NEGOTIABLE INSTRUMENTS ACT, 1881

 

 

 

TABLE OF CONTENTS

1. Introduction

2. Types of Negotiable Instruments Act

3. Endorsement

4. Parties to Negotiable Instrument

5. Discharge from liability

6. Miscellaneous

7. General Relationship between banker and customer

INTRODUCTION

 

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of India Act provides that no person in India other than the Bank or as expressly authorized by this Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand. This Section further provides that no one except the RBI or the Central Government can make or issue a promissory note expressed to be payable or demand or after a certain time. Section 32 of the Reserve Bank of India Act makes issue of such bills or notes punishable with fine which may extend to the amount of the instrument. The effect or the consequences of these provisions are:

1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on demand or after a certain time.

2. A bill of exchange cannot be made payable to the bearer on demand though it can be made payable to the bearer after a certain time.

3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a person’s account with a banker.

 

OBJECT OF THE ACT

The main object of the Negotiable Instruments Act is to legalise the system by which instruments contemplated by it could pass from hand to hand by negotiation like any other goods. The purpose of the Act was to present an orderly and authoritative statement of leading rules of law relating to the negotiable instruments.  To achieve the objective of the Act, the Legislature thought it proper to make provision in the Act for conferring certain privileges to the mercantile instruments contemplated under it and provide special procedure in case the obligation under the instrument was not discharged.

LOCAL USAGE

The Act does not apply to any local custom relating to any instrument in an oriental language. The Act applies to promissory notes, bills of exchange and cheques, but where the instrument is in an oriental language, e.g. a hundi or rukka, any local usage relating to such an instrument applies notwithstanding the provisions of the Act. The saving clause does not render the Act altogether inapplicable to hundis. It is only when there is a local usage to the contrary that the local usage overrides the provisions of the Act.

Interpretation Clause

Banker – The Act does not define the term banker. In one of the early cases, it was held that a banker is a person who receives the money of his customer to be drawn out again as the customer has occasion for it, the customer being the lender, and the bank being the borrower with the superadded obligation of honouring the customer’s  cheques up to the amount of the money received and still in the banker’s hands.

In United Dominions Trust Ltd v. Kirkwood, [1966] 1 All ER 968, the characteristics usually found in modern bankers were stated to be –

(a) they accept money form and collect cheques for, their customers  and place them to their credit;

(b) they honour cheques or orders withdrawn on them by their customers when presented for payment and debit their customers accordingly; and

(c) they keep current accounts, or something of that nature, in their books in which the credits and debits are entered.

Apart from these, there are characteristics such as stability, soundness and probity that constitute the persona of a banker.

In India, the following definitions of banking and banking company contained in the Banking Regulation Act 1949 would assist in determining whether or not a person is a banker.

Receiving money from customers and repaying it by honouring their cheques as and when required is a function which distinguishes banking business from other kinds of business.     

A company lacking the power to grant loans and to receive public deposits repayable in the manner indicated under section 5(b) of the Banking Regulation Act 1949 cannot be considered a banking company.

A government treasury was held to be a banker under the section.

MEANING OF A NEGOTIABLE INSTRUMENT –

 

• The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881. It is an Act to define and amend the law relating to promissory notes, bills of exchange and cheques.
• The Act does not affect the custom or local usage relating to an instrument in oriental language i.e., a Hundi.
• The term "negotiable instrument" means a document transferable from one person to another. However, the Act has not defined the term. It merely says that "A negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer [Section 13(1)].

A negotiable instrument may be defined as "an instrument, the property in which is acquired by anyone who takes it bona fide, and for value, notwithstanding any defect of title in the person from whom he took it, from which it follows that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of instrument" (Willis- The Law of Negotiable Securities, Page 6).

According to this definition, the following are the conditions of negotiability:

(i) The instrument should be freely transferable. An instrument cannot be negotiable unless it is such and in such state that the true owner could transfer by simple delivery or endorsement and delivery.

(ii) The person who takes it for value and in good faith is not affected by the defect in the title of the transferor.

         (iii)   Such a person can sue upon the instrument in his own name.

       Negotiability involves two elements namely, transferability free from equities and transferability by delivery or endorsement (Mookerjee J. In Tailors Priya v. Gulab Chand, AIR 1965 Cal).

But the Act recognises only three types of instruments viz., a Promissory Note, a Bill of Exchange and a Cheque as negotiable instruments. However, it does not mean that other instruments are not negotiable instruments provided that they satisfy the following conditions of negotiability:

1.  The instrument should be freely transferable by the custom of trade. Transferability may be by (i) delivery or (ii) endorsement and delivery.

2.   The person who obtains it in good faith and for consideration gets it free from

               all defects and can sue upon it in his own name.

        3.   The holder has the right to transfer. The negotiability continues till the maturity.

As such, documents like share warrants payable to bearer, debentures payable to bearer and dividend warrants are negotiable instruments. But the money orders and postal orders, deposit receipts, share certificates, bill of lading, dock warrant, etc. are not negotiable instruments. Although they are transferable by delivery and endorsements, yet they are not able to give better title to the bonafide transferee for value than what the transferor has.

     Effect of Negotiability

The general principle of law relating to transfer of property is that no one can pass a better title than he himself has (nemodat quad non-habet). The exceptions to this general rule arise by virtue of statute or by a custom. A negotiable instrument is one such exception which is originally a creation of mercantile custom.

Thus, a bona fide transferee of negotiable instrument for consideration without notice of any defect of title, acquires the instrument free on any defect, i.e., he acquires a better title than that of the transferor.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

A negotiable instrument has the following characteristics:

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

2. Title: The transferee of a negotiable instrument is known as ‘holder in due course.’ A bona fide transferee for value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the instrument.

3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonour. A negotiable instrument can be transferred any number of times till it is at maturity. The holder of the instrument need not give notice of transfer to the party liable on the instrument to pay.

4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that consideration has been paid under it. It is not necessary to write in a promissory note the words ‘for value received’ or similar expressions because the payment of consideration is presumed. The words are usually included to create additional evidence of consideration.

5. Prompt payment: A negotiable instrument enables the holder to expect prompt payment because a dishonour means the ruin of the credit of all persons who are parties to the instrument.

CLASSIFICATION OF NEGOTIABLE INSTUMENTS

The negotiable instruments may be classified as under:

1. Bearer Instruments

A promissory note, bill of exchange or cheque is payable to bearer when (i) it is expressed to be so payable, or (ii) the only or last endorsement on the instrument is an endorsement in blank, A person who is a holder of a bearer instrument can obtain the payment of the instrument.

1. Order Instruments

A promissory note, bill of exchange or cheque is payable to order (i) which is expressed to be so payable; or (ii) which is expressed to be payable to a particular person, and does not contain any words prohibiting transfer or indicating an intention that it shall not be transferable.

(3) Inland Instruments (Section 11)

A promissory note, bill of exchange or cheque drawn or made in India, and made payable, or drawn upon any person, resident in India shall be deemed to be an inland instrument. Since a promissory note is not drawn on any person, an inland promissory note is one which is made payable in India. Subject to this exception, an inland instrument is one which is either:

1. drawn and made payable in India, or

(ii) drawn in India upon some persons resident therein, even though it is made payable in a foreign country.

(4) Foreign Instruments

An instrument which is not an inland instrument, is deemed to be a foreign instrument. The essentials of a foreign instrument include that:

         (i) it must be drawn outside India and made payable outside or inside India; or

(ii) it must be drawn in India and made payable outside India and drawn on a

               person resident outside India.

(5) Demand Instruments (Section 19)

A promissory note or a bill of exchange in which no time for payment is specified

is an instrument payable on demand.

(6) Time Instruments

Time instruments are those which are payable at sometime in the future. Therefore, a promissory note or a bill of exchange payable after a fixed period, or after sight, or on specified day, or on the happening of an event which is certain to happen, is known as a time instrument. The expression "after slight" in a promissory note means that the payment cannot be demanded on it unless it has been shown to the maker. In the case of bill of exchange, the expression "after sight" means after acceptance, or after noting for non-acceptance or after protest for non-acceptance.

Ambiguous Instruments (Section 17)

An instrument, which in form is such that it may either be treated by the holder as a bill or as a note, is an ambiguous instrument. Section 5(2) of the English Bills of Exchange Act provides that where in a bill, the drawer and the drawee are the same person or where the drawee is a fictitious person or a person incompetent to contract, the holder may treat the instrument, at his option, either as a bill of exchange or as a promissory note.

Bill drawn to or to the order of the drawee or by  an agent on his principal, or by one branch of a bank on another or by the direction of a company or their cashier are also ambiguous instruments. A promissory note addressed to a third person may be treated as a bill by such person by accepting it, while a bill not addressed to anyone may be treated as a note. But where the drawer and payee are the same e.g., where A draws a bill payable to A's order, it is not an ambiguous instrument and cannot be treated as a promissory note. Once an instrument has been treated either as a bill or as a note, it cannot be treated differently afterwards.

Inchoate or Incomplete Instrument (Section 20)

When one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby giv9S prima facie authority to the holder thereof to make or complete, as the case may be ,upon it a negotiable instrument, for any amount specified therein, and not exceeding the amount, covered by the stamp. Such an instrument is called an inchoate instrument. The person so signing shall be liable upon such instrument, in the capacity in which he signs the same, to any holder in due course for such amount. provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereon.

