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  • 1. Tuesday, October 21, 2008The Negotiable Instruments Act, 1881.The Negotiable Instruments Act, 1881.The Act extends to the whole of India. It regulates commercial transactions, monetary dealingsand deals with promissory notes, bills of exchange and cheques. The latest amendment to the Actwas made in 2002.DEFINITION OF NEGOTIABLE INSTRUMENTSNegotiable instrument is a document which entitles a person to a sum of money and which istransferable from one person to another by mere delivery or by endorsement and delivery. Theword ―negotiable‖ means ― transferable from one person to another in return for consideration‖and ―instrument‖ means a ― written document by which a right is created in favour of someperson‖Characteristics of a Negotiable Instrument:1. Easy negotiability.2. Transferee can sue in his own name without giving notice to the debtor.3. Better title to a bona fide transferee for value.4. Presumptions:a). Consideration.b). Date.c). Time of acceptance.d). Time of transfer.e). Order of endorsements.f). Stamp.g).Holder presumed to be a holder in due course.h).Proof of protest.KINDS Of NEGOTIABLE INSTRUMENTSThe Act recognises only three kinds of instruments under section 13 of the Act but it does notexclude any other negotiable instrument provided the instrument entitles a person to a sum ofmoney and is transferable by delivery.The various kinds of instruments are:Bills of Exchange.Promissory Notes.Cheques.BILLS OF EXCHANGEDefinition: A bill of exchange is an instrument in writing containing an unconditional order,signed by the maker, directing a certain person to pay a certain sum of money only to or to theorder of, a certain person or to the bearer of the instrument.There are three parties to the bill of exchange- drawer, drawee and payee.Essentials of a Bill of Exchange :
  • 2. Must be in writing.Must contain an unconditional order to pay money.Must be signed by drawer.Parties must be certain.Sum payable must be certain.Must comply with other formalities eg. Stamps, date etc.PROMISSORY NOTESA promissory note is an instrument in writing ( not being a bank note or a currency note)containing an unconditional undertaking, signed by the maker to pay a certain sum of money to,or to the order of , a certain person, or only to the bearer of the instrument.Parties to a promissory note are the Maker, the Payee, and the Holder.Essentials of a promissory note:Must be in writing.Must contain an express promise or clear undertaking to pay.Promise must be unconditional.Must be signed by the maker in token of an undertaking to pay to the payee or his order.The maker and the payee must be certain person.Sum must be certain.Amount payable must be in legal tender money of India.Must be properly stamped .Must contain a name of place, number and the date on which it is made.Holder in Due Course.A person is ‗holder in due course‘ if he posses the following qualifications:That for consideration became the possessor of the negitiable instrument if payable to the bearer,or the payee or the indorsee thereof if payable to order .That he became the holder of the instrument before its maturity.That he became the holder in good faith without sufficient cause to believe that any defectexisted in the title of the transferor.Privileges of a Holder in Due CourseGets a better title than that of a transferor.Liability of prior parties.CHEQUEA cheque is a bill of exchange drawn on specified banker and not expressed to be payableotherwise than on demand and it includes the electronic image of a truncated cheque and acheque in electronic form.Cheque is a bill of exchange but has 2 additional qualifications:a). Always drawn of specified banker.b). Always payable on demand.Crossing of Cheques.There are two types of cheques :a). Open cheque- a cheque which is payable in cash across the counter of a bank is called an
  • 3. open cheque. Such a cheque runs great risk in the course of circulation.b). Crossed cheque- is one on which two parallel transverse lines with or without the words aredrawn on the left hand top corner of the cheque. The payment of such a cheque is obtainedthrough a banker.There are two types of crossing:General crossing: Where a cheque bears across its face two parallel transverse lines without anywords or with words ‗and company‘ or/ and ‗not negotiable‘ written in between these lines iscalled general crossing.1. Special crossing: Where a cheque bears across its face an addition of the name of a banker,either with or without words ‗not negotiable,‘ the cheque is deemed to be crossed specially.Thepayment can be obtained only through the particular banker whose name appears across the faceof the cheque.2. Restrictive crossing: This type has been adopted by commercial or banking usage. In thistype of crossing the words ‗ A/c Payee‘ are added to the general or special crossing.Who may cross a cheque :The drawer.The holder.The banker.NegotiationWhen a negotiable instrument is transferred to any person, so as to constitute that person asholder thereof, the instrument is said to be negotiated.There are two methods of negotiation:1. Negotiation by delivery: If a instrument is payable to bearer , it is negotiation by delivery.2. Negotiation by indorsement and delivery: If an instrument is payable to order, it isnegotiable by the holder by indorsement and delivery thereof.INDORSEMENTIt means writing of a person‘s name on the instrument for the purpose of negotiation. The personwho indorses the instrument is known as ‗indorser‘ , and the person to whom it is indorsed iscalled the ‗indorsee‘ .Types of indorsement: Blank or general indorsement: A blank indorsement is effected by the simple signature of the indorser on the face or back of the instrument.It specifies no indorse and the instrument in consequence becomes payable to the bearer. Full or special indorsement: If the indorser signs his name and adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, indoresement is full. Restrictive indorsement: When by express words , indorsee is prohibited from further negotiation , indorsement is restrictive. Partial Indorsement: When an indorsement purports to transfer to the indorsee a part of the amount only . A partial indorsement does not operate as negotiation of the instrument.
