is a c ous person An agent who signs his name on a promissory note, bill of exchange or cheque without indica ng thereon that he signs as agent, is liable personally on the instrument. This rule does not apply if anyone had induced him to sign upon the belief that the principal only would be held liable. B. LIABILITY OF LEGAL REPRESENTATIVE: SEC.29 A legal representa ve of a deceased person who signs his own name to a promissory note, bill of exchange or cheque is liable personally for the en re amount, unless he expressly limits his liability to the extent of the assets received by him as legal representa ve. C. MINOR A minor cannot make himself liable as a drawer, an acceptor or an endorser, but where the instrument is drawn or endorsed by him, the holder can receive payment from any party thereto. 97

16 UNIT-V Cases in which a Banker must Refuse to Honour a Customer s Cheque. A banker must refuse to honour a customer s cheque in the following cases : (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) Stop payment : When the banker receives instruc ons from the customer not to honour (i.e. stop payment) a par cular cheque issued by him. Garnishee order : When the banker receives a Garnishee Order, i.e., a prohibi ng order by any court a aching the money in the customer s account. Death : When the banker receives a no ce of the death of his customer. Insolvency : When the banker receives a no ce of the insolvency of his customer. Insanity : When the banker receives a no ce of the insanity. Assignment : When the banker receives a no ce of assignment of his credit balance from a customer. Defect in tle : When the banker suspects or has reason to believe that the tle of the person presen ng the cheque is defec ve. Loss of Cheque : When the banker receives a no ce of loss of cheque from his customer. Material altera on : When there is a material altera on in the cheque and such altera on has not been authen cated by his customer by pu ng his signature. Di erent signature : When the signature of the drawer does not tally with the specimen signature kept by the bank. No ce of closure : When the banker receives a no ce in respect of closure of account. Stale cheque : When the cheque is presented a er 6 months from the date of its issue. Post dated cheque : When the cheque is presented before the actual date on which it is wri en to be payable. Undated cheque : When the cheque is undated. Cases in which a Banker may Refuse to Honour a Customer s Cheque A banker may refuse to honour a customer s cheque in the following cases : (a) (b) (c) Insu cient funds : When funds in the customer s account are insu cient to honour the cheque presented. Funds not applicable : When funds in the customer s account are not applicable for the cheque presented. Presentment a er banking hours : When the cheque is presented a er the banking hours. A cheque is drawn upon Dena Bank. It is stolen by X who hands it over to Y who takes in good faith for valuable considera on. Y deposits the cheque into his own account in Canara Bank who presents it and obtains payment from Dena Bank. Discuss the legal posi on of paying banker, collec ng banker, Y and true owner in each of the following alterna ve cases : (a) (b) (c) (d) If the cheque is payable to bearer. If the cheque is payable to bearer and is crossed generally. If the cheque is payable to bearer and is crossed generally with words not nego able. If the cheque is payable to bearer and is crossed specially with words Canara Bank. 98

17 UNIT-V Amit Bachhawat (e) (f) (g) If the cheque is payable to bearer and is crossed specially with words Allahabad Bank. If the cheque is payable to B or order and X forges B s endorsement. If the drawer s signatures were forged. Case Paying banker Collecting banker Y True owner (a) Drawee is discharged by payment in due course [Sec. 85(2)] Collec ng banker does not incure any liability to the true He is not liable to ture owner. (b) do do do do (c) do do He is liable to true owner because he got a defec ve tle. (d) do do He is not liable to true owner. (e) Drawee is discharged true owner (Sec. 129) Collec ng banker is liable to true owner (sec on 131) He is not liable to true owner. He can recover from X and not from Y He can recover from Y or X He can recover from X only. He can recover from X or paying banker or collec ng banker. (f) Drawee is discharged by payment in due course [Sec. 85(1)] Collec ng banker does not incur any liability to the true owner (Sec. 131) He is not liable to true owner. He can recover from X only. (g) Drawee is liable to true owner because the payment is not in due course (Sec on 101) Collec ng banker is liable to the true owner (Sec. 131) He is liable to true owner because forgery passes no tle at all. He can recover from paying ker, collec ng banker, collec ng banker or Y. 2. Dishonour of Cheque: Sec.138 : Drawer/Liability Condi ons A person issuing a cheque will be punishable with imprisonment for a term up to 2 years or with ne twice the amount of cheque or both, if the cheque is dishonoured due to insu ciency of funds. a) Cheque should have been in discharge of liability, ie., it does not include gi cheques. b) Cheque should be presented within period of validity / 3 months whichever is earlier. c) Cheque should have been deposited and in ma on of dishonour received sta ng insu ciency of funds as reason for dishonour. d) The holder or payee in due course should give no ce demanding payment within 30 days of his receiving no ce of in ma on of dishonour. e) If the drawer fails to make payment within 15 days of receipt of no ce, then a person could proceed for prosecu on because on the expiry of 15 days, the cause of ac on arises. f) Prosecu on complaint to be made only by payee / holder in due course within 1 month of cause of ac on. 99