The authority to fill up a blank or incomplete instrument may be exercised by any "holder" and not only the first holder to whom the instrument was delivered. The person signing and delivering the paper is liable both to a "holder" and a "holder-in-due­-course". But there is a difference in their respective rights. A "holder" can recover only what the person signing and delivering the paper agreed to pay under the instrument, while a "holder-in- due-course" can recover the whole amount made payable by the instrument provided that it is covered by the stamp, even though the amount authorised was smaller.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court presumes in regard to negotiable instruments. In other words these presumptions need not be proved as they are presumed to exist in every negotiable instrument. Until the contrary is proved the following presumptions shall be made in case of all negotiable instruments:

1. Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted or endorsed for consideration. It is presumed that, consideration is present in every negotiable instrument until the contrary is presumed. The presumption of consideration, however may be rebutted by proof that the instrument had been obtained from, its lawful owner by means of fraud or undue influence.

2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn on such date, unless the contrary is proved.

3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to have been accepted within a reasonable time after its issue and before its maturity. This presumption only applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be taken as evidence of the date on which it was made.

4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of a negotiable instrument was made before its maturity.

5. Order of endorsement: Until the contrary is proved it shall be presumed that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of exchange or cheque was duly stamped.

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

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

CHAPTER 2

                                     TYPES OF NEGOTIABLE INSTRUMENT

Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note, bill of exchange or a cheque payable either to order or to bearer. Negotiable instruments recognized by statute are: (i) Promissory notes (ii) Bills of exchange (iii) Cheques. Negotiable instruments recognised by usage or custom are: (i) Hundis (ii) Share warrants (iii) Dividend warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii) Debentures of Bombay Port Trust (viii) Railway receipts (ix) Delivery orders.

Though the section speaks of only three kinds of instruments, it does not mean that there cannot be any other kind of negotiable instrument than these three. Indeed, every document which entitles a person to a sum of money and which is transferable by delivery, is entitled to be called a 'negotiable instrument'. In Smith's LEADING CASES it is said:

Where an instrument is by the custom of trade transferable in this country, like cash, by delivery and is capable of being sued upon by the person holding it pro tempore (for the time being) there it is entitled to the name negotiable instrument, and the property in it passes to a bona fide transferee value.'

The section makes it clear that instruments payable to order are also negotiable, it should be noted that an order instrument can only be negotiated by endorsement and the endorsement must be genuine.

This list of negotiable instrument is not a closed chapter. With the growth of commerce, new kinds of securities may claim recognition as negotiable instruments. The courts in India usually follow the practice of English courts in according the character of negotiability to other instruments.

(1) PROMISSORY NOTE

Section 4 of the Act defines, “A promissory note is an instrument in writing (note being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments.”

The usual form of Promissory Note is:

Rs 500.00                                                               Calcutta, November 7, 1959   Three months after date, I promise to pay Manick Chand or Bearer, the sum of rupees five hundred for value Order     received.                                                                                                                                                                                       Jamna Das

 

Parties to a Promissory Note:

A promissory note has the following parties:

(a)   The maker: the person who makes or executes the note promising to pay the

amount stated therein.

(b)   The payee: one to whom the note is payable.

(c)   The holder: is either the payee or some other person to whom he may have

endorsed the note.

(d)   The endorser.

(e)   The endorsee.

Essential elements:

An instrument to be a promissory note must possess the following elements:

1. It must be in writing: A mere verbal promise to pay is not a promissory note. The method of writing (either in ink or pencil or printing, etc.) is unimportant, but it must be in any form that cannot be altered easily.

2. It must certainly an express promise or clear understanding to pay: There must be an express undertaking to pay. A mere acknowledgment is not enough. The following are not promissory notes as there is no promise to pay.

If A writes:

(a) “Mr. B, I.O.U. (I owe you) Rs. 500”

(b) “I am liable to pay you Rs. 500”.

(c) “I have taken from you Rs. 100, whenever you ask for it have to pay” .

The following will be taken as promissory notes because there is an express promise to pay:

If A writes:

(a) “I promise to pay B or order Rs. 500”

(b) “I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand, for the value received”.

In Akbar Khan v Attar Singh, a document was made in the following words:

This receipt is hereby executed by B... for Rs 43,000... received from The amount to be payable after two years. Interest at the rate of Rs 5-4-0 per cent to be charged.

It was held by the Privy Council that "the instrument is not a promissory note within the definition of Section 4. It is a receipt for money containing the terms on which it is to be repaid. Being primarily a receipt, even if coupled with a promise to pay, it is not a promissory note and is not negotiable.... Receipts are generally not intended to be negotiable." Hence, to make a promissory note “there must be an express undertaking to pay the amount mentioned.... A mere implied undertaking... is not sufficient". This has been followed in a case where the note read as follows:

Received from Mr and Mrs T Claydon the sum of £10,000 as a loan lo he paid back in full by July 1, 1983 with interest rate of 20% per annum. The document was held to be not a promissory note.

In between these two cases, there is the case of Williamson v Rider which created a difference of opinion. The document contained the words: "I agree to repay on or before Dec 31, 1956". The majority of the Court of Appeal held that this was not a promissory note, because it gave the payer an option to repay on any day of his choosing on or before the specified date. The dissenting judge was of the view that there was a clear obligation to pay before the given day which brought it within the definition. Where a Zamindar said in a document "We shall order the borrowed money to be repaid", it was held to be another way of saying: "I shall pay" and therefore a promissory note.

(3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument. Therefore, the promise to pay must not depend upon the happening of some outside contingency or event. It must be payable absolutely. A promise to pay "when able", or "as soon as possible", or "after your marriage to I?", is conditional. But a promise to pay after a specific' time or on the happening of an event which must happen, is not conditional, e.g. "I promise to pay Rs. 1,000 ten days after the death of B", is unconditional.

in Beardsley v Baldwin a written undertaking to pay a sum of money within so many days after the defendant s marriage was not recognized as a promissory note, because possibly the defendant may never marry and the sum may never become payable. Similarly, in Roberts v Peake an action was brought upon a promissory note made m the following form:

We promise to pay to AB £116.lis value received, on the death of Hindshaw, provided he leaves either of us sufficient to pay the said sum or we shall be otherwise able to pay.

The court pointed out that if the note had merely been made payable death of G H, it would have been a good promissory note, because death is t so certain and necessary that it is bound to happen and, therefore, the no have become payable at one time or the other. But the other condition that it would be payable provided there would be sufficient funds left behind made the instrument bad, because that was an uncertain event, and a note payable on an uncertain contingency can never be a negotiable instrument. A document stated that the promised to pay-£100 "on or before December 31, 1956". It was held by the Court of Appeal that the document was not a valid promissory note." The Court said that the introduction of the date December 31 limited the time within which payment must be made, but it does not fix the date of payment as required by the Act.

The reason why conditional instruments are not permitted to come into circulation was explained in Carlos v Fancourt.

Certainty is a great object in commercial instruments. On this ground bills of exchange which are only payable on a contingency are not negotiable, because it does not appear on the face of them whether or not they will ever be paid.

Similarly, Lord KENYON observed:

It would perplex the commercial transactions of mankind, if paper securities of this kind were issued out into the world, encumbered with conditions and contingencies, and if the persons to whom they were offered in negotiation were obliged to inquire when these uncertain events would probably be reduced to certainty.

It may be added that "a negotiable instrument is a carrier without luggage. It is a requisite that it be framed in the fewest possible words, and those importing the most certain and precise contract. It must be free from contingencies or conditions that would embarrass it in its course. There should be nothing which would materially impede its circulation”.  Thus, in Palmer vs. Pratt a bill of exchange made payable “at thirty days after the arrival of the ship Paragon at Calcutta” was held to be bad, the court saying: “so that if the ship did not arrive the bill would never be paid.” Similarly, in another case, a note payable to the payee “when he is twenty-one years old” was held not negotiable. It was aid: “The payment was to be made when the payee should attain his majority – an event that might never happen, and therefore, money was not certainly and at all events payable.”

(4) It should be signed by the maker: The person who promises to pay must sign the instrument even though it might have been written by the promisor himself. There are no restrictions regarding the form or place of signatures in the instrument. It may be in any part of the instrument. It may be in pencil or ink, a thumb mark or initials. The pronote can be signed by the authorised agent of the maker, but the agent must expressly state as to on whose behalf he is signing, otherwise he himself may be held liable as a maker.

The only legal requirement is that it should indicate with certainty the identity of the person and his intention to be bound by the terms of the agreement.

(5) The maker must be certain: The note self must show clearly who is the person agreeing to undertake the liability to pay the amount. In case a person signs in an assumed name, he is liable as a maker because a maker is taken as certain if from his description sufficient indication follows about his identity. In case two or more persons promise to pay, they may bind themselves jointly or jointly and severally, but their liability cannot be in the alternative.

(6) The payee must be certain: The instrument must point out with certainty the person to whom the promise has been made. The payee may be ascertained by name or by designation. A note payable to the maker himself is not pronote unless it is indorsed by him. In case, there is a mistake in the name of the payee or his designation; the note is valid, if the payee can be ascertained by evidence. Even where the name of a dead person is entered as payee in ignorance of his death, his legal representative can enforce payment.

Intention to make Promissory Note

There should be nothing in the instrument than what constitutes promise to pay. The instrument must be intended by the parties to be note. The court said that this shows that the court has necessarily to cull out the intention of the parties so as to decide whether a particular instrument is promissory note. The instrument has to be looked at as a whole. The parties’ description is not a decisive factor.

(7) The promise should be to pay money and money only:

• Money means legal tender money and not old and rare coins.

• A promise to deliver paddy either in the alternative or in addition to money does not constitute a promissory note.

I promise to pay to JE... the sum of £65 with lawful interest for the same, three months after date, and also all other sums which may be due to him.