  • 4. Conditional indorsement: If the indorser by express words, make his liability, dependent on the happening of the event, although such event may never happen, such indorsement is conditional indorsement.Posted by Sharvani Shukla at 5:36 PM1 comments: EGOTIABLE INSTRUMENTS ACTNegotiable Instruments are money/cash equivalents. These can be converted into liquid cashsubject to certain conditions. They play an important role in the economy in settlement of debtsand claims. The transactions involving the Negotiable Instruments in our country are regulatedby law and the framework of the Statute which governs the transaction of these instruments isknown as The Negotiable Instruments Act. This act was framed in our country in the year 1881when the British ruled our country. Prior to 1881 the transactions governing NegotiableInstruments were regulated under the cover of Indian Contract Act 1872. This act has beenamended as many as 23 times to meet the needs of the time. The last amendment was made in2002.PreambleIt became a statutory necessity to enact law governing Promissory Notes, Bills of Exchange andcheques.What is a Negotiable InstrumentSection 13:- " A Negotiable instrument means a promissory note, bill of exchange or chequeeither to order or bearer."This definition does not say anything about the characteristics of a negotiable instrument but itmentions about instruments, which can be legally called as a negotiable instrument. Itfortunately, however does not prohibit any other instrument which satisfies the features ofnegotiability from being designated as negotiable instruments. Justice K.C.Wills definesnegotiable instrument as "ONE THE PROPERTY IN WHICH IS ACQUIRED BY ANY ONEWHO TAKES IT BONAFIED FOR VALUE, NOT WITHSTANDING ANY DEFECT OFTITLE IN THE PERSON FROM WHOM HE TOOK IT".TransferabilityA Negotiable instrument as a document of title to money is transferable either by the applicationof the law or by the custom of the trade concerned.Special feature of N.I
  • 5. The special feature of such an instrument is the privilege it confers to the person who receives itbonafide and for value, to possess good title thereto, even if the transferor has no title or haddefective title to the instrument.Distinctive features of Negotiable Instruments- Easily transferable from one person to another- Confers absolute and good title on the transferee- The holder of a Negotiable Instrument (P.N./B.E./Cheque) is called as the holder in due courseand possesses the right to sue upon the instrument in his own name.Types of Negotiable Instruments Negotiable instruments by Statue are of three types, cheques, bills of exchange and promissory note. Negotiable instruments by custom or usage :- Some other instruments have acquired the character of negotiability by the the custom or usage of trade. Section 137 of Transfer of Property Act 1882 also recognizes that an instrument may be negotiable by Law or Custom. Thus in India Govt. Promissory notes, Shah Jog Hundis, Delivery Orders, Railway Receipts, Bill of Lading etc. have been held negotiable by usage or custom. These can be said as quasi statutory Negotiable Instruments.ExceptionsSometimes the Drawer and Holder can take away the negotiability of an instrument byexpression such as "Not Negotiable", Pay to "A" only. Here "A" (the holder) cannot transfer abetter title to the transferee.Promissory NoteSection 4: "A promissory note is an instrument in writing (not being a bank note or a currencynote), containing an unconditional undertaking, signed by the maker to pay a certain sum ofmoney only to, or to the order of a certain person or to the bearer of the instrument."Bill of ExchangeSection 5: "A bill of Exchange is an instrument in writing containing an unconditional ordersigned by the maker, directing a certain person to pay a certain sum of money only to, or to theorder of a certain person or to the bearer of the instrument."According to Section 7, the maker/creator of the instrument is known as Drawer. The person towhom payment may be made is known as "Payee". The person who is directed to pay the amountis known as Drawee. He accepts to pay the amount mentioned in the instrument. In case of a
  • 6. promissory note Drawer and Drawee are same. In case of a cheque the Drawee is always aBanker.ChequeAs per Section 6 "A cheque is a bill of exchange drawn on a specified banker and not expressedto be payable otherwise than on demand." After 2002 amendment cheque includes " theelectronic image of a truncated cheque and a cheque in the electronic form." In terms ofExplanation I, (a) " a cheque in the electronic form means a cheque which contains the exact mirror image ofa paper cheque, and is generated, written and signed in a secure system ensuring the minimumsafety standards with the use of digital signature (with or without biometrics signature) andasymmetric crypto system;(b) ― a truncated cheque means a cheque which is truncated during the course of a clearingcycle, either by the clearing house or by the bank whether paying or receiving payment,immediately on generation of an electronic image for transmission, substituting the furtherphysical movement of the cheque in writing."M.I.C.R.Cheques/DraftsIn MICR (Magnetic Ink Character Recognition) cheques: First six number indicate the cheque number Next three numbers indicate city code Next three numbers indicate Bank code Next three numbers indicate Branch codeCharacteristics of Cheque, Bill of Exchange and Promissory Note1) Instrument in writing: Pencil writing is not forbidden by the law but to prevent alternation,etc. the custom and usage do not allow this.(2) Unconditional order/promise: Cheque and bill of exchange are orders of creditors(Drawers) to the debtors (Drawee) to pay money. Instruments with expressions such as "I.O.U.Rs.500/-" is not a bill of exchange. On the other hand a promise with following narration dulysigned, dated and accepted by a drawee is a Bill of Exchange B/E – "I promise to pay B or orderRs.5,000/-"(3) Difference between cheque and bill of exchange: The main difference between a chequeand a bill of exchange is that the former is always drawn on and is payable by a banker specifiedtherein.