18 UNIT-V On su cient cause exten on of me can be given for ling the case under Sec 138. Presumption in favour of holder (Sec. 139) Defence not allowed (Sec. 140) O ences by companies (Sec. 141) It shall be presumed, unless contrary is proved, that the holder of a cheque received the cheque for discharge, in whole or in part, of any debt or other liability. It shall not be a defence in a prosecution for that the drawer had no reason to believe that when he issued the cheque that the cheque may be dishonoured, for the reason of insufficiency of funds. If the person commi ng an o ence is a company, every person who, at the me the o ence was commi ed, 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 o ence and shall be liable to be proceeded against and punished accordingly. Further, a director, manager, secretary, or other o cer of the company shall be deemed to be guilty of that o ence and shall be liable to be proceeded against and punished accordingly in case the o ence has been commi ed with his consent or connivance, or is a ributable to any neglect on his part in this regard. However, a person will not be liable - a. where such person proves that the o ence was commi ed without his knowledge, or Solve Q. No. Page No. 197 & last Q. Page No. 201 b. where he had exercised all due diligence to prevent the commission of such o ence. A nominee Director holding any o ce or employment in Government or nancial ins tu on owned by Government shall not be liable. Explana on. The expression Company includes any body corporate and includes a rm and associa on of individuals; and director, in rela on to a rm, means a partner in the rm. Cognizance of o ences (Sec. 142) a. No Court shall take cognizance of any o ence punishable under Sec. 138 except upon a complaint, in wri ng, made by the payee or, as the case may be, the holder in due course of the cheque; b. Such complaint is to be made within one month of the date on which the cause of ac on arises under Sec. 138; c. No Court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class shall try the o ence. d. O ences u/s 138 are compoundable o ences. The Nego able Instruments (Amendment and Miscellaneous provision) Act, 2002 has introduced Sec on 143 to 147 which deal with the Court procedures followed in prosecu on rela ng to dishonour of cheque. 3. Protec on to Collec ng Banker: Sec.131 The bank which receives the payment of a crossed cheque on behalf of its customer is known as the collec ng banker. The requirements for protec on are : 100