Lord ELLENBOROUGH was of the opinion that the instrument was too indefinite to be considered a promissory note. It contained a promise to pay interest for a sum not specified and not otherwise ascertained than by reference to the defendant’s books. When an instrument specifies the rate of interest, it has to be calculated from the date of the instrument until tender or realisation. Where no rate of interest is specified in the instrument, the applicable rate of interest would be eighteen per cent.

The Act nowhere requires that the amount should be stated both in words and figures. But this has become usual. In recognition of this fact Section 18 says that in case of discrepancy the amount stated in words will prevail.

(8) The amount should be certain: One of the important characteristics of a promissory note is certainty—not only regarding the person to whom or by whom payment is to be made but also regarding the amount. If A promises to pay Rs. 100 and all other sums which shall become due to him, the instrument is not a promissory note.

However, paragraph 3 of Section 5 provides that the sum does not become indefinite merely because

(a) there is a promise to pay amount with interest at a specified rate.

(b) the amount is to be paid at an indicated rate of exchange.

(c) the amount is payable by installments with a condition that the whole balance shall fall due for payment on a default being committed in the payment of anyone installment.

(9) Other formalities: The other formalities regarding number, place, date, consideration etc. though usually found given in the promissory notes but are not essential in law. The date of instrument is not material unless the amount is made payable at a certain time after date. Even in such a case, omission of date does not invalidate the instrument and the date of execution can be independently ascertained and proved and if it is undated, it is deemed to be dated on the date of delivery.

Note: A promissory note cannot be made payable or issued to bearer, no matter whether it is payable on demand or after a certain time (Section 31 of the RBI Act).

(2) BILL OF EXCHANGE

A "bill of exchange" is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person or to the bearer of the instrument. (Section 5)

           

The definition of a bill of exchange is very similar to that of a promissory note and for most of the cases the rules which apply to promissory notes are in general applicable to bills. There are however, certain important points of distinction between the two.

The usual form of Bill of Exchange is:

Rs 500.00                                         Bombay, November 20, 1959 Three months after date pay to Pearson or           Bearer the sum Order rupees five hundred, for value received. To Robins May Bombay

Although this is the general form of a bill of exchange, no particular form is prescribed. Whatever form it may take, it must substantially comply with the requirements of Section 5. In essence a bill of exchange is the order upon his debtor requiring him to pay the money to the person specified.

Parties to a bill of exchange:

A bill of exchange has the following parties:

(a) The Drawer: the person who draws the bill.

(b)     The Drawee: the person on whom the bill is drawn.

(c)     The Acceptor: one who accepts the bill. Generally, the drawee is the acceptor but a stranger may accept it on behalf of the drawee.

(d)    The payee: one to whom the sum stated in the bill is payable, either the draweror any other person may be the payee.

(e)    The holder: is either the original payee or any other person to whom, the payee has endorsed the bill. In case of a bearer bill, the bearer is the holder.

(f)   The endorser: when the holder endorses the bill to anyone else he becomes the  endorser.

(g)  The endorsee: is the person to whom the bill is endorsed.

(h) Drawee in case of need: Besides the above parties. another person called the "drawee in case of need", may be introduced at the option of the drawer. The name of such a person may be inserted either by the drawer or by any endorser in order that resort may be had to him in case of need, i.e., when the bill is dishonoured by either non-acceptance or non-payment.

  (i)   Acceptor for honour: Further, any person may voluntarily become a party to a bill as acceptor. A person, who on the refusal by the original drawee to accept the bill or to furnish better security, when demanded by the notary, accept the bill supra protest in order to safeguard the honour of the drawer or any endorser, is called the acceptor for honour.

  Essential elements:

(1) It must be in writing.

(2) It must be signed by the drawer.

(3) The drawer, drawee and payee must be certain.

In Cruchley v Clarence, the defendant issued a bill without inserting the name of any payee and the court said: "A bill of exchange drawn and issued in blank for the name of the payee, may be filled up by a bona fide holder with his name and will bind the drawer." Lord ELLENBOROUGH "It is the same thing as if the defendant made the bill payable to bearer.”

        But though the payee may not be named, the drawee must be designated with reasonable certainty. In Gray v Milner, however, no drawee was at all indicated in the bill yet it to be valid. The facts were that an instrument was made payable "to the order". It was not addressed to any person by name. But the place of payment was specified. The bill was afterwards accepted by the person who resided at where it was made payable. DALLAS CJ said: "The court was of the opinion that the instrument was clearly a bill of exchange... it being directed to a particular place, which could only mean to the person who resides there; and that the defendant by accepting it, acknowledged that he was the person to whom it was directed.” ALDERSON B later explained the meaning of this case by saying: "That exchange made payable at a particular place or house, is meant to be add the person who resides at that place or house." He was giving his judgment in Peto v Reynolds. Here the plaintiff drew an instrument in the form of a bill of a bill of exchange. Its form was:

      Exchange for £200 Cameroons, September 3, 1852. At sight... please pay to S. M. Peto or order the sum of two hundred pounds sterling for value received....

      It was not addressed to anybody. No drawee was at all specified. But later the defendant accepted it. The question was whether it was a valid bill of exchange. No direct answer was given to this question because a new trial was ordered. But none of the judges recognized it as a valid bill of exchange. They were of opinion "law merchant required that every bill of exchange should have a draw drawee''.

      Accordingly in Mason v Lack a purported bill of exchange which did not specify any drawer or drawee was held to be invalid.

      It was not signed by any person as drawer, nor was it addressed to any drawee. Subsequently it was accepted by the defendant Lack. The Court of King’s Bench held that the document was invalid as a bill of exchange because it did not comply with the requirements of Section 6 of the English Act of 1882, which provides that "the drawee must be named or otherwise indicated with reasonable certainty". Hence, to make a valid bill of exchange, the drawer must address it to a particular person and only that person or somebody for him can accept it.

(4) The sum payable must also be certain.

(5) It should be properly stamped.

(6) It must contain an express order to pay money and money alone. For example, in the following cases, there is no order to pay, but only a request to pay. Therefore, none can be considered as a bill of exchange:

(a) “I shall be highly obliged if you make it convenient to pay Rs.1000 to Suresh”.

(b) “Mr. Ramesh, please let the bearer have one thousand rupees, and place it to my account and oblige”

However, there is an order to pay, though it is politely made, in the following examples:

(a) “Please pay Rs. 500 to the order of ‘A’.

(b) ‘Mr. A will oblige Mr. C, by paying to the order of’ P”.

In Ruff v Webb, the plaintiff Ruff was a servant of the defendant Webb. The defendant dismissed him from service and for his wages gave him a draft in the following words: "Mr Nelson will much oblige Mr Webb by paying to J. Ruff or order, twenty guineas on his account." Lord KENYON was of opinion that the "paper was a bill of exchange, that it was an order by one person to another to pay money to the plaintiff or his order". It is quite apparent that the language of the draft was very polite, but it has been said that "the introduction of the terms of gratitude does not destroy the promise (or order) to pay".

If the language of the draft does not show any "order to pay", the draft will not be a bill of exchange. In Little v Slackford the defendant issued a paper addressed to the plaintiff in the following words:

Mr Little, Please to let the bearer have seven pounds, and to place them to my account, and you will oblige. Yours humble servant, R. Slackford.

Lord TENTERDON said: "...the paper does not purport to be a demand made by a party having a right to call on the other to pay. The fair meaning is you will oblige by doing it."

The order must be such as to require the other to pay the money at all events. Merely to give him authority to pay the money is not sufficient. In Hamilton v Spottiswood'' an instrument read:

To Alexander Spottiswood, Dear Sir, We hereby authorise you to pay on our account, to the order of William Gentle, the sum of six thousand pounds.

All the judges were of the opinion that the letter did not import an absolute intention that the money should at all events be paid, but merely authorized the defendant to pay. Accordingly it was not a bill of exchange.

(7) The order must be unconditional.

Distinction between Bill of Exchange and Promissory Note:

1. Number of parties: In a promissory note there are only two parties – the maker (debtor) and the payee (creditor). In a bill of exchange, there are three parties; drawer, drawee and payee; although any two out of the three may be filled by one and the same person,

2. Payment to the maker: A promissory note cannot be made payable the maker himself, while in a bill of exchange to the drawer and payee or drawee and payee may be same person.

3. Unconditional promise: A promissory note contains an unconditional promise by the maker to pay to the payee or his order, whereas in a bill of exchange, there is an unconditional order to the drawee to pay according to the direction of the drawer.

4. Prior acceptance: A note is presented for payment without any prior acceptance by the maker. A bill of exchange is payable after sight must be accepted by the drawee or someone else on his behalf, before it can be presented for payment.

5. Primary or absolute liability: The liability of the maker of a promissory note is primary and absolute, but the liability of the drawer of a bill of exchange is secondary and conditional.

6. Relation: The maker of the promissory note stands in immediate relation with the payee, while the maker or drawer of an accepted bill stands in immediate relations with the acceptor and not the payee.

7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such protest is required to be made by the law of the country where they are drawn, but no such protest is needed in the case of a promissory note.

8. Notice of dishonour: When a bill is dishonoured, due notice of dishonour is to be given by the holder to the drawer and the intermediate indorsers, but no such notice need be given in the case of a note.

How bill of exchange originates - Forms of Bills of Exchange.

Bills of exchange were originally used for payment of debts by traders residing in one country to another country with a view to avoid transmission of coin. Now-a-days they are used more as trade bills both in connection with domestic trade and foreign trade and are called inland bills and foreign bills respectively.

Classification of Bills

Bills can be classified as:

(1) Inland and foreign bills.

(2) Time and demand bills.

(3) Trade and accommodation bills.

(1) Inland and Foreign Bills (Sections 11 and 12)

Inland Bills

A bill of exchange is an inland instrument if it is (i) drawn or made and payable in India, or (ii) drawn in India upon any person who is a resident in India, even though it is made payable in a foreign country. But a promissory note to be an inland shouid  be drawn and payable in India, as it has no drawee.