  • 7. (4) Certainty of the sum: The amount of the instrument must be certain.(5) Payable to order or bearer: The instrument must be payable either to order or to beareras per the provision of Section 13 of the Act. For example if a cheque is drawn with theexpression " Pay to Ram Lal" it indicates that it can be paid to Ram Lal or any person as per hisorder. But if it is written pay to Ram Lal only it must be paid to Ram Lal only. A bill ofexchange and cheque are payable to bearer if it is expressed to be so payable or if the only or thelast endorsement is an endorsement in blank.(6) Payee must be a certain person: The term person includes besides individuals, bodiescorporate, local authorities, Co-operative Societies, etc. and it also includes Registrar, Principal,director, Secretary, etc. of those institutions. Payee may be more than one person(7) Term of payment: A cheque is always payable on demand, though words to this effect arenot mentioned therein. A bill may be payable at sight or after a period of time specified therein.A promissory note or bill of exchange in which no time for payment is specified is payable ondemand (Section 19). If the bill is payable after a certain period it must be accepted by a drawee.But no such acceptance is necessary in case of a cheque.(8) Signature of the drawer/promisor: The negotiable instrument is valid only if it bears thesignature of the drawer/promisor.(9) Delivery of the instrument: The making, acceptance or endorsement of an instrument iscompleted by delivery in terms of Section 46 of the Act. Stamping of promissory notes and billof exchange is necessary. The Indian Stamp Act 1899 requires that the promissory note and thebill of exchange except cheques to be stamped.(11) Currency note: The currency note is a promissory note payable to bearer on demand.Section 21 of RBI Act prohibits creation of this type of promissory notes by others excepting theReserve Bank of India.Holder and holder in due-courseA negotiable instrument is transferable from person to person. The Negotiable Instrument Actconfers upon the person who acquires it bonafide and for value, the RIGHT TO POSSESS goodtitle to the instrument. such a person is called HOLDER IN DUE COURSE.Each and every person in possession of a cheque or bill cannot be its holder in due course andcannot claim statutory protection available under the Act.In terms of Section 8, "The Holder of a Promissory Note, Bill of Exchange or cheque means anyperson entitled in his own name to the possession thereof and to receive and recover the amountdue thereon from the parties thereto."Two fold entitlements
  • 8. He must be entitled to the possession of the instrument in his own name and under legal title. Actual possession of the instrument is not essential; the holder must have legal right to possess the instrument in his own name. He must have lawfully derived the title as an endorsee or payee. He must be entitled to receive or recover the amount from the parties concerned in his own name.In case of order instruments, the name of the person must appear as its endorse or payee.Bearer/Order instrumentIn case of a bearer instrument, the bearer may claim the money without having his namementioned on the cheque. In case a Bill, a Promissory note or a cheque is lost or destroyed itsholder is the person so entitled at the time of such loss or destruction.Holder in due courseAs per Section 9, "Holder in due course means any person who for consideration became thepossessor of a promissory note, bill of exchange or cheque, if payable to bearer, or payee orendorsee thereof if payable to order before the amount mentioned in it became defect in the titleof the person from whom derived his title."ConditionalitiesA person becomes holder in due course if the following conditions are satisfied:- The instrument must be in the possession of the holder in due course and in case of an order instrument he must be its payee or endorsee. The negotiable instrument must be regular and complete in all aspects. Alterations if any must be authenticated. The instrument must have been obtained for valuable consideration i.e. by paying its full value.ExceptionsA person who receives a cheque (not being a gift cheque issued by banks) as a gift will not becalled its holder in due course for want of consideration.If a cheque is given in respect of a debt incurred in gambling the consideration of the cheque isunlawful and hence cheque received on such consideration cannot make the payee thereof aholder in due course provided: The instrument must have been obtained before the amount mentioned therein became payable. He must have received it without having sufficient cause to believe that any defect existed in the title of the transferor.
