Meaning: Negotiable means “freely transferable” from one person to another person, by mere delivery or by endorsement & delivery. According to section – 13 of Negotiable Instrument Act a “ negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer. According to this definition, any other instrument which satisfies the condition of negotiability can be added to the list of negotiable instruments.
TYPES OF NEGOTIABLE INSTRUMENTS Negotiable instruments may be 1. Negotiable by Statute, or 2. Negotiable by custom or usage. 1. Instruments negotiable by Statute. The Negotiable Instruments Act mentions only three kinds of negotiable instruments (Sec. 13). These are : promissory notes, bills of exchange and cheques. These instruments are negotiable by Statute.
Instruments negotiable by custom or usage. There are certain other instruments which have acquired the character of negotiability by usage or custom of trade. Thus in India, Government promissory notes, banker’s draft and pay orders, hundis, railway receipts for goods, have been held to be negotiable by usage or custom.
Bearer and order instruments Bearer instruments. A negotiable instrument is payable to bearer— (1) when it is expressed to be so payable, or (2) when the only or last indorsement on the instrument is an indorsement in blank. Order instruments. A negotiable instrument is payable to order— when it is expressed to be payable to order, e.g., 'Pay to A or order' or 'Pay to the order of A'. In both these cases, the bill is payable to A or his order at his option. when it is expressed to be payable to a particular person, and does not contain words prohibiting or restricting its transfer, e.g., 'Pay A one hundred rupees'
Instruments payable on demand An Instrument is payable on demand— when no time for payment is specified in it (Sec. 19) ; or when it is expressed to be payable 'on demand', or 'at sight' or 'on presentment'. Time instruments A bill or note which is payable (a) after a fixed period, or (b) after sight, or (c) on a specified day, or (d) on the happening of an event which is certain to happen, is known as a time instrument.
HOLDER AND HOLDER IN DUE COURSE Holder:- Means a person, who is entitled, in his own name:
Holder in due course:- Means a person, who fulfils following conditions:
He must have paid consideration to obtain the negotiable instrument.
He must have obtained possession of instrument, before the maturity date.
He must have obtained the instrument in good faith
Thus, where a person receives a negotiable instrument without consideration, he may be a holder but will not be called a holder in due course. The title of holder of a negotiable instrument is always subject to the title of its transferor whereas a holder in due course acquires a better title than that of its transferor.
Indorsement It means writing of a person’s name on the face or back of the NI or on a slip of paper called allonge. Who signs the instrument is called indorser and the person to whom the instrument is indorsed is called the indorsee. The first indorsement shall be made by the payee and subsequent can be made by any person who is a holder of an instrument.
The first signature of drawer as a drawer is no an indorsement but if he signs it for the second time for the purpose of negotiating it, the second will be an indorsement.
Essential of valid indorsement It must be on instrument itself It must be signed by the indorser for the purpose of negotiation It may be made by the indorser either by signing or in addition to signing also writing the name of the person to whom or to whose order the instrument is payable.
Kinds of indorsement Blank or general indorsement Full or special indorsement Restrictive indorsement Partial indorsement Conditional indorsement Sans recours
Characteristics of a negotiable instrument The characteristics of a negotiable instrument are as follows: Freely transferable. The property in a negotiable instrument passes from one person to another by delivery, if the instrument is payable to bearer, and by indorsementand delivery if it is payable to order. Title of holder free from all defects. A person, taking an instrument bone fide and for value, known as a holder due course, gets the instrument free from all defects in the title of the transferor. He is not in any way affected by any defect in the title of the transferor or of any prior party.
Example. S sells certain goods to B. B gives a promissory note to S for the price. He refuses to pay the promissory note, claiming that the goods are not according to order. If S suesBon the note, B's defence is good. But if he negotiates the note to H, a holder in due course, B's defence will be of no avail. The holder in due course is also not affected by certain defences, for example, fraud, which might be available against previous holders, provided he himself is not a party to it.
Recovery. The holder in due course can sue upon a negotiable instrument in his own name for the recovery of the amount. Further he need not give notice of transfer to the party liable on the instrument to pay. Presumptions. Certain presumptions apply to all negotiable instruments, unless contrary is proved. These presumptions are dealt with in Secs. 118 and 119 and are as follows: Consideration. Every negotiable instrument is presumed to have been made, drawn, accepted, indorsed, negotiated or transferred, for consideration. Date. Every negotiable instrument bearing date is presumed to have been drawn on such date. Time of acceptance. When a bill of exchange has been accepted, it is presumed that it was accepted within a reasonable time of its date and before its maturity.
Time of transfer. Every transfer of a negotiable instrument is presumed to have been made before its maturity. Order of indorsements. The indorsements appearing upon a negotiable instrument are presumed to have been made in the order in which they appear thereon. Stamp. When an instrument has been lost, it is presumed that it was duly stamped. Holder presumed to be a holder in due course. Every holder of a negotiable instrument is presumed to be a holder in due course (Sec. 118). Proof of protest. In a suit upon an instrument which has been dishonoured, the Court, on proof of the protest, presumes the fact of dishonour, until such fact is disproved (Sec. 119)
Types of Negotiable Instruments: 1. Promissory note A promissory note' is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to order of, a certain person, or to the bearer of the instrument (Sec. 4). The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is to be made is called the payee.