Two essential conditions to make an inland instrument are:

(1) the instrument must have been drawn or made in India; and

(2) the instrument must be payable in India or the drawee must be in India.

The following are the Inland bills:

(i) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in Bombay. The bill is an inland bill.

(ii) A bill is drawn by a Delhi merchant on a person in London, but is made payable in India. This is an inland bill.

(iii) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is accepted for payment in Japan. The bill is an inland bill.

Foreign Bills

           All bills which are not inland are deemed to be foreign bills. Normally foreign bills are drawn in sets of three copies.

 

The following are the foreign bills:

1. A bill drawn outside India and made payable in India.

2. A bill drawn outside India on any person residing outside India.

3. A bill drawn in India on a person residing outside India and made payable outside India.

4. A bill drawn outside India on a person residing in India.

5. A bill drawn outside India and made payable outside India.

(2) Time Bill and Demand Bill

Time bill: A bill payable after a fixed time is termed as a time bill. In other words, bill payable “after date” is a time bill.

Demand bill: A bill payable at sight or on demand is termed as a demand bill.

(3) Trade and accommodation bills.

Trade Bill

 

A bill drawn and accepted for a genuine trade transaction is termed as a trade bill. When a trader sells goods on credit, he may make use of a bill of exchange. Suppose A sells goods worth Rs. 1,000 to B and allows him 90 days time to pay the price, A will draw a bill of exchange on B, in the following terms: "Ninety days after date pay A or order, the sum of one thousand rupees only for value received". A will sign the bill and then present it to B for acceptance. This is necessary because, until a bill is accepted by the drawee, nobody has either rights or obligations. If B agrees to obey the order of A, he will accept the bill by writing across its face the word "accepted" and signing his name underneath and then delivering the bill to the holder. B, the drawee, now becomes the acceptor of the bill and liable to its holders. Such a bill is a genuine trade bill.

 

Accommodation Bill

All bills are not genuine trade bills, as they are often drawn for accommodating a party. An accommodation bill is a bill in which a person lends or gives his name to oblige a friend or some person whom he knows or otherwise. In other words, a bill which is drawn, accepted or endorsed without consideration is called an accommodation bill. The party lending his name to oblige the other party is known as the accommodating or accommodation party, and the party so obliged is called the party accommodated. An accommodation party is not liable on the instrument to the party accommodated because as between them there was no consideration and the instrument was merely to help, But the accommodation party is liable to a holder for value, who takes the accommodation bill for value, though such holder may not be a holder in due course. Thus, A may be in need of money and approach his friends B and C who, instead of lending the money directly, propose to draw an "Accommodation Bill" in his favour in the following form:          

"Three months after date pay A or order, the sum of Rupees one thousand only'

                                                                                                                           B

To

       C

If the credit of Bank C is .good, this device enables A to get an advance of Rs. 1,000 from his banker at the commercial rate of discount. The real debtor in this case is not C, but A the payee who promises to reimburse C before the period of three months only. A is here the principal debtor and Band C are mere sureties. This inversion of liability affords a good definition of an accommodation bill "If as between the original parties to - the bill the one who should prima facie be principal is in. fact the surety whether he be drawer, acceptor, or endorser, that bill is an accommodation bill".

Rules regarding accommodation bills are:

(i) In case the patty accommodated continues to hold the bill till maturity, the accommodating party shall not be liable to him for payment of, the bill since the contract between them is not based on any consideration (Section 43).

(ii) But the accommodating party shall be liable to any subsequent holder for value who may be knowing the exact position that the bill is an accommodation bill and that the full consideration has not been received by the acceptor. The accommodating party can, in turn, claim compensation from the accommodated party for the amount it has been asked to pay the holder for value.

(iii) An accommodation bill may be negotiated after maturity. The holder or such a bill after maturity is in the same position as a holder before maturity, provided he takes it in good faith and for value (Sec. 59)

In form and all other respects an accommodation bill is quite similar to an ordinary bill of exchange. There is nothing on the face of the accommodation bill to distinguish it from an ordinary trade bill.

\

Bills in Sets (Section 132 and 133)

            Foreign bills are usually drawn in sets to avoid the danger of loss. They are drawn in sets of three, each of which is called "Via" and as soon as anyone of them is paid, the others become inoperative. They are drawn in order to avoid their loss or miscarriage during transit. Each part is despatched separately. To avoid delay, all the parts are sent on the same day; by different mode of conveyance.All these parts form one bill and the drawer must sign and deliver all of them to the payee. The stamp is affixed only on one part and one part is required to be accepted. But if the drawer mistakenly accepts all the parts of the same bill, he will be liable on each part accepted as if it were a separate bill.

Rules: Sections 132 and 133 provide for the following rules:

(i)  A bill of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All parts make one bill and the entire bill is extinguished, i.e. when payment is made on one part- the other parts will become inoperative (Section 132).

 

(ii) The drawer should sign and deliver all the parts but the acceptance is to be conveyed only on one of the parts. In case a person accepts or endorses different parts of the bill in favour of different persons, he and the subsequent endorsers of each part are liable on such part as if it were a separate bill (Sec. 132).

 

(iii) As between holders in due course of the different parts of the same bill, he who first acquired title to anyone part is  entitled to the other parts and is also entitled to claim the money represented by bill (Sec. 133).

 

  Right to Duplicate Bill

 

Where a bill of exchange has been lost before it was overdue, the person who was the holder to it may apply to the drawer, to give him another bill of the same tenor. It is only the holder who can ask for a duplicate bill, promissory note or cheque.

 Bank Draft

A bill of exchange is also sometimes spoken of as a draft. It is called as a bank draft when a bill of exchange drawn by one bank on another bank, or by itself on its own branch, and is a negotiable instrument. It is very much like the cheque with three points of distinction between the two. A bank draft can be drawn only by a bank on another bank, usually its own branch. It cannot so easily be counter-manded. It cannot be made payable to bearer.

___________________________________________________

                                              Specimen of a Bank Draft

                               A.B.C. Bank

                              X.Y.Z. Branch

No.....................                                                                          Date...................

 

On demand pay 'A' or order the sum of rupees one thousand five hundred only for value received.

                                                                                                           Rs. 1,500/-

                                                                                                                                                                                                              Sd./­

                                                                                                                Manager

To

In the above demand draft the drawer is X.Y.Z. Branch, the drawee is 'B' branch and the payee is 'A'.

CHEQUE

Section 6 of the Act provides that a cheque is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand. Simply stated, a cheque is a bill of exchange drawn on a bank payable always on demand. Thus, a cheque is a bill of exchange with two additional qualifications, namely: (i) it is always drawn on a banker, and (ii) it is always payable on demand. A cheque being a species of a bill of exchange, must satisfy all the requirements of a bill; it does not, however, require acceptance.

in the case of Cole v Milson, a document was drawn absolutely in the form of a cheque. It was made payable to "cash or order". The question was whether it was a valid cheque. Section .5 of the Indian Act and Section 3(1) of the English Act require that a bill of exchange must be made payable to or to the order of a specified person or to bearer. This document was made payable to "cash or order". Hence, it was not payable to any person or to bearer and, therefore, was not a bill of exchange within the meaning of the above sections. And if it was not a bill of exchange, it could not be a cheque either.

Again, even as a bill of exchange has to be an unconditional order to must be a cheque. In Bevins v London & South-Western Bank Ltd, a company issued a cheque on its bankers. A receipt was appended to the cheque and it the banker to make the payment "provided the receipt form at foot hereof signed, stamped and dated". The cheque was held to be invalid because its p was made conditional upon signature of the receipt.

In addition to satisfying the essentials of a bill of exchange a cheque mu the requirements of Section 6. In the first place, a cheque must be drawn banker. Who is a banker? A case which gives the answer is R. Pillai v S. Ayyar. A District Board had its funds in a Government Treasury and used to w money by issuing orders in the form of cheques. One such unconditional order in writing having been issued the question was whether it was a cheque. AYYAR J held that "Treasury is not a bank" and, therefore, the order was not a cheque under Section 6, but a bill of exchange under Section 5. The reason is that every person who receives the money of another and pays it according to his orders cannot be regarded as a banker, unless he establishes that business for profit. The learned judge cited the definition by Hart who says in his LAW OF BANKING: "A banker is one who in the ordinary course of his business honours cheques drawn upon persons from and for whom he receives money on current accounts."

Secondly, the cheque must be payable on demand.

    Note: By virtue of Section 31 of the Reserve Bank of India Act, no bill of exchange or hundi can be made payable to bearer on demand and no promissory note or a bank draft can be made payable to bearer at all, whether on demand or after a specified  time. Only a cheque can be payable to bearer on demand.

Specimen of a Cheque

ABC Bank                                                                                                       Date_____________  Pay 'A;--------------------------------------------------------------------------------or the bearer sum of rupees---------------------------------------------------------------------------------only. Rs-------/-     A/c No---------LF------                                                                                                                                                 Sd/- No---------------------

 

Parties to a cheque

The following are the parties to a cheque:

(a) The drawer: The person who draws the cheque.

(b) The drawee: The banker of the drawer on whom the cheque is drawn.

(c), (d), (e) and (f) The payee, holder, endorser and endorsee: same as in the

case of a bill.

   Essentials of a Cheque

       (1)It is always drawn on a banker.

(2) It is always payable on demand.

(3) It does not require acceptance. There is, however, a custom among banks to mark cheques as good for purposes of clearance.

(4) A cheque can be drawn on bank where the drawer has an account.