  • 9. The title of a Negotiable Instrument is deemed to be defective if it is acquired by unfair means,e.g. fraud, coercion, undue influence or by any other illegal means.Section 9 thus lays heavy responsibility on the person accepting a negotiable instrument.Rights of a Holder An endorsement in blank may be converted by him into an endorsement in full.(2) He is entitled to cross a cheque either generally or specially with the words Not Negotiable.(3) He can negotiate a cheque to a third person.(4) He can obtain a duplicate of the lost instrument.Privileges of a Holder in Due Course (1) He possesses a better title free from all defects, which is the greatest privilege of all. Section53 states that a holder of negotiable instrument who derives title from a holder in due course hasrights thereon of that of a holder in due course. (2) Every prior party to negotiable instrument, i.e, maker or drawer, acceptor or endorser isliable thereon to a holder in due course until the instrument is duly satisfied. (Section 36). (3) If a negotiable instrument was originally inchoate (i.e. incomplete) instrument and asubsequent transfer completed the instrument for a sum greater than what was the intention ofthe maker, the right of a holder in due course to recover the money of the instrument is notaffected at all.(4) Right in case of fictitious instrument is unaffected.(5) Right in case the instrument was obtained by unlawful means or for unlawful consideration isunaffected.(6) Estoppel against denying original validity of the instrument.(7) Estoppel against denying capacity of payee to endorsee.(8) Estoppel against denying signature or capacity of prior party.Payment in due courseSection 10 defines payment in due course as ―Payment in due course means payment inaccordance with the apparent tenor of the instrument in good faith and without negligence to anyperson in possession thereof under circumstances which do not afford a reasonable ground for
  • 10. believing that he is not entitled to receive payment of amount mentioned therein.‖ The otherimportant provisions relating to payment in due course are the following.i. The payment should be made in accordance with the apparent tenor of the instrument i.e.according to the true intentions of the parties.ii. The payment should be made in good faith and without negligence.iii. The payment should be made to the person in possession of the instrument in circumstances,which do not arouse suspicion about his title to possess the instrument and to receive paymentthereof.NegotiationAccording to Section 14 an instrument is said to have been negotiated when a promissory note,of exchange or cheque is transferred to any person so as to constitute the person the holderthereof, the instrument is said to be negotiated.Negotiation can be done in any of the two indicated below –I. By delivery – A promissory note, bill of exchange or cheque payable to bearer is negotiable bydelivery thereof (Section 47)II By endorsement and delivery – AP/N, B/E or cheque payable to order is negotiable by theholder by endorsement and delivery (Section 48)EndorsementDefinition of EndorsementWhen the maker or holder of negotiable instrument signs the same, otherwise than as maker, forthe purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, orsigns for the same purpose a stamped paper intended to be completed as a negotiable instrument,he is said to have endorsed the same and is called the endorser. Endorsement consists of thesignature of the maker (or drawer) payee of a negotiable instrument with the intention ofnegotiation.Provisions Regarding EndorsementEffect of endorsementThe endorsement of a negotiable instrument followed by delivery transfers to the endorsee theproperty therein with the right of further negotiation.Endorsee – an agent
  • 11. The section permits that an instrument may also be endorsed so as to constitute the endorsee anagent of the endorser.Right to endorseEvery sole maker, drawer, payee or endorsee or all of several joint makers, drawers, payees orendorsees of an negotiable instrument m ay endorse and negotiate the same.Time limit for endorsementA negotiable instrument may be negotiated until its payment has been made by the banker,drawee or acceptor. (Section 60)Endorsement for a part amountEndorsement for a part amount is prohibited (Section 56) but instruments which have been partlypaid can be negotiated for the balance amount.No right to legal representativeThe Legal representative of the deceased cannot endorse the instrument.Order of endorsementUnless contrary is proved, it is presumed under Section 118 that the endorsements appearingupon a negotiable instrument were made in order in which they appear thereon (Section 118)General Rules regarding the form of Endorsements1. Signature of the endorser on the document for the purpose of endorsement must be that ofthe endorser or any other person who is duly authorized to endorse on his behalf.2. Spelling: The endorser should spell his name in the same way as his name appears on theinstrument as its payee or endorsee.3. No addition or omission of initial of the name. For example, J.C. Mishra cannot endorse asJ.Mitra.4. Prefixes and suffixes to be struck out (Mr., M/s, Miss, Shri, Smt. Lala, Babu,General, Dr.,Major)Payee Regular Irregular Endorsement EndorsementMrs. Asha Gupta Asha Gupta Mrs. Asha Gupta
  • 12. If a cheque is payable to a woman in her maiden name e.g. to Miss Jyoti Mishra now married toMrs.S.C.Das may endorse it as follows. Jyoti Mishra (Now Mrs.S.C.Das) or Jyoti Das nee (or formerly) Jyoti MishraIlliterate PersonIf the payee of a negotiable instrument is an illiterate person, he may endorse the instrument byaffixing his thumb impression duly witnessed or attested by somebody who should give his fulladdress. Thumb Impression of A Attested and witnessed by XYZ, Advocate 111, G.K.Road, Pune-16Partnership FirmIn case of a partnership firm, the name of the firm must be signed by a person (partner, manageretc.) who is duly authorized to sign on behalf of the partnership firm. For example a chequepayable to M/s Krishen Chand Raja Ram may be endorsed in any of the following ways:- (Per pro) (For) Kishan Chand Raja Ram For (on behalf of) Raja Ram (Sd/-) PartnerAgentA person may duly authorize his agent to endorse the cheque on his behalfKinds of Endorsements