Specimen of a promissory note Rs. 1,000 Delhi, July 10, 2007 Three months after date I promise to pay Shyam Sunder or order the sum of one thousand rupees, for value received. To Stamp Shyam Sunder 222, Ashok Vihar Delhi-110052 Sd/-Ram
Essential elements For an instrument to become a promissory note, it must have the following essential elements 1. Writing. The instrument must be in writing. Mere verbal engagement to pay is not enough. Writing includes print and typewriting and may also be in pencil or ink. 2. Promise to pay. The instrument must contain an express promise to pay. A mere acknowledgement of indebtedness or implied undertaking by the use of the word 'debt' or 'pronote', is not sufficient. The following instruments signed by A are not promissory notes "Mr. B. I.O.U. Rs. 100" or "Mr. B, l owe you Rs. 100." “I am liable to B, in a sum of Rs. 500 to be paid by instalments." "I am bound to pay the sum of Rs. 500 which I received from you.“
Example. "I of my own free will and accord approached B and borrowed from him the sum of Rs. 100 bearing interest at the rate of 2 per cent per mensem. I have, therefore, executed these few presents by way of a promissory note so that it may serve as evidence and be of use when needed." Signed by A. [Bal Mukand v. MunnaLalRamjiLal) Example. 'We have received the sum of Rs. 9,000 from Shri R.R. Sharma. This amount will be repaid on demand. We have received this amount in cash.“ (Surjit Singh v. Ram Ratan)
3.Definite and unconditional. The promise to pay must be definite and unconditional. If it is uncertain or conditional, the instrument is invalid. Thus the following instruments signed by A are not promissory notes ‘I promise to pay B a sum of Rs. 500, when convenient or able.“ "I promise to pay Rs. 1,000 to B, 30 days after his marriage with C.“ This is not a promissory note as it is probable that B may not marry C (Beardsley v. Baldwin, (1741)
However, a promise (or order, in case of a bill of exchange) to pay is not 'conditional' if— (1)it depends upon an event which is certain to happen though the time of its happening may be uncertain. Example. A promises to pay B a sum of Rs. 500 after the death of C. This is not a conditional promise for it is certain that C shall die. (2) the promise is to pay at a particular place or after a specified time.
4. Signed by the maker. The instrument must be signed by the maker, otherwise it is incomplete and of no effect. 5. Certain parties. The instrument must point out with certainty as to who the maker is and who the payee is. The payee may sometimes be misnamed or designated by description only. In such case, the note is valid if the payee can be ascertained by evidence.
A promissory note cannot be made payable to the maker (promisor) himself. Such a note is a nullity. But if it is indorsed by the maker to some other person or indorsed in blank, it becomes a valid promissory note (Gay v. Landal, (1848)) 6. Certain sum of money. The sum payable must be certain and must not be capable o contingent additions or subtractions. The following instruments signed by A are not promissory notes (as the sum payable is no certain) "I promise to pay B Rs. 1,000 and all the other sums due to him." “I promise to pay B Rs. 1,000 and the fine according to the rules."
7. Promise to pay money only. The promise must be to pay money only & not any other thing If the instrument contains a promise to pay something in addition to the money, it cannot be a promissory note. For Eg. "I promise to pay B Rs. 200 and deliver one quintal of Wheat.” is not a valid promissory note.
8. Bank note or currency note is not a promissory note. This is because a bank note or a currency note is money itself. 9.Formalities like number, date, place, consideration, etc. These are usually found in an instrument although they are not essential in law. But it must bear the necessary stamp under the Indian Stamp Act, 1899. 10. It may be payable on demand or after a definite period of time. 11. It cannot be made payable to bearer on demand. The Reserve Bank of India Act 1934 prohibits issue of such promissory notes except by the Reserve Bank of India itself or the Central Government.
BILL OF EXCHANGE A bill of exchange is an instrument in writing containing an unconditional order, signed b 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). Parties to a Bill of Exchange, There are three parties to bill of exchange, viz., the drawer, the drawee and the payee. The person who gives the order to pay or who makes the bill is called the drawer. The person who is directed to pay is called the drawee. When the drawee accepts the bill, he is called the acceptor. The person to whom the payment is to be made is called the payee.
Where the payee named in a bill is a fictitious or non-existing person, the bill is treated as payable to bearer [Cluttonv. Attenborough, (1897). In some cases, the drawer and the payee, may be one and the same person. The drawer or the payee who is in possession of the bill is called the holder. The holder must present the bill to the drawee for his acceptance. When the holder indorses the bill, note or cheque, he is called the indorser. The person to whom the bill, note or cheque is indorsed is called the indorsee.
Specimen of a bill of exchange Shyam of Delhi buys goods on credit from Krishan of Mumbai for Rs. 500 to be paid 3 months after date. Krishan buys goods from Ram of Delhi for Rs. 500 on similar terms. Now Krishan may order Shyam to pay the sum of Rs. 500 to Ram. The order will be a bill of exchange.
Rs. 500 Mumbai, Jan. 10, 2007 Three months after date pay to Ram or order the sum of five hundred rupees, for value received. To Shyam, 235, SubhashMarg, Accepted Stamp Delhi – 110006 ShyamSd/-Krishan
Essential elements It must be in writing. It must contain an order to pay. Example. "Mr. Little, Please let the bearer have £ 7 and oblige.' Signed by A . This is not a bill of exchange as it contains a request and not an order [Little v. Slackford, (1828) M. & W. 171]. The order must be unconditional. It requires three parties, i.e., the drawer, the drawee and the payee. The parties must be certain. It must be signed by the drawer. The sum payable must be certain It must contain an order to pay money. The formalities relating to number, date, place and consideration, though usually found in bills, are not essential in law. But a bill must be affixed with the necessary stamp. A bill as originally drawn cannot be made payable to bearer on demand.