(5) Cheques may be payable to the drawer himself. It may be made payable to

              bearer on demand unlike a bill or a note.

(6) The banker is liable only to the drawer. A holder -has no remedy against      the banker if a cheque is dishonoured.

(7) A cheque is usually valid for fix months. However, it is not invalid if it is post dated or ante-dated.

       (8) No Stamp is required to be affixed on cheques.

Distinction Between Bills of Exchange and Cheque

1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a bank.

2. It is essential that a bill of exchange must be accepted before its payment can be claimed A cheque does not require any such acceptance.

3. A cheque can only be drawn payable on demand, a bill may be also drawn payable on demand, or on the expiry of a certain period after date or sight.

4. A grace of three days is allowed in the case of time bills while no grace is given in the case of a cheque.

5. The drawer of the bill is discharged from his liability, if it is not presented for payment, but the drawer of a cheque is discharged only if he suffers any damage by delay in presenting the cheque for payment.

6. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque.

7. A cheque may be crossed, but not needed in the case of bill.

8. A bill of exchange must be properly stamped, while a cheque does not require any stamp.

9. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never be drawn to bearer.

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

Some of the peculiarities were clearly stated by PARKE B in Ra Midlick v Luchmeechund Radakissen. He said that a cheque "is a peculiar instrument, in many respects resembling a bill of exchange, but in some, different. A cheque does not require acceptance, in the ordinary course it is never accepted; it is not intended for circulation, it is given for immediate payment; it is not entitled to days of grace...". This passage was cited with approval by Lord WRIGHT in Bank of Baroda v Punjab National Bank. His Lordship made his own valuable contribution to explaining the nature of a cheque. He said: "In add is to be noted, a cheque is presented for payment, whereas a bill in the first instance is presented for acceptance unless it is a bill on demand. A bill is dishonoured by non-acceptance, this is not so in the case of a cheque. These essential differences (besides others) are sufficient to explain why in practice cheques are not acceptance is not necessary to create liability to pay as between the drawer drawee bank.

 Pay order

 

  A pay order is not a cheque. It is issued by one branch of a bank to another branch of the same bank or under arrangement, to another bank with a direction to credit the amount to the account of a party on whose demand it is issued. Therefore, neither a pay order is equivalent to a cheque, nor for its dishonor S. 138 would be attracted, nor the banker who is directed to make the payment can be a proper complainant because he is not the payee of the instrument. The decision of the Supreme Court on this point is different. A "pay order" has been held to be covered by the definition of a cheque in S. 6 of the Act. A complaint under S. 138 for the dishonor of a pay order was held to be maintainable.

  Hundis

A “Hundi” is a negotiable instrument written in an oriental language. The term hundi includes all indigenous negotiable instruments whether they be in the form of notes or bills. The word ‘hundi’ is said to be derived from the Sanskrit word   ‘hundi’, which means “to collect”. They are quite popular among the Indian merchants from very old days. They are used to finance trade and commerce and provide a fascile and sound medium of currency and credit.

       Hundis are governed by the custom and usage of the locality in which they are intended to be used and not by the provision of the Negotiable Instruments Act. In case there is no customary rule known as to a certain point, the court may apply the provisions of the Negotiable Instruments Act. It is also open to the parties to expressly exclude the applicability of any custom relating to hundis by agreement (lndur Chandra vs. Lachhmi Bibi, 7 B.I.R. 682).

The following types of hundis are worth mentioning:

1. Shah Jog Hundi

        "Shah" means a respectable and responsible person or a man of worth in the bazar. Shah Jog Hundi means a hundi which is payable only to a respectable holder,­as opposed. to a hundi payable to bearer. In other words the drawee before paying the same has to satisfy himself that the payee is a 'SHAH'.

2. Jokhmi Hundi

A "jokhmi" hundi is always drawn on or against goods shipped on the vessel mentioned in the hundi. It implies a condition that money will be paid only in the event of arrival of the goods against which the hundi is drawn. It is in the nature of policy of insurance. The difference, however, is that the money is paid before hand and is to be recovered if the ship arrives safely.

3. Jawabee Hundi

According to Macpherson, "A person desirous of making a remittance writes to the payee and delivers the letter to a banker, who either endorses it on to any of his correspondents near the payee's place of residence, or negotiates its transfer. On the arrival, the letter is forwarded to the payee, who attends and gives his receipt in the form of an answer to the letter which is forwarded by the same channel of the drawer or the order". Therefore, this is a form of hundi which is used for remitting money from one place to another.

4. Nam jog Hundi

It is a hundi payable to the party named in the bill or his order. The name of the payee is specifically inserted in the hundi. It can also be negotiated like a bill of exchange. Its alteration into a Shah Jog hundi is a. material alteration and renders it void.

5. Darshani Hundi

This is a hundi payable at sight. It is freely negotiable and the price is regulated by demand and supply. They are payable on demand and must be presented for payment within a reasonable time after they are received by the holder.

6. Miadi Hundi

This is otherwise called muddati hundi, that is, a hundi payable after a specified period of time. Usually money is advanced against these hundis by shroffs after deducting the advance for the period in advance. There are other forms of hundis also like.

7. Dhani Jog Hundi - A hundi which is payable to "dhani" Le., the owner.

8. Firman Jog Hundi - which is payable to order if can be negotiated by endorsement and delivery.

Banker

A banker is one who does banking business. Section 5(b) of the Banking Regulation Act, 1949 defines banking as, "accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft or otherwise." This definition emphasises two points: (1) that the primary function of a banker consists of accepting of deposits for the purpose of lending or investing the same; (2) that the amount deposited is repayable to the depositor on demand or according to the agreement. The demand for repayment can be made through a cheque, draft or otherwise, and not merely by verbal order.

Customer

The term "customer" is neither defined in Indian nor in English statutes. The general opinion is that a customer is one who has an account with the bank or who utilises the services of the bank.

The special features of the legal relationship between the banker and the customer

may be termed as the obligations and rights of the banker. These are:

1. Obligation to honour cheques of the customers.

2. Obligation to collect cheques and drafts on behalf of the customers.

3. Obligation to keep proper record of transactions with the customer.

4. Obligation to comply with the express standing instructions of the customer.

5. Obligation not to disclose the state of customer's account to anyone else.

6. Obligation to give reasonable notice to the customer, if the banker wishes to

               close the account.

7.  Right of lien over any goods and securities bailed to him for a general balance

               of account.

 

8.  Right of set off and right of appropriation.

 

9.  Right to claim incidental charges and interest as per rules and regulations of

the bank as communicated to the customer at the time of opening the account.

 

    Liability of a Banker

           

         By opening a current account of a customer, the banker becomes liable to his debtor to the extent of the amount so received in the said account and undertakes to honour the cheques drawn by the customer so long as he holds sufficient funds to the customer's credit. If a banker, without justification, fails to honour his customer's cheques, he is liable to compensate the drawer for any loss or damage suffered by him. But the payee or holder of the cheque has no cause of action against the banker as the obligation to honour a cheques is only towards the drawer.

The banker must also maintain proper and accurate accounts of credits and debits. He must honour a cheque presented in due course. But in the following circumstances, he must refuse to honour a cheque and in some others he may do so.

When Banker must Refuse Payment

In the following cases the authority of the banker to honour customer's cheque comes to an end, he must refuse to honour cheques issued by the customer:

(a) When a customer countermands payment ie., where or when a customer, after issuing a cheque issues instructions not to honour it, the banker must not pay it.

(b) When the banker receives notice of customer's death.

      (c)  When customer has been adjudged an insolvent.

      (d) When the banker receives notice of customer's insanity.

(e) When an order (e.g., Garnishee Order) of the Court, prohibits payment.

(f) When the customer has given notice of assignment of the credit balance of his account.

(g) When the holder's title is defective and the banker comes to know of it.

(h) When the customer has given notice for closing his account.

Other cases:

(a) When the cheque is post-dated.

(b) When the banker has not sufficient funds of the drawer with him and there is no communication between the bank and the customer to honour the cheque.

 (c) When the cheque is of doubtful legality.

(d) When the cheque is not duly presented, e.g., it is presented after banking

               hours.

      (e) When the cheque on the face of it is irregular, ambiguous or otherwise materially altered.

          (f) When the cheque is presented at a branch where the customer has no account. 

      (g) When some persons have joint account and the cheque is not signed jointly by    all or by the survivors of them.

   (h) When the cheque has been allowed to become stale, ie., it has not been presented within six months of the date mentioned on it.

Protection of Paying Banker (Sections 10, 85 and 128)

Section 85 lays down that where a cheque payable to order purports to be endorsed by or on behalf -of the payee the banker is discharged by payment in due course. He can debit the account of the customer with the amount even though the endorsement turns out subsequently to have been forged, or the agent of the payee without authority endorsed it on behalf of the payee. It would be seen that the payee includes endorsee. This protection is granted because a banker cannot be expected to know the signatures of all the persons in the world. He is only bound to know the signatures of his own customers.

Therefore, the forgery of drawer's signature will not ordinarily protect the banker but even in this case, the banker may debit the account of the customer, if it can show that the forgery was intimately connected with the negligence of the customer and was the proximate cause of loss.

I n the case of bearer cheques, the rule is that once a bearer cheque, always a bearer cheque. Where, therefore, a cheque originally expressed by the drawer himself to be payable to bearer, the banker may ignore any endorsement on the cheque. He will be discharged by payment in due course. But a cheque which becomes bearer by a subsequent endorsement in blank is not covered by this Section. A banker is discharged from liability on a crossed cheque if he makes  payment in due course.

Payment in due Course (Section 10)

Any person liable to make payment under a negotiable instrument, must make the payment of the amount due thereunder in due course in order to obtain a valid discharge against the holder.