  • 13. 1. Endorsement in blankIf the endorser signs his name only, endorsement is said to be in blank (Section-16). Theendorser does not specify the name of the endorsee with the effect that an instrument endorsed inblank becomes payable to bearer, even though originally payable to order (Section 54) and nofurther endorsement is required for negotiation.2. Endorsement in fullIf in addition to signature, the endorser adds a direction to pay the amount mentioned in theinstrument to, or to the order of a specified person, the endorsement is said to be endorsement infull.3. Conditional EndorsementIf the endorser of a negotiable instrument by express words in the endorsement makes hisliability or the right of the endorsee to receive the amount due thereon is called a conditionalendorsement.Restrictive Endorsement (Section 50)Examples:a) Pay the contents to C onlyb) Pay to C for my useEndorsement Sans Recourse (Section 52)Example: (i) Pay to A or order at his own risk Sd/-R (ii) Pay to B without recourse to me Sd/CCrossing of Cheques : Section 123 to Section 131Types of CrossingGeneral CrossingSection 123: Where a cheque bears across its face an addition of words and company or anyabbreviation thereof, between two parallel transverse lines or of two pair parallel lines simply,
  • 14. either, with or without the words Not Negotiable that addition shall be deemed a crossing andthe cheque shall be deemed to be crossed generally.What constitutes a crossing It is an addition The addition is of two transverse parallel lines in cross direction The words "&Co." may or may not be enclosed in between the parallel lines.The effect of general crossing is that the cheque must be presented to the paying banker throughany banker and not by payee himself at the counter. The collecting banker credits the proceeds tothe account of the payee or the holder of the cheque. It is a direction to the paying banker.Special crossingAccording to Section 124:- Where a cheque bears across its face an addition of the name of abanker either with or without the words not negotiable, that addition shall be deemed a crossingand the cheque shall be deemed to be crossed specially and to be crossed to that banker.It should be noted that in addition to these minimum statutory requirements for two types ofcrossing addition of words or lines may also be A/c payee, "Not Negotiable".What does Not Constitute Crossing(i) When a cheque bears the words Not Negotiable or A/c payee without two parallel lines or thename of the bank it not treated as crossed.(ii) If a cheque bears single line across is face or simply an X mark, the cheque is not treated ascrossed cheque.Note that the inclusion of any other word/words within two parallel lines is irrelevant and thecheque is still deemed to be a crossed cheque.Under Rupees One hundred % Co., PuneSpecimen of General crossing Specimen of special Crossing1. and Co. 1.Punjab National Bank2. A/c Payee 2.State Bank of IndiaPersons who can cross the chequeCrossing is a direction to the paying banker regarding the mode of payment.i. The Drawer can crossii. The holder can cross
  • 15. iii.The banker to whom the cheque is crossed specially may again cross it specially to anotherbanker as his agent or collection only.Liability of the Paying Banker (Section 126)Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwisethan to a banker. And where a cheque is crossed specially, the banker on whom it is drawn shallnot pay it other wise than to the banker to whom it is crossed or his agent for collection.Any banker paying a cheque crossed generally, otherwise than to a banker, or a cheque crossedspecially, otherwise than to the banker to whom the same is crossed, or his agent for collectionbeing banker, shall be liable to the true owner of the cheque for any loss he may sustain owing tothe cheque having been so paid.[Sec.129]1. Liability to the True Owner of the cheque.2. Liability to the DrawerNot Negotiable crossingA person taking a cheque crossed generally or specially bearing in either case the words notnegotiable shall not have and shall not be capable of giving a better title to the cheque than thatwhich the person from whom he took it had.[Sec.130]The effect of the words not negotiable in the crossing will be clear from the followingexamples:(1) A draws a crossed cheque on his banker in favour of B without the words not negotiabletherein C steals it from the house of B and endorses it to D who receives it for value and in goodfaith from C (i.e. without the knowledge of the fact that C had no title to the cheque). D will beits holder in due course and will have valid title, though his transferor (endorser) had no titlethereto.(2) In the above, example if the cheque bears the words "NOT NEGOTABLE" then D will nothave a valid title even if all the above circumstances are satisfied.Collection of 3rd Party Crossed bearer chequesIn trade circles particularly in Mumbai in textile trade it was observed that as per practice thecrossed bearer cheques were circulated exchanged freely for trade transactions and were in thepast collected by bank through the instrument was issued in the name of third parties and werepresented by the customers of the bank for credit to their account without endorsement on thereverse of the instrument. The issue whether collecting banker can get protection under Section131 of NI Act 1881 in such cases had been examined and it is opined that the negotiability of abearer cheque is not affected by the crossing. Under section 47 of the Act ibid a cheque payableto bearer is negotiable even by a mere delivery and section 47 does not exempt (forbid) crossed