Distinction between a bill of exchange and a promissory note In a note there are two parties—the maker and the payee. In a bill there are three parties— the drawer, the drawee and the payee. A note contains an unconditional promise to pay. A bill contains an unconditional order to pay. The maker of a note is the debtor and he himself undertakes to pay. The drawer of a bill is the creditor who directs the drawee (his debtor) to pay. The liability of the maker of a note is primary and absolute, whereas the liability of the drawer of a bill is secondary and conditional. A note cannot be made payable to the maker himself, whereas in a bill the drawer and the payee may be one and the same person.
A note requires no acceptance whereas a bill payable after sight or after a certain period must be accepted by the drawee before it is presented for payment. A note cannot be drawn payable to bearer. A bill can be so drawn. But in no case can a note or bill be drawn payable to bearer on demand.' The maker of a note stands in immediate relation with the payee. The drawer of a bill stands in immediate relation with the acceptor and not the payee.
A note cannot be drawn payable to bearer. A bill can be so drawn. But in no case can a note or bill be drawn payable to bearer on demand. The maker of a note stands in immediate relation with the payee. The drawer of a bill stands in immediate relation with the acceptor and not the payee. In case of dishonour of a bill either by non-acceptance or by non-payment, due notice of dishonour must be given to all the persons who are to be made liable to pay. This includes the drawer and the prior indorsers. But in the case of dishonour of a note no such notice is required to be given to the maker (Sec. 93).
Types of Bills of Exchange: Demand & Usance Bills: Demand bills are otherwise called sight bills. These bills are payable immediately as soon as they are presented to the drawee. No time of payment is specified and hence they are payable at sight. Usance bills are called time bills. These bills are payable immediately after the expiry of time period mentioned in the bills.
Clean bills and Documentary bills: When bills have to be accompanied by documents of title to goods like railway receipt, lorry receipt, bill of lading etc. the bills are called documentary bills. When bills are drawn without accompanying any documents, they are called clean bills.
Inland and foreign Bills: Inland instruments. A promissory note, bill of exchange or cheque which is (1) both drawn or made in India and made payable in India, or (2) drawn upon any person resident in India, is deemed to be an inland instrument (Sec. 11). Examples: A bill of exchange drawn upon a resident in India is an inland bill irrespective of the place where it was drawn. A bill is drawn in Delhi on a merchant in Mumbai and accepted payable in Kolkata or London. A bill is drawn in Delhi on a merchant in London and accepted payable in Kolkata. Foreign instruments. An instrument, which is not an inland instrument, is deemed to be a foreign instrument (Sec. 12).
Accommodation bill A bill may be— a genuine trade bill, or an accommodation bill. When a bill is drawn, accepted, or indorsed for consideration, it is called a 'genuine trade bill'. When it is drawn, accepted or indorsed without any consideration, it is called an 'accommodation bill'. Example. A is in need of Rs. 1,000. He approaches his friend B for borrowing the amount. B is not in a position to lend, but he suggests that A might draw a bill on him which he would accept. If the credit of A is good, he would get the bill discounted with his banker. On the due date, A would pay Rs. 1,000 to B who would meet the bill. This bill is an accommodation bill.
CHEQUES: A cheque, in essence, is an order by the customer of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer. Section 6 defines a cheque as “a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.” Thus, a cheque is a bill of exchange with two added features, viz. (i) it is always drawn on a specified banker, (ii) and it is always payable on demand and not otherwise.
Every bank has its own printed cheque forms which are supplied to the account holders at the time of opening the account as well as, subsequently whenever needed. These forms are printed on special security paper which is sensitive to chemicals and makes any chemical alterations noticeable. Although, legally; a customer may withdraw his money even by writing his directions to the banker on a plain paper but in practice bankers honour only those orders which are issued on the printed forms of cheques.
Requisites of a Cheque. The requisites of a cheques are: Written instrument. A cheque must be an instrument in writing. Regarding the writing materials to be used, law does not lay down any restrictions and therefore cheque may be written either with (a) pen (b) typewriter or may be (c) printed. Unconditional order. A cheque must contain an unconditional order. It is, however, not necessary that the word order or its equivalent must be used to make the document a cheque.. Generally, the order to bank is expressed by the word "pay".
A cheque must be drawn on a specified banker only. A certain sum of money. The order must be only for the payment of money and that too must be specified. Thus, orders asking the banker to deliver securities or certain other things cannot be regarded as cheques. Payee to be certain. A cheque to be valid must be payable to a certain person. 'Person' should not be understood in a limited sense including only human beings. The term in fact includes 'legal persons' also. Thus, instruments drawn in favour of a body corporate, local authorities, clubs, institutions, etc., are valid instruments being payable to legal persons.