A payment in due course means a payment in accordance with the apparent tenor of the instrument, in good faith and without negligence to any person in possession

thereof. .

A payment will be a payment in due course if:

(a) it is in accordance with the apparent tenor of the instrument, i.e. according

               to what appears on the face of the instrument to be the intention of the parties;

                                                      1

      (b) it is made in good faith and without negligence, and under circumstances

which do not afford a ground for believing that the person to whom it is made is not entitled to receive the amount;

1. it is made to the person in possession of the instrument who is entitled as holder to receive payment;

(d) payment is made under circumstances which do not afford  a reasonable ground believing that he is not entitled to receive payment of the amount mentioned in the instrument; and

(e) payment is made in money and money only.

Under Sections 10 and 128, a paying banker making payment in due course is protected.

Collecting Banker

Collecting Banker is one who collects the proceeds of a cheque for a customer. Although a banker collects the proceeds of a cheque for a customer purely as a matter of service, yet the Negotiable Instruments Act, 1881 indirectly imposes statutory obligation, statutory in nature. This is evident from Section 126 of the Act which provides that a cheque bearing a "general crossing" shall not be paid to anyone other than banker and a cheque which is "specially crossed" shall not be paid to a person other than the banker to whom it is crossed. Thus, a paying banker must pay a generally crossed cheque only to a banker thereby meaning that it should be collected by another banker. While so collecting the cheques for a customer, it is quite possible that the banker collects for a customer, proceeds of a cheque to which the customer had no title in fact. In such cases, the true owner may sue the collecting banker for "conversion". At the same time, it cannot be expected of a banker to know or to ensure that all the signatures appearing in endorsements on the reverse of the cheque are genuine. The banker is expected to be conversant only with the signatures of his customer. A customer to whom a cheque has been endorsed, would request his banker to collect a cheque. In the event of the endorser's signature being proved to be forged at later date, the banker who collected the proceeds should not be held liable for the simple reason that he has merely collected the proceeds of a cheque. Section 131 of the Negotiable Instruments Act affords statutory protection in such a case where the customer's title to the cheque which the banker has collected has been questioned. It reads as follows:

"A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specifically to himself -shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason of only having received such payment.”

Explanation: A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer's account with the amount of-the cheque before receiving payment thereof."

The requisites of claiming protection under Section 131 are as follows:

(i) The collecting banker should have acted in good faith and without negligence. An act is done in good faith when it is done honestly. The plea of good faith can be rebutted on the ground of recklessness indicative of want of proper care and attention. Therefore, much depends upon the facts of the case. The burden of proving that the cheque was collected in good faith and without negligence is upon the banker claiming protection. Failure to verify the regularity of endorsements, collecting a cheque payable to the account of the company to the credit of the director, etc. are examples of negligence.

 (ii) The banker should have collected a crossed cheque, i.e., the cheque should

        have been crossed before it came to him for collection.

 (iii) The proceeds should have been collected for a customer, i.e., a person who

     has an account with him.

       (iv)That the collecting banker has only acted as an agent of the customer. If he had become the holder for value, the protection available under Section 131 is forfeited - Where for instance, the banker allows the customer to withdraw the amount of the cheque before the cheque is collected or where the cheque has been accepted in specific reduction of an overdraft, the banker is deemed to have become the holder for value and the protection is lost. But the explanation to Section 131 says that the mere crediting of the amount to the account does not imply that the banker has become a holder for value because due to accounting conveniences the banker may credit the account of the cheque to the customer's account even before proceeds thereof are realized.

Overdue, Stale or Out-of-date Cheques

A cheque is overdue or becomes statute-barred after three years from its due date of issue. A holder cannot sue on the cheque after that time. Apart from this provision, the holder of a cheque is required to present it for payment within a reasonable time, as a cheque is not meant for indefinite circulation. In India, a cheque, which has been in circulation for more than six months, is regarded by bankers as stale. If, as a result of any delay in presenting a cheque, the drawer suffers any loss, as by the failure of the bank, the drawer is discharged from liability to the holder to the extent of the damage.

Liability of Endorser

 

In order to charge an endorser, it is necessary to present the cheque for payment within a reasonable time of its delivery by such endorser. 'A' endorses and delivers a cheque to B, and B keeps it for an unreasonable length of time, and then endorses and delivers it to C. C presents it for payment within a reasonable time after its receipt by him, and it is dishonoured. C can enforce payment against B but not against A, as qua A, the cheque has become stale.

Rights of Holder against Banker

A banker is liable to his customer for wrongful dishonour of his cheque but it is not liable to the payee or holder of the cheque. The holder has no right to en.t0rce payment from the banker except in two cases, namely, (i) where the holder does not present the cheque within a reasonable time after issue, and as a result the drawer suffers damage by the failure of the banker in liquidation proceedings; and (ii) where  banker pays a crossed cheque by mistake over the counter, he is liable to the owner for any loss occasioned by it.

CHAPTER 3

Endorsement (Sections 15 and 16)

The word ‘endorsement’ in its literal sense means, writing on the back of an instrument. But under the Negotiable Instruments Act it means, the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein. Thus, endorsement is signing a negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called an ‘endorser’, and the person to whom negotiable instrument is  transferred by endorsement is called the ‘endorsee’.

Essentials of a valid endorsement

The following are the essentials of a valid endorsement:

1. It must be on the instrument. The endorsement may be on the back or face of the instrument and if no space is left on the instrument, it may be made on a separate paper.

attached to it called allonage. It should usually be in ink.

2. It must be made by the maker or holder of the instrument. A stranger cannot endorse it.

3. It must be signed by the endorser. Full name is not essential. Initials may suffice. Thumb-impression should be attested. Signature may be made on any part of the instrument. A rubber stamp is not accepted but the designation of the holder can be done by a rubber stamp.

4. It may be made either by the endorser merely signing his name on the instrument (it is a blank endorsement) or by any words showing an intention to endorse or transfer the instrument to a specified person (it is an endorsement in full). No specific form of words is prescribed for an endorsement. But intention to transfer must be present.

When in a bill or note payable to order the endorsee’s name is wrongly spelt, he should when he endorses it, sign the name as spelt in the instrument and write the correct spelling within brackets after his endorsement.

5. It must be completed by delivery of the instrument. The delivery must be made by the endorser himself or by somebody on his behalf with the intention of passing property therein. Thus, where a person endorses an instrument to another and keeps it in his papers where it is found after his death and then delivered to the endorsee, the latter gets no right on the instrument.

6. It must be an endorsement of the entire bill. A partial endorsement i.e. which purports to transfer to the endorsee a part only of the amount payable does not operate as a valid endorsement.

If delivery is conditional, endorsement is not complete until the condition is fulfilled.

Who may endorse?

The payee of an instrument is the rightful person to make the first endorsement. Thereafter the instrument may be endorsed by any person who has become the holder of the instrument. The maker or the drawer cannot endorse the instrument but if any of them has become the holder thereof he may endorse the instrument (Sec. 51). The maker or drawer cannot endorse or negotiate an instrument unless he is in lawful possession of instrument or is the holder there of. A payee or indorsee cannot endorse or negotiate unless he is the holder there of.

Classes of endorsement

An endorsement may be:

(1) Blank or general.

(2) Special or full.

(3) Partial.

(4) Restrictive.

(5) Conditional.

(a) Blank or general endorsement (Sections 16 and 54).

It is an endorsement when the endorser merely signs on the instrument without mentioning the name of the person in whose favour the endorsement is made. Endorsement in blank specifies no endorsee. It simply consists of the signature of the endorser on the endorsement. A negotiable instrument even though payable to order becomes a bearer instrument if endorsed in blank. Then it is transferable by mere delivery.

An endorsement in blank may be followed by an endorsement in full.

Example: A bill is payable to X. X endorses the bill by simply affixing his signature. This is an endorsement in blank by X. In this case the bill becomes payable to bearer.

There is no difference between a bill or note indorsed in blank and one payable to bearer. They can both be negotiated by delivery.

(b) Special or full endorsement (Section 16)

When the endorsement contains not only the signature of the endorser but also the name of the person in whose favour the endorsement is made, then it is an endorsement in full. Thus, when endorsement is made by writing the words “Pay to A or A’s order,” followed by the signature of the endorser, it is an endorsement in full. In such an endorsement, it is only the endorsee who can transfer the instrument.

Conversion of endorsement in blank into endorsement in full:

When a person receives a negotiable instrument in blank, he may without signing his own name, convert the blank endorsement into an endorsement in full by writing above the endorser’s signature a direction to pay to or to the order of himself or some other person. In such a case the person is not liable as the endorser on the bill. In other words, the person transferring such an instrument does not incur all the liabilities of an endorser (Section 49).

Example: A is the holder of a bill endorsed by B in blank. A writes over B’s signature the words “Pay to C or order.” A is not liable as endorser but the writing operates as an endorsement in full from B to C.

Where a bill is endorsed in blank, or is payable to bearer and is afterwards endorsed by another in full, the bill remains transferable by delivery with regard to all parties prior to such endorser in full. But such endorser in full cannot be sued by anyone except the person in whose favour the endorsement in full is made (Section 55).

Example: C the payee of a bill endorses it in blank and delivers it to D, who specially endorses it to E or order. E without endorsement transfers the bill to F. F as the bearer is entitled to receive payment or to sue the drawer, the acceptor, or C who endorsed the bill in blank but he cannot sue D or E.

(c) Partial endorsement (Section 56)

A partial endorsement is one which purports to transfer to the endorsee a part only of the amount payable on the instrument. Such an endorsement does not operate as a negotiation of the instrument.