  • 16. cheques. As such it is permissible to negotiate crossed bearer cheques by delivery thereofwithout endorsement.Case laws on liability of the paying bankers When customers signature is forged there is no mandate to the bank to pay. As such the bank is not entitled to debit customers account on such forged note cheque. [Canara Bank vs. Canara Sales Corporation & others 1987, SC] In a joint account if one of the signatures is forged then there is no mandate and banker cannot make payment. [Bihta Coop. Development and Cane Marketing Union Ltd. vs. Bank of Bihar, SC] Payment should be made in due course to seek protection under Sec. 85 [Bank of Bihar vs. Mahabir Lal 1964, SC] Where there are no circumstances which afforded any reasonable ground for believing that the payee was not entitled to receive payment of the cheques, the bank is deemed to have made payment in due course. [Bhutoria Trading Co. vs. Allahabad Bank 1977, Calcutta HC] Payment made to a liquidator against the cheques presented across the counter was not payment in due course. [Madras Provincial Coop. Bank Ltd. vs. Official Liquidator, South Indian Match factory Ltd. 1945, Madras HC] Bank is protected if payment was made in good faith without negligence of a cheque on which alteration was not apparent. [Bank of Maharashtra vs. M/s Automotive Engineering Co. 1993, SC] The bank is liable where payment was made on cheques on which alterations were authenticated by not all but some of the drawers. [Brahma Shumshere Jung Bahadur vs. Chartered Bank of India, Australia & China 1956 Calcutta HC]Case laws on liability of the paying bankersUnder Section 131 a collecting bank is protected if following conditions are met. The collecting banker should have acted in good faith .He should have acted without negligence He should receive payment for customer The check should have been crossed generally or specially to the bank.Some important case laws are following:It is the duty of the bank to open account with references. [Syndicate Bank vs. JaishreeIndustries & others, 1994 Karnataka HC, Indian Bank vs. Catholic Syrian Bank, 1981, MadrasHC]Duty to follow up references where referee is not known. [Harding vs. London Joint Stock Bank,1914]
  • 17. Duty to ensure crossing in favour of the bank. [Crumpling vs. London Joint Stock Bank Ltd.1911]Duty to verify instruments or any apparent defect in instruments [Underwood Ltd. vs. Bank ofLiverpool Martin Ltd. 1924, Savory Co. vs. Lloyds Bank 1932, ANZ Bank vs. Ateliers deConstructions Electriques Cherleroi, 1967 etc.]Appendix THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) BILL, 2002 a BILLfurther to amend the Negotiable Instruments Act, 1881, the Bankers Books Evidence Act, 1891and the Information Technology Act, 2000.Be it enacted by Parliament in the Fifty-third Year of the Republic of India as follows:— CHAPTER I Preliminary1. Short title and commencement.-(1) This Act may be called the Negotiable Instruments(Amendment and Miscellaneous Provisions) Act, 2002.(2) It shall come into force on such date as the Central Government may, by notification in theOfficial Gazette, appoint and different dates may be appointed for different provisions of thisAct. CHAPTER II Amendments to the Negotiable Instruments Act, 18812. Substitution of new section for section 6.-For section 6 of the Negotiable Instruments Act,1881 (26 of 1881) (hereinafter referred to as the principal Act), the following section shall besubstituted, namely:—
  • 18. ‗6. ―Cheque‖.-A ―cheque‖ is a bill of exchange drawn on a specified banker and not expressed tobe payable otherwise than on demand and it includes the electronic image of a truncated chequeand a cheque in the electronic form.Explanation I.—For the purposes of this section, the expression—(a) ―a cheque in the electronic form‖ means a cheque which contains the exact mirror image of apaper cheque, and is generated, written and signed in a secure system ensuring the minimumsafety standards with the use of digital signature (with or without biometrics signature) andasymmetric crypto system;(b) ―a truncated cheque‖ means a cheque which is truncated during the course of a clearingcycle, either by the clearing house or by the bank whether paying or receiving payment,immediately on generation of an electronic image for transmission, substituting the furtherphysical movement of the cheque in writing.Explanation II.—For the purposes of this section, the expression ―clearing house‖ means theclearing house managed by the Reserve Bank of India or a clearing house recognised as such bythe Reserve Bank of India.‘.3. Amendment of section 64.-Section 64 of the principal Act shall be re-numbered as sub-section(1) thereof, and after sub-section (1) as so re-numbered, the following sub-section shall beinserted, namely:—―(2) Notwithstanding anything contained in section 6, where an electronic image of a truncatedcheque is presented for payment, the drawee bank is entitled to demand any further informationregarding the truncated cheque from the bank holding the truncated cheque in case of anyreasonable suspicion about the genuineness of the apparent tenor of instrument, and if thesuspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled tofurther demand the presentment of the truncated cheque itself for verification:Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if thepayment is made accordingly.‖.4. Amendment of section 81.-Section 81 of the principal Act shall be re-numbered as sub-section(1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall beinserted, namely:—―(2) Where the cheque is an electronic image of a truncated cheque, even after the payment thebanker who received the payment shall be entitled to retain the truncated cheque.(3) A certificate issued on the foot of the printout of the electronic image of a truncated chequeby the banker who paid the instrument, shall be prima facie proof of such payment.‖.