Payable on demand. A cheque to be valid must be payable on demand and not otherwise. Use of the words 'on demand' or their equivalent is not necessary. When the drawer asks the banker to pay and does not specify the time for its payment, the instrument is payable on demand (s.19). Amount of the cheque. Amount of the cheque must be clearly mentioned. The amount should be written both in words as well as figures so as to avoid mistakes. Moreover, the amount should be so written as to leave no blank space before or after the words and figures specifying the amount. In case a customer does so, though innocently and his banker pays the forged amount because the forgery is not noticeable in spite of reasonable care, the banker would be justified in debiting his account with the amount actually paid.
Dating of cheques. The drawer of a cheque is expected to date it before it leaves his hands. A cheque without a date is considered incomplete and is returned unpaid by the banks. The drawer can date a cheque with the date earlier or later than the date on which it is drawn. A cheque bearing an earlier date is ante-dated and the one bearing the later date is called post-dated. A post-dated cheque cannot be honoured, except at the personal risk of the bank's manager, till the date mentioned. A post-dated cheque is as much negotiable as a cheque for which payment is due, i.e., the transferee of a post-dated cheque, like that of the cheque on which payment is due, acquires a better title than its transferor, if he is a holder in due course. A cheque that bears a date earlier than six months is a stale cheque and cannot be claimed for.
A Bill of Exchange and a Cheque Distinguished. Cheque must be drawn only on a banker. A Bill can be drawn on any person including a banker. In Cheque, the amount is always payable on demand. In bills amount may be payable on demand or after a specified time. The cheque is not enlitled to days of grace. A usance (time) bill is entitled to three days of grace. Acceptance is not needed in a cheque, A bill payable after sight must be accepted
A cheque can be crossed. Crossing of a bill of exchange is not possible In Cheque notice of dishonour is not necessary. The parties thereon remain liable, even if no notice of the dishonour is given, In bills notice of dishonour is necessary to hold the parties liable thereon. A party who does not receive a notice of dishonor can generally escape its liability thereon.
A cheque is not to be noted or protested in case of dishonour. A bill is noted or protested to establish dishonour. Out-of-date, or Stale and Post dated Cheques: The paying banker is bound to pay only such cheques as are presented to him for payment within a reasonable time of issue. Usually, the cheque presented after six months of the date mentioned thereon are considered stale and hence are returned by the banker for their confirmation of the drawers.
This period of six months is sometimes varied by a special agreement with a particular customer. For example, a company issuing dividend warrants, reduces this period to three months. In any case, the company may revalidate the same on the request of the holder who fails to present it within the stipulated period of three months.
There are two types of cheques, open chequesand crossed cheques. A cheque which is payable in cash across the counter of a bank is called an open cheque. When such a cheque is in circulation, a great risk attends it, If its holder loses it, its finder may go to the bank and get payment unless its payment has already been stopped. It was to prevent the losses incurred by open cheques getting into the hands of wrong persons that the custom of crossing was introduced. A crossed cheque is one on which two parallel transverse lines with or without the words '& Co.' are drawn. The payment of such a cheque can be obtained only through a banker. Thus crossing is a direction to the drawee banker to pay the amount of money on a crossed cheque generally to a banker or a particular banker so that the party who obtains the payment of the cheque can be easily traced.
The crossing compels the holder to present the cheque through a 'quarter of known respectability and credit" and affords security and protection to the owner of the cheque, as the cheque is payable only through a banker. Types of crossing. 1. General crossing. A cheque is said to be crossed generally where it bears across its face an addition of‑ the words 'and company' or any abbreviation thereof, between two parallel transverse lines, either with or without the words 'not negotiable' or two parallel transverse lines simply, either with or without the words 'not negotiable' (Sec. 123).
Where a cheque is crossed generally, the drawee banker shall not pay it unless it is presented by a banker (Sec. 126, para 1). 2. Special crossing. Where a cheque bears across its face an addition of the name of a banker, either with or without the words 'not negotiable', the cheque is deemed to be crossed specially (Sec. 124). Where a cheque is crossed specially the banker on whom it is drawn shall pay it only to the banker on whom it is crossed, or his agent for collection (Sec. 126, para 2).
Restrictive crossing. In addition to the two statutory types of crossing discussed above, there is another type which has been adopted by commercial and banking usage. In this type of crossing the words 'A/c Payee' are added to the general or special crossing. The words 'A/c Payee' on a cheque are a direction to the collecting banker that the amount collected on the cheque is to be credited to the account of the payee. If he credits the proceeds to a different account, he is guilty of negligence and will be liable to the true owner for the amount of the cheque. In practice, the collecting banker sees to it that such instruction is carried out and usually refuses to accept A/c payee crossed cheques with any endorsement thereon.
Not negotiable crossing (Sec. 130). The effect of the words 'not negotiable' on a crossed cheque is that the title of the transferee of such a cheque cannot be better than that of its transferor. The addition of the words 'not negotiable' does not restrict the further transferability of the cheque. It only takes away the main feature of negotiability, which is, that a holder with a defective title can give a good title to a subsequent holder in due course. Anyone who takes a cheque marked 'not negotiable' takes it at his own risk. The object of crossing a cheque 'not negotiable' is to afford protection to the drawer or holder of the cheque against miscarriage or dishonesty in the course of transit by making it difficult to get the cheque so crossed cashed, until it reaches its destination.