19 UNIT-V Amit Bachhawat a) Payment should be received on behalf of and for a customer; b) The banker should receive payment of the crossed cheque as agent of the customer; c) The cheque should be crossed when handed over to the Bank for collec on. If the cheque is uncrossed the banker is not protected if the customer s tle is defec ve and he cannot secure protec on by subsequently crossing the cheque himself; d) Payment in good faith and without negligence. Protec on to paying Banker Where a cheque is payable to order and it appears to be endorsed by or on behalf of the payee, the banker will be discharged from his liability if he pays such a cheque in good faith and without negligence even though later on endorsement is found to be a forgery. K. DISCHARGE OF ENDORSER S LIABILITY: SEC.40 Where the holder of a nego able instrument, without the consent of the endorser, destroys or impairs the endorser s remedy against a prior party, then endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity. A is the holder of a bill of exchange made payable to the order of B, which contains the following endorsement in blank : First endorsement, B. Second endorsement, X. (B X Y Z A) Third endorsement, Y. Fourth endorsement, Z". A strikes out without Z s consent, the endorsements by X and Y. A is not en tled to recover anything from Z. L. EFFECT OF FORGED ENDORSEMENT ON ACCEPTOR S LIABILITY : The acceptor of a bill of exchange which is already endorsed is not relieved of his liability by reason that such endorsement is forged, if he knew or had reason to believe that the endorsement was forged. Thus if he knew or had suspicion that the endorsement was forged and even then accepted the bill, he would be liable, but not otherwise. N. LIABILITY UNDER ACCOMMODATION BILLS I WITHOUT CONSIDERATION : An accommoda on instrument means an instrument which has been made, accepted or endorsed without considera on and for the help of a party. A is in need of money. He draws a bill on B which B accepts to help A and without any considera on to B. A can get the bill discounted and thus raise a sum of money to de over his di cul es. If there is considera on or the considera on has failed, as between the par es to the transac on, no obliga on as to payment will arise. But if such an instrument has been transferred by the holder to any person for considera on, he or any transferee from him can recover from all the prior par es. The ul mate liability however is of the party for whose accommoda on the instrument was made or endorsed. He should pay it and relieve the party who helped him from liability. When he pays it, he himself cannot recover from any party. B accepts a Bill payable to C for accommoda ng A. C endorses the bill to D for considera on. D can recover the amount from B, C or A. If A has paid, he cannot recover amount from any person. If B has paid, B can recover from A. 101

20 UNIT-V P. FAILURE OF CONSIDERATION 1. Par al absence or failure of money considera on When the considera on for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in part, the sum for which a holder standing in immediate rela on with such signer is en tled to receive from him is propor onally reduced. A draws a bill on B for ` 500 payable to the order of 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 ` 400 and as an accommoda on to the plain as to the residue. A can only recover ` Par al failure of considera on not consis ng of money - Where a part of the considera on for which a person signed a promissory note, bill of exchange or cheque, though not consis ng of money, is ascertainable in terms of money without collateral enquiry, and there has been a failure of that part, the sum for which a holder standing in immediately rela on with such signer is en tled to receive from him is propor onally reduced. B. PRESENTMENT OF PROMISSORY NOTE FOR SIGHT / INSTRUMENT FOR PAYMENT : SEC 131 Presentment for payment means surrendering the instrument to the party who has been called upon to pay in such manner that he is able to get possession of the instrument on payment. Presentment for payment is necessary in all cases of nego able instruments. All nego able instruments must be presented for payment to the maker, acceptor or drawee thereof respec vely, by or on behalf of the holder. In default of such presentment, the other par es thereto are not liable thereon to such holder. 10. Presentment when excused : Presentment for payment is necessary in all the cases of nego able instruments. In default of such presentment, the other par es thereto are not liable thereon to such holder- (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) Where presentment is inten onally prevented by the maker, drawee or acceptor. Party liable to pay closes place of business during usual business hours on the due date. Nobody a ends place of payment if the instrument is payable at a speci ed place. Party liable to pay not traceable, ie., where the drawee is a c ous person, as no demand can be made on a person who does not have existence. Waiver of presentment Promise to pay notwithstanding non-presentment Part payment is made Promise to pay amount in whole or in part Presentment becomes impossible. 102