Example: A is the holder of a bill for Rs.1000. He endorses it “pay to B or order Rs.500.” This is a partial endorsement and invalid for the purpose of negotiation.

(d) Restrictive endorsement (Section 50)

The endorsement of an instrument may contain terms making it restrictive. Restrictive endorsement is one which either by express words restricts or prohibits the further negotiation of a bill or which expresses that it is not a complete and unconditional transfer of the instrument but is a mere authority to the endorsee to deal with bill as directed by such endorsement.

“Pay C,” “Pay C for my use,” “Pay C for the account of B” are instances of restrictive endorsement. The endorsee under a restrictive endorsement acquires all the rights of the endoser except the right of negotiation.

Conditional or qualified endorsement

It is open to the endorser to annex some condition to his owner liability on the endorsement. An endorsement where the endorsee limits  or negatives his liability by putting some condition in the instrument is called a conditional endorsement. A condition imposed by the endorser may be a condition precedent or a condition subsequent. An endorsement which says that the amount will become payable if the endorsee attains majority embodies a condition precedent. A conditional endorsement unlike the restrictive endorsement does not affect the negotiability of the instrument. It is also sometimes called qualified endorsement. An endorsement may be made conditional or qualified in any of the following forms:

(i) ‘Sans recourse’ endorsement: An endorser may be express word exclude his own liability thereon to the endorser or any subsequent holder in case of dishonour of the instrument. Such an endorsement is called an endorsement sans recourse (without recourse). Thus ‘Pay to A or order sans recourse, ‘pay to A or order without recourse to me,’ are instances of this type of endorsement. Here if the instrument is dishonoured, the subsequent holder or the indorsee cannot look to the indorser for payment of the same.

An agent signing a negotiable instrument may exclude his personal liability by using words to indicate that he is signing as agent only. The same rule applies to directors of a company signing instruments on behalf of a company. The intention to exclude personal liability must be clear. Where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate endorsers are liable to him.

Example: A is the holder of a negotiable instrument. Excluding personal liability by an endorsement without recourse, he transfers the instrument to B, and B endorses it to C, who endorses it to A. A can recover the amount of the bill from B and C.

(ii) Facultative endorsement: An endorsement where the endorser extends his liability or abandons some right under a negotiable instrument, is called a facultative endorsement.

“Pay A or order, Notice of dishonour waived” is an example of facultative endorsement.

(iii) ‘Sans frais’ endorsement: Where the endorser does not want the endorsee or any subsequent holder, to incur any expense on his account on the instrument, the endorsement is ‘sans frais’.

(iv) Liability dependent upon a contingency: Where an endorser makes his liability depend upon the happening of a contingent event, or makes the rights of the endorsee to receive the amount depend upon any contingent event, in such a case the liability of the endorser will arise only on the happening of that contingent event. Thus, an endorser may write ‘Pay A or order on his marriage with B’. In such a case, the endorser will not be liable until the marriage takes place and if the marriage becomes impossible, the liability of the endorser comes to an end.

Effects of endorsement

The legal effect of negotiation by endorsement and delivery is:

(i) to transfer property in the instrument from the endorser to the endorsee.

(ii) to vest in the latter the right of further negotiation, and

(iii) a right to sue on the instrument in his own name against all the other parties (Section 50).

Cancellation of endorsement

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

Negotiation back

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

INSTRUMENTS WITHOUT CONSIDERATION

A person cannot pass a better title than he himself possesses. A person who is a mere finder of a lost goods or a thief or one who obtains any article by fraud or for an unlawful consideration does not get any title to the thing so acquired. The true owner can recover it not only from him but from any person to whom he may have sold it. But there is a difference between the transfer of ordinary goods and negotiation of negotiable instruments. The Negotiable Instruments Act provides protection to those persons who acquire the instruments in good faith and for valuable consideration. A holder in due course who has no means to discover the defect of title in an instrument of any previous holder when the instrument may have passed through several hands must be protected if he obtains the instrument for value and in good faith.

Section 58 of the Act provides that no person in possession of an instrument with a defect of title can claim the amount of the instrument unless he is a holder in due course. The moment an instrument comes  into the hands of a holder in due course, not only does he get a title which is free from all defects, but having passed through his hands the instrument is cleaned of all defects.

Lost instruments

Where the holder of a bill or note loses it, the finder gets no title to it. The finder cannot lawfully transfer it. The man who lost it can recover it from the finder. But if the instrument is transferable by mere delivery and there is nothing on its face to show that it does not belong to the finder, a holder obtaining it from the finder in good faith and for valuable consideration and before maturity is entitled to the instrument and can recover payment from all the parties thereof. If the instrument is transferable by endorsement, the finder cannot negotiate it except by forging the endorsement.

The holder of the instrument when it is lost must give a notice of loss to all the parties liable on it and also a public notice by advertisement. The holder of a lost bill remains owner in law and as such on maturity can demand payment from the acceptor, and if is dishonoured he must give notice of dishonour to prior parties. The owner of the lost bill has a right to obtain the duplicate from the drawer and on refusal he can sue the drawer for the same.

Stolen instrument

The position of thief of an instrument is exactly the same as that of a finder of lost instruments. A thief acquires no title to an instrument if he receives payment on it the owner can sue him for the recovery of the amount. But if an instrument payable to bearer is stolen and if transferred to a holder in due course, the owner must suffer.

Instruments obtained by fraud

It is of the essence of all contracts including those on negotiable instruments, that they must have been brought about by free consent of the parties competent to contract. Any contract to which consent has been obtained by fraud is voidable at the option of the person whose consent was so obtained. A person who obtains an instrument by fraud gets a defective title. But if such an instrument passes into the hands of a holder in due course, the plea of fraud will not be available against him. If however, it could be shown that a person without negligence on his part was induced to sign an instrument it being represented to him to be a document of a different kind he would not be liable even to a holder in due course.

Instrument obtained for an unlawful consideration

The general rules as to the legality of object or consideration of a contract apply to contracts on negotiable instruments also. An instrument given for an illegal consideration is void and does not covey a valid title to the holder. He cannot enforce payment against any party thereto. Thus, a bill of exchange given in consideration of future illicit cohabitation is void. But if such an instrument passes into the hands of a holder in due course, he obtains a good and complete title to it.

Forged instrument

Forgery confers no title and a holder acquires no title to a forged instrument. A forged instrument is treated as a nullity. Forgery with the intention of obtaining title to an instrument would include:

(1) fraudulently writing the name of an existing person,

(2) signing the name of a fictitious person with the intention

that it may pass that of a real person, or

(3) signing one’s own name with the intention that the signature may pass as the signature of some other person of the same name.

Example: A bill is payable to Ram Sunder or order. At maturity it wrongfully comes into the possession of another Ram Sunder who knows that he has no claim on the bill. He puts his own signature and the acceptor pays him. The bill is not discharged and the acceptor remains liable to Ram Sunder who is the owner of the bill.

A forged instrument has no existence in the eyes of law. A title which never came into existence cannot be improved even if it passes into the hands of a holder in due course. A forges B’s signature on a promissory note and transfers the same to C who takes it in good faith for value. C gets no title of the note even though he is a holder in due course.

Examples: (a) On a note for Rs.1000, A forges B’s signature to it as maker. C, a holder, who takes it bonafide and for value acquires no title to the note.

(b) On a bill for Rs.1000 A’s acceptance to the bill is forged. The bill comes into hands of B, a bonafide holder for value, B acquires no title to the bill.

Forged endorsement

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

Bankers are specially protected against forged endorsement under section 85 of the Act.

Examples: (a) A bill is endorsed, “Pay X or order.” X must endorse the bill and if his signature is forged, the bill is worthless.

(b) A bill is payable to “X or order.” It is stolen from X and the thief forges X’s endorsement and endorses it to Y who takes it in good faith and for value. Y acquires no title to the bill.

(c) A bill payable to “A or order” is endorsed in blank by A. It comes into the hands of B. B by simple delivery passes it to C. C forges B’s endorsement and transfers it to D. As D does not derive his title through the forged endorsement of B, but through the genuine endorsement of A, he obtains a good title to the instrument in spite of the intervening forged endorsement.

Instrument without consideration

Sections 43 to 45 of the Negotiable Instrument Act deal with the consequences of failure or absence of consideration in negotiable instruments. In the case of negotiable instruments consideration is presumed to exist between the parties unless the contrary is proved. As between immediate parties, if an instrument is made, drawn or endorsed without consideration, or for a consideration which subsequently fails, it is void. As between immediate parties, failure of consideration has the same effect as the absence of consideration. For instance if a promissory note is delivered by the maker to the payee as a gift, it cannot be enforced against such maker.

Examples: (a) C the holder of a bill endorses it in blank to D receiving no value. D for value transfers it by delivery to E. E is a holder of value.

(b) A is the holder of a bill for consideration. A endorses it to B, without consideration. The property in the bill passes to B. The bill is dishonored at maturity. B cannot sue A on the bill.

As between remote parties, the defence of absence or failure of consideration is not available at all. The holder in due course who has paid consideration can recover it from all prior parties immaterial of the fact whether any of them has received consideration or not.

Where there is a partial absence or failure of consideration, as between immediate parties, only that part can be recovered which was actually paid. However, a holder in due course is not affected by this rule. But even between immediate parties, where the part of the consideration which is absent or cannot be ascertained without collateral inquiry, the whole of the amount is recoverable.

Examples: (a) A owes B Rs. 500. B draws a bill on A for Rs. 1000.

A to accommodate B and at his request accepts it. If B sues A on the bill he can only recover Rs. 500.