Example. W drew a cheque crossed 'not negotiable' in blank and handed it to his clerk to fill in the amount and the name of the payee. The clerk inserted a sum in excess of her authority and delivered the cheque to P in payment of a debt of her own. Is W liable to P? (Wilson & Meesonv. Pikering, (1946))
When Banker must refuse payment? A paying banker must refuse payment on cheques if any of the following circumstances exist: 1. Where the customer countermands the payment A banker must refuse to honourcheque, payment for which has been stopped by the drawer. However, the instructions regarding ‘Stop Payment’ should be honored only if it is in a (a) writing, (b) signed by the drawer, and (c) mentions the number, the date, the name of the payee and the amount of the cheque.
In case of joint account or partnership accounts any of the joint account holders or any of the partner if asks the banker to stop the payment, he should do so. But in such cases any request to remove the stop order must be signed by all the required signatories, though the better course is to suggest the issue of the new cheque. It needs to be emphasized that a banker must follow the customers’ instructions to stop payment very carefully to avoid liability thereon. In Hilton v. Westminster Bank Ltd. (1927), it was observed that “a bank could be sued as much for failing to honour a cheque as for cashing a cheque that had been stopped”
In case information regarding “Stop Payment” is received by telegram or telephone, the payment should be postponed and the drawer asked to send a written confirmation so as to avoid the risk of any unauthorized stopping of payment. Effect of Payment of countermanded Cheque In case a bank pays a countermanded cheque, not only he will be asked to reverse the entry but also to pay damages for dishonor of the cheques presented subsequently which would have been honored otherwise.
2. On receipt of a notice of customers’ Death The payment of cheques presented after death of customer must not be made. But where the payment is made without knowing the fact of the customers’ death, bank can not be held liable. 3. On customers becoming Insolvent. On a person being declared or adjudicated as insolvent, his properties vest in the official receiver or assignment and therefore any cheques presented after the adjudication of a customer as insolvent must be refused payment.
4. On receipt of a notice of the customers’ Insanity. A banker should refuse payment on cheques drawn and received after the receipt of notice of the customers’ insanity. As to how a banker should believe a customer insane, it is suggested that if the customer has been removed to the lunatic asylum, the banker will be justified in assuming him as insane. Otherwise a certificate from a competent doctor should be obtained in this regard. 5. On suspicion as to title Where the banker believes that the person presenting the cheque is not entitled to receive the payment thereon. For eg. Where the banker believes it has been stolen.
6. On suspicious misuse by trustee In case of trust accounts, if the banker feels suspicious that the trustee intends to use the amount of the cheque for his personal use. When bankers may refuse payment? In the following cases banker may dishonor a cheque without incurring any liability thereon: 1. Where the cheque is post dated. Refusal to pay a post dated cheque before its due date does not make a banker liable for wrongful dishonor.
2. Where the funds of the customer are insufficient. The banker may however honor the cheque in case it feels that the customer is a long trusted customer. 3. Where the cheque is not duly presented. For instance, a cheque presented after business hours shall be deemed not to have been duly presented. 4. In case of a Joint account to be operated by all jointly, where the cheque is not signed by all of the joint account holders. 5. Where the cheque is irregular, ambiguous or otherwise materially altered. 6. Where the cheque is presented after a period of six months from the date it bears, i.e it has become stale.
Answers generally given by Banks in Case of Dishonored Cheques: R.D. – “Refer to Drawer”. The expression is used to convey to the holder that funds in the drawer’s account are not sufficient to honor the cheque and, therefore, he should refer to the drawer for payment. N .S. = "Not Sufficient"; N.E. = "No Effects" and N .F. = "No Funds" are other abbreviations used for the same purpose. These terms have been declared to have defamatory meaning and therefore, where a cheque has to be returned for reasons other than insufficient funds, the bank should avoid the use of such words, viz., "RD." 'Refer to Drawer'; 'N.S.' 'Not Sufficient', etc.
E.I. = "Endorsement Irregular". When an endorsement on a cheque is not in order e.g., the spelling of the payee's name appearing in the endorsement from that on the face of the cheque, the cheque is returned with his remark. E.N.C. = "Effects Not Cleared." This reply is given where the drawer has paid in cheques or bills for collection, but their proceeds have not been realised by that time. "Irregularly drawn: requires confirmation." This expression is used where the cheque appears to have been drawn in an unusual manner or ambiguous manner or where the banker suspects the cheque having been tampered with.
D.D. = "Drawer Deceased." When the drawee comes to know of the drawer's death, payment on cheques drawn prior to his death should be suspended. W. & ED. = "Words and Figures Differ," This answer is given where the amount stated in words differ from the amount in figures.
DISHONOUR OF A CHEQUE ON GROUNDS OF INSUFFICIENCY OF FUNDS Sections 138-142 of the Negotiable Instruments Act [added by the (Amendment) Act,B8] provides for criminal penalties in the event of dishonour of cheques for insufficiency of funds. The drawer, under Sec. 138, may be punished with imprisonment up to 2 years or with a fine up to twice the amount of the cheque or with both.
However, in order to attract the aforesaid penalties, following conditions must be satisfied- 1. The cheque has been dishonoured due to insufficiency of funds in the account maintained by him with a banker for payment of any amount of money to another person from out of that account. In case of stop-payment, it shall be deemed to have been so dishonoured for insufficiency of funds unless stop payment can be justified. Dishonour due to closure of account has also been held to be dishonour for insufficiency of funds Similarly, directing the payee not to present will be deemed to have the same effect [Modi Cement Ltd. v. KuchilKutmar Nandi (1998) )
2. The payment for which the cheque was issued should have been in discharge of a legally enforceable debt or liability in whole or part of it. It may be noted that the holder of a cheque shall be presumed to have received the cheque for discharge, in whole or in part, of any debt or other liability (Sec. 139). 3. The cheque should have been presented within 6 months from the date on which it is drawn or within the period of validity, whichever is earlier.