  • 19. 5. Amendment of section 89.-Section 89 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shallbe inserted, namely:—―(2) Where the cheque is an electronic image of a truncated cheque, any difference in apparenttenor of such electronic image and the truncated cheque shall be a material alteration and it shallbe the duty of the bank or the clearing house, as the case may be, to ensure the exactness of theapparent tenor of electronic image of the truncated cheque while truncating and transmitting theimage.(3) Any bank or a clearing house which receives a transmitted electronic image of a truncatedcheque, shall verify from the party who transmitted the image to it, that the image so transmittedto it and received by it, is exactly the same.‖.6. Amendment of section 131.-In section 131 of the principal Act, Explanation shall be re-numbered as Explanation I thereof, and after Explanation I as so re-numbered, the followingExplanation shall be inserted, namely:—―Explanation II.—It shall be the duty of the banker who receives payment based on an electronicimage of a truncated cheque held with him, to verify the prima facie genuineness of the chequeto be truncated and any fraud, forgery or tampering apparent on the face of the instrument thatcan be verified with due diligence and ordinary care.‖.7. Amendment of section 138.-In section 138 of the principal Act,—(a) for the words ―a term which may be extended to one year‖, the words ―a term which may beextended to two years‖ shall be substituted;(b) in the proviso, in clause (b), for the words ―within fifteen days‖, the words ―within thirtydays‖ shall be substituted.8. Amendment of section 141.-In section 141 of the principal Act, in sub-section (1), after theproviso, the following proviso shall be inserted, namely:—―Provided further that where a person is nominated as a Director of a company by virtue of hisholding any office or employment in the Central Government or State Government or a financialcorporation owned or controlled by the Central Government or the State Government, as the casemay be, he shall not be liable for prosecution under this Chapter.‖.9. Amendment of section 142.-In section 142 of the principal Act, after clause (b), the followingproviso shall be inserted, namely:—―Provided that the cognizance of a complaint may be taken by the Court after the prescribedperiod, if the complainant satisfies the Court that he had sufficient cause for not making acomplaint within such period.‖.
  • 20. 10. Insertion of new sections after section 142.-After section 142 of the principal Act, thefollowing sections shall be inserted, namely:—―143. Power of Court to try cases summarily.-(1) Notwithstanding anything contained in theCode of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by aJudicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions ofsections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials:Provided that in the case of any conviction in a summary trial under this section, it shall belawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one yearand an amount of fine exceeding five thousand rupees:Provided further that when at the commencement of, or in the course of, a summary trial underthis section, it appears to the Magistrate that the nature of the case is such that a sentence ofimprisonment for a term exceeding one year may have to be passed or that it is, for any otherreason, undesirable to try the case summarily, the Magistrate shall after hearing the parties,record an order to that effect and thereafter recall any witness who may have been examined andproceed to hear or rehear the case in the manner provided by the said Code.(2) The trial of a case under this section shall, so far as practicable, consistently with theinterests of justice, be continued from day to day until its conclusion, unless the Court finds theadjournment of the trial beyond the following day to be necessary for reasons to be recorded inwriting.(3) Every trial under this section shall be conducted as expeditiously as possible and anendeavour shall be made to conclude the trial within six months from the date of filing of thecomplaint.144. Mode of service of summons.-(1) Notwithstanding anything contained in the Code ofCriminal Procedure, 1973 (2 of 1974), and for the purposes of this Chapter, a Magistrate issuinga summons to an accused or a witness may direct a copy of summons to be served at the placewhere such accused or witness ordinarily resides or carries on business or personally works forgain, by speed post or by such courier services as are approved by a Court of Session.(2) Where an acknowledgement purporting to be signed by the accused or the witness or anendorsement purported to be made by any person authorised by the postal department or thecourier services that the accused or the witness refused to take delivery of summons has beenreceived, the Court issuing the summons may declare that the summons has been duly served.145. Evidence on affidavit.-(1) Notwithstanding anything contained in the Code of CriminalProcedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavitand may, subject to all just exceptions be read in evidence in any enquiry, trial or otherproceeding under the said Code.(2) The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused,summon and examine any person giving evidence on affidavit as to the facts contained therein.
  • 21. 146. Bank‘s slip prima facie evidence of certain facts.-The Court shall, in respect of everyproceeding under this Chapter, on production of bank‘s slip or memo having thereon the officialmark denoting that the cheque has been dishonoured, presume the fact of dishonour of suchcheque, unless and until such fact is disproved.147. Offences to be compoundable.-Notwithstanding anything contained in the Code of CriminalProcedure, 1973 (2 of 1974), every offence punishable under this Act shall be compoundable. CHAPTER III Amendment to the Bankers’ Books Evidence Act, 189111. Amendment of section 2.-In section 2 of the Bankers‘ Books Evidence Act, 1891 (18 of1891),—(a) for clause (3), the following clause shall be substituted, namely:—‗(3) ―bankers‘ books‖ include ledgers, day-books, cash-books, account-books and all otherrecords used in the ordinary business of the bank, whether these records are kept in written formor stored in a micro film, magnetic tape or in any other form of mechanical or electronic dataretrieval mechanism, either onsite or at any offsite location including a back-up or disasterrecovery site of both‘.