21 UNIT-V Amit Bachhawat Basis Discharge of an instrument Discharge of a party 1. When When the party who is ultimately liable, is discharged from liability. When any party or parties to an instrument is/are discharged. 2. Nego ability The instrument ceases to be nego able The instrument con nues to be nego able 3. Ex nguishments All rights of ac on under the instrument are completely ex nguished. 4. Discharge of all par es Discharge of an instrument means discharge of all par es. A. MODE OF DISCHARGE OF INSTRUMENT 1. Payment in due Course All rights of ac on under the instrument are not completely ex nguished. Discharge of a party does not mean discharge of all par es. If the maker or acceptor makes payment to the holder of the instrument on or a er maturity in good faith and without no ce of any defect in the tle to the instrument, the instrument is discharged. A payment before maturity does not discharge the instrument unless the instrument is cancelled or the fact of payment is recorded on the instrument. 2. Cancella on If the holder of an instrument cancels acceptor s or maker s name with intent to discharge him, the instrument is discharged. 3. Release If the holder of an instrument renounces his right against all the par es to the instrument, the instrument is discharged. 4. Party Primarily Liable becoming Holder If the acceptor of a bill of exchange becomes its holder at or a er maturity in his own right, the instrument is discharged. A draws a bill on B. A er several nego a ons the bill comes to B as endorsee. If B holds the instrument on maturity date, the instrument is discharged. 5. Opera on of Law A nego able instrument is also discharged by opera on of law such as - i. under the Law of the Limita on Act, on the expiry of the period prescribed for the recovery of the amount due. ii. under the Law of the Insolvency, on declara on of a party as an insolvent by an order of the court. The limita on period for the recovery of debts is 3 years from the date of default. B. DISCHARGE OF PARTY: 1. By payment - All par es to an instrument are discharged from liability when the amount due on the instrument is paid by the maker / acceptor / endorser to the holder of the instrument at or a er maturity in good faith and without no ce of any defect in the tle to the instrument. 103

22 UNIT-V 2. By cancella on of acceptor s or endorser s name 104 When the holder of a nego able instrument or his agent cancels the name of any party on the instrument with intent to discharge him from liability, such party and all subsequent par es, who have a right of recourse against the partywhose name is cancelled, are discharged from liability to the holder. The subsequent par es are in the posi on of sure es to the prior party whose name is cancelled and a discharge of the principal debtor automa cally discharges the sure es. If the maker s or acceptor s name has been cancelled, the liability of all par es to the instrument, gets discharged and the instrument itself gets discharged. This is based on the principle of law of guarantee that when a principal debtor is discharged, the sure es are also discharged. If the name of an endorser has been cancelled then all the endorsers subsequent to him will be discharged but those prior to him will remain liable. But if the holder, without consent of the endorser, destroys or impairs the endorser s remedy against a prior party, the endorser is discharged from liability. 3. By Release - The holder can discharge the maker, acceptor or endorser otherwise than by cancella on of names (by a separate agreement of waiver, release or remission). The holder may agree to release any of them from liability by a separate agreement or may do so by conduct which has the e ect of discharging a party from his liability. The e ect of release is the same as that of cancelling a party s name, ie., the party so released and all the par es subsequent to him who have a right of ac on against the party so released are discharged from liability in due course. 4. By allowing drawee more than 48 hours to accept - Sec. 83 The holder of a bill has to present it to the drawee for his acceptance. The drawee should be allowed only forty-eight hours to consider whether he will accept or not. 5. By default in presen ng cheque within reasonable me - Sec. 84 It is the duty of the holder of a cheque to present it for payment within reasonable me of its issue. If he fails to do so and before he actually presents the cheque something happens (for eg., the failure of the bank) which prevents the banker from paying the cheque, then the drawer of the cheque is discharged as against the holder provided that he had su cient balance to meet the cheque when it ought to have been presented. A draws a cheque for ` 5,00,000/- and, when the cheque ought to have been presented, he has funds at the Bank to meet it. The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove against the bank for the amount of the cheque. In determining what is a reasonable me, regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the par cular case. If the holder and the banker are at the same place, the cheque should be presented the next day a er its receipt. But if they are at di erent places, due margin has to be given for the me taken in transit. A draws a cheque at Chennai on a bank in Kolkata. The bank fails before the cheque could be presented in the ordinary course. A is not discharged, for he has not su ered, actual damage through any delay in presen ng the cheque. Similarly, a crossed cheque takes more me in reaching the drawee-banker and, therefore, me necessary for clearance is excluded in determining reasonable me for presentment.