4. The payee or the holder in due course of the cheque should have given notice demanding payment within 30 daysfrom the drawer on receipt of information of dishonour of cheque from the bank. If notice is served within the said 30 days, no fresh cause of action can be created by presenting the cheque again. But, if notice is not served as above, presentment again will create a fresh cause of action It may be noted that there is no compulsion to issue notice on first default
5. The drawer is liable only if he fails to make the payment within 15 days of such notice period. 6. The payee or holder in due course of the chequedishonoured should have made a complaint within one month of cause of action arising out of Sec. 138. However, no Court shall take cognizance of any offence punishable under Sec. 138 except upon a complaint, in writing, made by the payee, or, as the case may be, the holder in due course of the cheque. Further, no Court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class shall try any offence punishable under Sec. 138.
Offences by Companies If the person committing an offence is a company, every person, who at the time the offence was committed, was in charge of and was responsible to, the company for the conduct of the banker of the company, as well as the company, shall be deemed to be guilty of offence and shall be liable to be proceeded against and punished accordingly. To invoke the liability of the company, notice of dishonour should be served on the company. However, notice served on the director who had signed the cheque was held valid - Rajneesh Aggarwal v. AmitBhalla(2001). Further, a director, manager, secretary or other officer of the company shall be liable to be proceeded against and punished accordingly in case the offence has been committed with the consent or connivance, or is attributable to any neglect on his part in this regard.
However, a person will not be liable in a case: where such person proves that the offence was committed without his knowledge, or where he had exercised all due diligence to prevent the commission of such offence; where he is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or financial corporation owned or controlled by the Central Government or the State Government, as the case may be.
Liability of Company in Liquidation The Supreme Court in PankajMishra v. State of Maharashtra (2001) had held that the offence under Section 138 would be complete when drawer fails to make payment within stipulated time whatever because for such failure and, therefore, company could not avert its penal liability under Section 138 on mere ground that petition for its winding up was presented prior to company being called upon by notice to pay amount of dishonouredcheque.
Scope of Section 138 Post-dated Cheques Offence under Section 138 of the Act would be committed only when a cheque drawn for payment of any debt or liability is returned by the bank unpaid and the drawer fails to make payment of the said amount within 15 days of the notice of dishonour. One of the elements to be satisfied is that the cheque should have been returned unpaid. It goes without saying that such return of the cheque by the drawee could only be on presentation; that is when he is capable of presenting the same for encashment. In the case of the post-dated cheque, the same can be presented only on or after the date of the cheque. Thus, if a post-dated cheque is presented within 6 months from the date it hears, the presentation shall be deemed to be in order and hence cause of action shall lie under Sec. 138.
The Supreme Court in Anil Kumar Sawhney v. GuishanRai (1993) observed that in case of a post-dated cheque, up to the date shown on the cheque, it remains a mere bill of exchange and becomes a cheque only from the date written on it. A cheque is an instrument payable on demand. A post-dated cheque which is not payable on demand till the particular date is not a cheque in the eyes of law till the date it becomes payable on demand. The period of six months is, therefore, to be reckoned from the date of the cheque.
Account Closed—Whether Covered Under Section 138? Whether Section 138 is attracted when the cheque is returned with the memorandum "Account Closed"? The question was considered in the case of S. Prasanna v. R. Vijayalakshnii (1993) 76 Comp. Cas. 522. The Madras High Court observed as follows: Section 138 is attracted when a cheque is returned by the bank unpaid in two circumstances, viz, (i) the amount of money standing to the credit of that account is insufficient to honour the cheque, or (ii) it exceeds the amount arranged to be paid from that account. It does not include a situation where the cheque is returned because the account is closed.
However, the recent judgements offer an otherwise view. In G.M. Mittal Stainless Steel v. Nagarjuna Investments (1997) 90 Comp. Cas. 106, it was held that 'the return of cheque by the bank with endorsement 'account closed' and non-payment of the amount of the cheque after due notice is sufficient for deemed commission of an offence under Section 138 of the Negotiable Instruments Act, 1881. Again, in N.E.P.C. Micon Ltd. v. Magma Leasing Ltd. (1999) 96 Comp. Cas. 822, it has been held that dishonour of a cheque on account of 'account closed' tantamounts to dishonour for insufficiency of funds since the account is rendered to a cipher. Any otherwise interpretation will only encourage the dishonest persons to issue cheques and then close the account.
Cheque not issued in discharge of liability—Whether covered? The Calcutta High Court in In-mark Finance & Investment Co. Pvt. Ltd. and another v. Metropolitan Magistrate, Bombay and others (1993) 76 Comp. Cas. 156 (Cal.) held that in order to attract the provisions of Section 138 of the Negotiable Instruments Act, it is necessary that the cheques are issued in discharge of a debt or liability. Unless the cheques are so issued, the drawer will not be guilty of the offence under Section 138 of the Negotiable Instruments Act even if other conditions are fulfilled.