‖(b) in clause (8), after sub-clause (b), the following sub-clause shall be inserted, namely:—―(c) a printout of any entry in the books of a bank stored in a micro film, magnetic tape or in anyother form of mechanical or electronic data retrieval mechanism obtained by a mechanical orother process which in itself ensures the accuracy of such printout as a copy of such entry andsuch printout contains the certificate in accordance with the provisions of section 2A.‖. CHAPTER IV Amendments to the Information Technology Act, 200012. Amendment of section 1.-In the Information Technology Act, 2000 (21 of 2000) (hereinafterreferred to as the principal Act), in section 1, in sub-section (4), for clause (a), the followingclause shall be substituted, namely:—―(a) a negotiable instrument (other than a cheque) as defined in section 13 of the NegotiableInstruments Act, 1881 (26 of 1881);‖.13. Insertion of a new section 81A.-After section 81 of the principal Act, the following sectionshall be inserted, namely:—‗81A. Application of the Act to electronic cheque and truncated cheque.-(1) The provisions ofthis Act, for the time being in force, shall apply to, or in relation to, electronic cheques and the
  • 22. truncated cheques subject to such modifications and amendments as may be necessary forcarrying out the purposes of the Negotiable Instruments Act, 1881 (26 of 1881) by the CentralGovernment, in consultation with the Reserve Bank of India, by notification in the OfficialGazette.(2) Every notification made by the Central Government under sub-section (1) shall be laid, assoon as may be after it is made, before each House of Parliament, while it is in session, for a totalperiod of thirty days which may be comprised in one session or in two or more successivesessions, and if, before the expiry of the session immediately following the session or thesuccessive sessions aforesaid, both Houses agree in making any modification in the notificationor both Houses agree that the notification should not be made, the notification shall thereafterhave effect only in such modified form or be of no effect, as the case may be; so, however, thatany such modification or annulment shall be without prejudice to the validity of anythingpreviously done under that notification.Explanation.—For the purposes of this Act, the expressions ―electronic cheque‖ and ―truncatedcheque‖ shall have the same meaning as assigned to them in section 6 of the NegotiableInstruments Act, 1881 (26 of 1881).‘. Statement of objects and reasonsThe Negotiable Instruments Act, 1881 was amended by the Banking, Public FinancialInstitutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new ChapterXVII was incorporated for penalties in case of dishonour of cheques due to insufficiency offunds in the account of the drawer of the cheque. These provisions were incorporated with aview to encourge the culture of use of cheques and enhancing the credibility of the instrument.The existing provisions in the Negotiable Instruments Act,1881, namely, sections 138 to 142 inChapter XVII have been found deficient in dealing with dishonour of cheques. Not only thepunishment provided in the Act has proved to be inadequate, the procedure prescribed for theCourts to deal with such matters has been found to be cumbersome. The Courts are unable todispose of such cases expeditiously in a time bound manner in view of the procedure containedin the Act.2. A large number of cases are reported to be pending under sections 138 to 142 of theNegotiable Instruments Act in various courts in the country. Keeping in view the large number ofcomplaints under the said Act pending in various courts, a Working Group was constituted toreveiw section 138 of the Negotiable Instruments Act, 1881 and make recommendations as towhat changes were needed to effectively achieve the purpose of that section.3. The recommendations of the Working Group along with other representations from variousinstitutions and organisations were examined by the Government in consultation with theReserve Bank of India and other legal experts, and a Bill, namely, the Negotiable Instruments(Amendment) Bill, 2001 was introduced in the Lok Sabha on 24th July, 2001. The Bill wasreferred to Standing Committee on Finance which made certain recommendations in its reportsubmitted to Lok Sabha in November, 2001.
  • 23. 4. Keeping in veiw the recommendations of the Standing Committee on Finance and otherrepresentations, it has been decided to bring out, inter alia, the following amendments in theNegotiable Instruments Act,1881, namely:—(i) to increase the punishment as prescribed under the Act from one year to two years;(ii) to increase the period for issue of notice by the payee to the drawer from 15 days to 30 days;(iii) to provide discretion to the Court to waive the period of one month, which has beenprescribed for taking cognizance of the case under the Act;(iv) to prescribe procedure for dispensing with preliminary evidence of the complainant;(v) to prescribe procedure for servicing of summons to the accused or witness by the Courtthrough speed post or empanelled private couriers;(vi) to provide for summary trial of the cases under the Act with a view to speeding up disposalof cases;(vii) to make the offences under the Act compoundable;(viii) to exempt those directors from prosecution under section 141 of the Act who are nominatedas directors of a company by virtue of their holding any office or employment in the CentralGovernment or State Government or a financial corporation owned or controlled by the CentralGovernment, or the State Government, as the case may be;(ix) to provide that the Magistrate trying an offence shall have power to pass sentence ofimprisonment for a term exceeding one year and amount of fine exceeding five thousand rupees;(x) to make the Information Technology Act, 2000 applicable to the Negotiable InstrumentsAct,1881 in relation to electronic cheques and truncated cheques subject to such modificationsand amendments as the Central Government, in consultation with the Reserve Bank of India,considers necessary for carrying out the purposes of the Act, by notification in the OfficialGazette; and(xi) to amend definitions of "bankers books" and "certified copy" given in the Bankers BooksEvidence Act,1891.5. The proposed amendments in the Act are aimed at early disposal of cases relating to dishonourof cheques, enhancing punishment for offenders, introducing electronic image of a truncatedcheque and a cheque in the electronic form as well as exempting an official nominee directorfrom prosecution under the Negotiable Instruments Act,1881.6. The Bill seeks to achieve the above objects.
  • 24. New Delhi;JASWANT SINGH.The 9th July, 2002.Prepared by Shri J C Mishra, Member of Faculty.