Jurisdiction of the Court under Section 138 As to which Court shall have the jurisdiction to entertain complaints under Section 138, the Kerala High Court in P.K. Muraleedharan v. C.K. Pareed (1993) 76 Comp. Cas. 615, observed that the cause of action as contemplated by Section 142 of the Negotiable Instruments Act arises at the place where the drawer of the cheque fails to make payment of the money. That can be the place where the bank to which the cheque was issued is located. It can also be the place where the cheque was issued or delivered. The Court within whose jurisdiction any of the above mentioned places fall has, therefore, got jurisdiction to try the offence under Section 138 of the Act.
Time within which action must be taken under Section 138 Under Section 142 (b) of the Negotiable Instruments Act, action under Section 138 must be taken within one month after the failure of the drawer to make the payment on expiry of 15 days from the service of the notice. The Andhra Pradesh High Court, therefore held the period of limitation viz, one month starts from the 16th day after the receipt of notice by the petitioner Thus, in the case of M/s Mahalakshmi Enterprises, Calicut - Kerala and Another v. Sri Vishnu Trading Co. and Another, AIR 1991 A.P. 74, MIs Sri Vishnu Trading Co. field a complaint uls 138 on the ground that the cheque dated 16.7.1989 issued for I Rs. 15,260/- by the petitioner was dishonoured on 24.7.1989. In view of the dishonour, they issued a notice to the petitioner on 20 August, 1989, which was received by the petitioner on 24.8.1989. On 5.9.1989, they field the petition before the Court complaining of the offence under Section 138 (c).
The Court held that the notice was received by the petitioner on 24.8.1989 and thereafter he had time to pay the amount within 15 days. The limitation starts from the date of expiry of 15 days, viz., from 9.9.1989, the 16th day. The complaint was field on 5.9.1989 which therefore is within limitation.
Effect of – Part Payment Any part-payment would not affect the cause of action of the payee to file a complaint. Clause (b) of the proviso requires that on dishonour the payee shall make a demand for the payment of the "said amount of money" by giving a notice in writing which means that the notice shall make a demand for payment of the amount mentioned in the cheque. Clause (c) refers only to failure of the drawer of such cheque to make payment of the 'said amount of money' makes it clear that the drawer would have to make payment of the entire amount of money as mentioned in the cheque and any part payment, even if made, would be of no avail to the drawer of the cheque for evading prosecution. If part-payment could protect the drawer of the cheque from prosecution this would have been a very handy and convenient device for an unscrupulous person to frustrate the very purpose of section 138.
It is immaterial whether the pay order which was issued in part-payment was encashed after filling the complaint. Once the offence was complete any subsequent conduct either of the complainant or of the accused would not wash away the offence. Fine: The power to impose fine under the section is quite flexible and the court may impose any amount of fine not exceeding twice the amount of the cheque or even may not impose any fine at all on passing a sentence of imprisonment alone.
CONSEQUENCES OF A WRONGFUL DISHONOUR If a banker, without justification, dishonours his customer's cheque, he makes himself liable to compensate the customer for any loss or damage. The words "loss or damage" used in Section 31, not only mean the pecuniary loss but also loss of credit or injury to reputation of the customer. Thus, if the customer is a trader or a business man, the damages may be substantial. But, a non trader is not entitled to recover substantial damages for the wrongful dishonour of his cheque. In Gibbs v. Westminster Bank. Mrs, Margaret Gibbons, a non-trader, was awarded only nominal damages because of the absence of any special loss. In assessing the damages for injury to credit, the Courts give due consideration to various factors, such as financial position and business reputation of the customer and the customs of the trade to which he may belong.
Discharge of One or More Parties from the liability: A party is said to be discharged from his liability when his liability on the instrument comes to an end. When only some of the parties to a negotiable instrument are discharged, the instrument continues to be negotiable and the undercharged parties remain liable on it. One or more parties to a negotiable instrument is/are discharged from liability in the following ways:
1. By cancellation [s.82 (a)]. When the holder of a negotiable instrument deliberately cancels the name of any of the party (by drawing a line through the name) liable on the instrument with an intent to discharge him from liability thereon, such party and all endorsers subsequent to him, who have a right of action against the party whose name is so cancelled, are discharged from liability.
Thus, if the maker's or acceptor's name has been cancelled, the liability of other parties to the instrument, who must have obviously become parties thereto subsequent to the maker or acceptor comes to an end, which in effect discharges or cancels the instrument itself. But 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
2. By release (s.82 (b)). If the holder of a negotiable instrument releases any party to the instrument by any method other than cancellation of names (i.e., by a separate agreement of waiver, release, or remission), the party so released and all parties subsequent to him, who have a right of action against the party so released, are discharged from liability.
3. By payment (s.82 (c) ) When the party primarily liable on the instrument makes the payment in due course to the holder at or after maturity, all the parties to the instrument stand discharged, because the instrument as such is discharged by such payment. 4. By allowing drawee more than 48 hours to accept (s.83). If the holder of a bill of exchange allows the drawee more than forty eight hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder.
5. By taking qualified acceptance (s.86). If the holder of the bill agrees to a qualified acceptance all prior parties whose consent is not obtained to such an acceptance are discharged for liability. 6. By not giving notice of dishonour. Any party to a negotiable instrument (other than the party primarily liable) to whom notice of dishonour is not sent by the holder is discharged from liability as against the holder, unless the circumstances are such that no notice of dishonour is required to be sent.
7. By non-presentment for acceptance of a bill (s.61). When a bill of exchange is payable certain period after sight, its holder must present it for acceptance to the drawee within a reasonable time after it is drawn. If he makes a default in making such presentment, the drawer and all endorsers who were liable towards such a holder are discharged from their liability towards him.
8. By delay in presenting a cheque (s.84). It is the duty of the holder of a cheque to present it for payment within a reasonable time of its issue. If he fails to do so and in the meanwhile the bank fails causing damage to the drawer, the drawer is discharged as against the holder to the extent of the actual damage suffered by him. Example: A draws a cheque for Rs. 1000, and when the cheque ought to be presented,has funds at the bank to meet the cheque. The bank fails before the cheque is presented and pays 25 paise per Rupee. The drawer is discharged to the extent of Rs.750
9. By material alteration Any material alteration of a negotiable instrument renders the same void, i.e., discharges the instrument itself and all parties thereto before such alteration unless they have consented to the alteration. (s.87) But, persons who become parties to the instrument after the alteration are liable under the instrument as altered. In other words, those who take an altered instrument cannot complain (s.88). 10. By negotiation back. When a bill of exchange comes back to the acceptor by process of negotiation and he becomes its holder, it is called 'negotiation back' and all rights of action thereon are extinguished [s.90].
The sale of goods is the most common of all commercial contracts. A knowledge of its main principles is of the utmost importance to all classes of the community. The law relating to it is contained in the Sale of Goods Act, 1930. Prior to this Act, the law of sale of goods was contained in Chapter VII of the Indian Contract Act, 1872.
FORMATION OF CONTRACT OF SALE A contract of sale of goods is a contract whereby the seller transfersor agrees to transferthe property to goods to the buyer for a price. A contract of sale may be absolute or conditional [Sec. 4 (2)]. The term 'contract of sale' is a generic term and includes both a sale and an agreement to sell. Sale and agreement to sell. Where under a contract of sale, the property in the goods is transferred from the seller to the buyer, the contract is called a sale', but where the transfer of the property in the goods is to take place at a future time or subject to some conditions thereafter to be fulfilled, the contract is called an 'agreement to sell' [Sec. 4 (3) ]. An agreement to sell becomes a sale when the time elapses or the conditions, subject to which the property in the goods is to be transferred are fulfilled [Sec. 4 (4)]. Transfer of property in goods for a price is the linchpin of the definition of contract of sale
Essentials of a contract of sale. The following essential elements are necessary for a contract of sale Two parties. There must be two distinct parties. i.e., a buyer and a seller, to effect a contract of sale and they must be competent to contract. 'Buyer' means a person who buys or agrees to buy goods [Sec. 2(1)]. Seller means a person who sells or agrees to sell goods [Sec. 2 (13)].
2. Goods. There must be some goods the property in which is or is to be transferred from the seller to the buyer. The goods which form the subject-matter of the contract of sale must be movable. Transfer of immovable property is not regulated by the Sale of Goods Act. 3. Price. The consideration for the contract of sale, called price, must be money. When goods are exchanged for goods, it is not a sale but a barter. There is, however, nothing to prevent the consideration from being partly in money and partly in goods [Sheldon v. Cox, (1824) 3 B. & C. 4201.
Example. A agreed to exchange with B 100 quarters of barley at £ 2 per quarter for 52 bullocks valued at £ 6 per bullock and pay the difference in cash. [Aldridge v. Johnson, (1857) 7 E. & B. 385]. Is it a contract of sale? 4. Transfer of general property. Theremust be a transfer of general property as distinguished from special property in goods from the seller to the buyer. If A owns certain goods. he has general property in the goods. If he pledges them with B, B has special property in the goods. 5. Essential elements of a valid contract. All the essential elements of a valid contract must be present in the contract of sale.
Sale and agreement to sell—distinction A sale is an executed contract and an agreement to sell is an executory contract. Risk of loss. In a sale, if the goods are destroyed, the loss falls on the buyer even though the goods are in the possession of the seller. In an agreement to sell, if the goods are destroyed, the loss falls on the seller, even though the goods are in the possession of the buyer. Consequences of breach. In a sale, if the buyer fails to pay the price of the goods or if there is a breach of contract by the buyer, the seller can sue for the price even though the goods are still in his possession. In an agreement to sell if there is a breach of contract by the buyer, the seller can only sue for damages and not for the price even though the goods are in the possession of the buyer.
General and particular property. A sale is a contract plus conveyance, and creates jus in rem, i.e., gives right to the buyer to enjoy the goods as against the world at large including the seller as well as ownership of goods An agreement to sell is merely a contract, pure and simple, and creates ,jus in personam, i.e., it gives both the parties, a right to enforce the contract against each other.
Insolvency of buyer. In a sale, if the buyer becomes insolvent before he pays for the goods, the seller, in the absence of lien over the goods, must return them to the Official Receiver or Assignee. He can only claim a rateable dividend for the price of the goods. In an agreement to sell, if the buyer becomes insolvent and has not yet paid the price, the seller is not bound to part with the goods until he is paid for. Insolvency of seller. In a sale, if the seller becomes insolvent, the buyer, being the owner, is entitled to recover the goods from the Official Receiver or Assignee. In an agreement to sell, if the buyer, who has paid the price, finds that the seller has become insolvent, he can only claim a rateable dividend and not the goods because property in them has not yet passed to him.