(b) A draws a bill on B for Rs. 500 payable to the order A. B accepts the bill but subsequently dishonours it by non-payment. A sues B on the bill. B proves that it was accepted for value as to Rs. 400 and as an accommodation to A (the plaintiff) for Rs. 100. A can only recover Rs. 400. But if this bill gets into the hands of a holder in due course, he can recover the full amount of Rs. 500.

NEGOTIATION (Section 14)

Negotiation may be defined as the process by which a third party is constituted the holder of the instrument so as to entitle him to the possession of the same and to receive the amount due thereon in his own name. According to section 14 of the Act, ‘when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated.’ The main purpose and essence of negotiation is to make the transferee of a

promissory note, a bill of exchange or a cheque the holder there of.

Negotiation thus requires two conditions to be fulfilled, namely:

1. There must be a transfer of the instrument to another person; and

2. The transfer must be made in such a manner as to constitute the transferee the holder of the instrument.

Handing over a negotiable instrument to a servant for safe custody is not negotiation; there must be a transfer with an intention to pass title.

Modes of negotiation

Negotiation may be effected in the following two ways:

1. Negotiation by delivery (Sec. 47): Where a promissory note or a bill of exchange or a cheque is payable to a bearer, it may be negotiated by delivery thereof.

Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B. The instrument has been negotiated.

2. Negotiation by endorsement and delivery (Sec. 48): A promissory note, a cheque or a bill of exchange payable to order can be negotiated only be endorsement and delivery.

Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are more payees than one, all must endorse it.

ASSIGNMENT

Bills, notes and cheques represent debts and as such have been held to be assignable without endorsement. Transfer by assignment takes place when the holder of a negotiable instrument sells his right to another person without endorsing it. The assignee is entitled to get possession and can recover the amount due on the instrument from the parties thereto. Of the two methods of transfer of negotiable instruments discussed, transfer by negotiation is recognised by the Negotiable Instrument Act.

NEGOTIATION AND ASSIGNMENT DISTINGUISHED

The various points of distinction between negotiation and assignment are as below:

1. Negotiation requires delivery only to constitute a transfer, whereas assignment requires a written document signed by the transferor.

2. Consideration is always presumed in the case of transfer by negotiation. In the case of assignment consideration must be proved.

3. In case of negotiation, notice of transfer is not necessary, whereas in the case of assignment notice of the transfer must be given by the assignee to the debtor.

4. The assignee takes the instrument subject to all the defects in the title of the transferor. If the title of the assignor was defective the title of the assignee is also defective. However, in case of negotiation the transferee takes the instrument free from all the defects in the title of the transferor. A holder in due course is not affected by any defect in the title of the transferor. He may therefore have a better title than the transferor.

5. In case of negotiation a transferee can sue the third party in his own name. But an assignee cannot do so.

Importance of delivery in negotiation

(1) Delivery is a voluntary transfer of possession from one person to another. Delivery is essential to complete any contract on a negotiable instrument whether it be contract of making endorsement or acceptance.

(2) The property in the instrument does not pass unless the delivery is fully completed. Section 46 of the Act provides that a negotiable instrument is not made or accepted or endorsed unless it is delivered to a proper person. For instance, if a person signs a promissory note and keeps it with himself, he cannot be said to have made a promissory note; only when it is delivered to the payee that the promissory note is made.

(3) Delivery may be actual or constructive. Delivery is actual when it is accompanied by actual change of possession of the instrument. Constructive delivery is effected without any change of actual possession.

Negotiation by Mere Delivery

A bill or cheque payable to bearer is negotiated by mere delivery of the instrument.

An instrument is payable to bearer:

(i) Where it is made so payable, or

(ii) Where it is originally made payable to order but the only or the last endorsement

             is in blank.

(iii) Where the payee is a fictitious or a non-existing person

            (iv) These Instruments do not require signature of the transferor. The person who takes them is a holder, and can sue in his own name on them. Where a bearer negotiates an instrument by mere delivery, and does not put his signature thereon,-he is not liable to any party to the instrument in case the instrument is dishonoured, as he has not lent his credit to it. His obligations are only towards his immediate transferee and to no other holders.

      A cheque, originally drawn payable to bearer remains bearer, even though it is subsequently endorsed in full. The rule is once a bearer cheque always a bearer cheque.

  Negotiation by Endorsement and Delivery

An instrument payable to a specified person or to the order of a specified person or to a specified person or order is an instrument payable to order. Such an instrument can be negotiated only by endorsement and delivery. Unless the holder signs his endorsement on the instrument, the transferee does not become a holder. Where an instrument payable to order is delivered without endorsement, it is merely assigned and not negotiated and the holder thereof is not entitled to the rights of a holder in due course, and he cannot negotiate it to a third person.

  HOLDER OF INSTRUMENT

 

Holder [S. 8]

Every instrument initially belongs to the payee and he is entitled to its possession. The payee can transfer it to any person in payment of his own debt. This transfer is known as negotiation. Negotiation takes place in two ways. A bearer instrument passes by simple delivery and the person to whom it is delivered becomes the holder. An order instrument, on the other hand, can be negotiated only by endorsement and delivery and the endorsee becomes the holder. Hence, holder means either the bearer or endorsee becomes the holder. Hence, holder means either the bearer or endorsee of an instrument. Section 14 declares that when an instrument is transferred to any person so as to be negotiated. Section 2 of the English bills of Exchange Act 1882, provides that “holder means the payee or indorsee of a bill or note who is in possession of it or the bearer thereof”. The definition contained in Section 8 of the Indian Act is to the same effect, although expressed in different words. It says that holder “means any person entitled in his own name to the possession” of an instrument “and to receive and recover the amount”. Now, no one can be entitled to the possession of a bill or note unless he becomes either the bearer or indorsee thereof.

Where the note, bill or cheque is lost or destroyed, it’s holder is the person so entitled at the time of such loss or destruction.

The use of the phrase “entitled in his own name” is significant, because of the institution of ‘benami’. Its significance is thrown into full relief by the case of Sarjoo Prasad v. Rampayari Debi. In this case, the plaintiff advanced a sum of Rs 2,459 under a hand note. The note was executed not in the name of the plaintiff, but in the name of one X who was a name-lender or a benamidar. On maturity the plaintiff brought an action to recover the amount. The High Court, of Patna rejected his claim. He was not entitled to the possession of the note 'in his own name' and, there for, the holder. In a similar case the Nagpur High Court observed: "The doctrine of 'benami cannot be applied in a case like this, where the law by clear excludes its application. The application of the doctrine to negotiable would, by introducing an element of uncertainty into them, hamper co the facility of which they are largely used." Similarly, in Suraj Bali v Ram Chandra the real holder of a promissory note had disappeared but was civilly alive. On maturity his son sued for the amount, but the court dismissed his action on the ground that he was not entitled "in his own name" to the possession of the instrument. He was as much a stranger to the instrument as a thief or finder would have been.

  HOLDER IN DUE COURSE

  Section 9 of the Act defines ‘holder in due course’ as any person who -

  (i) for valuable consideration,

(ii) becomes the possessor of a negotiable instrument payable to bearer or the indorsee or payee thereof,

(iii) before the amount mentioned in the document becomes payable, and

 

(iv) without having sufficient cause to believe that any defect existed in the title of the person from whom he derives his title. (English law does not regard payee as a holder in due course).

 

The essential qualification of a holder in due course may, therefore, be summed up as follows:

1. He must be a holder for valuable consideration - Consideration must not be void or illegal, e.g. a debt due on a wagering agreement. It may, however, be inadequate. A donee, who acquired title to the instrument by way of gift, is not a holder in due course, since there is no consideration to the contract. He cannot maintain any action against the debtor on the instrument. Similarly, money due on a promissory note executed in consideration of the balance of the security deposit for the lease of a house taken for immoral purposes cannot be recovered by a suit.

2. He must have become a holder (possessor) before the date of maturity of the negotiable instrument. Therefore, a person who takes a  bill or promissory note on the day on which it becomes payable cannot claim rights of a holder in due course because he takes it after it becomes payable, as the bill or note can be discharged at any time on that day.

3. He must have become holder of the negotiable instrument in good faith. Good faith implies that he should not have accepted the negotiable instrument after knowing about any defect in the title to the instrument. But, notice of defect in the title received subsequent to the acquisition of the title will not affect the rights of a holder in due course.  Besides good faith, the Indian Law also requires reasonable care on the part of the holder before he acquires title of the negotiable instrument. He should take the instrument without any negligence on his part. Reasonable care and due caution will be the proper test of his bona fides. It will not be enough to show that the holder acquired the instrument honestly, if in fact, he was negligent or careless. Under conditions of sufficient indications showing the existence of a defect in the title of the transferor, the holder will not become a holder in due course even though he might have taken the instrument without any suspicion or knowledge.

Examples:

(i) A bill made out by pasting together pieces of a tom bill taken without enquiry will not make the holder, a holder in due course. It was sufficient to show the intention to cancel the bill. A bill should not be taken without enquiry if suspicion has been aroused.

(ii) A post-dated cheque is not irregular. It will not preclude a bonafide purchase instrument from claiming the rights of a holder in due course.

It is to be noted that it is the notice of the defect in the title of his immediate transferor which deprives a person from claiming the right of a holder in due course. Notice of defect in the title of any prior party does not affect the title of the holder.

A holder in due course must take the negotiable instrument complete and regular on the face of it.

PRIVILEGES OF A HOLDER IN DUE COURSE

1. Instrument purged of all defects: A holder in due course who gets the instrument in good faith in the course of its currency is not only himself protected against all defects of title of the person from whom he has received it, but also serves, as a channel to protect all subsequent holders. A holder in due course can recover the amount of the instrument from all previous parties although, as a matter of fact, no consideration was paid by some of the previous parties to instrument or there was a defect of title in the party from whom he took it. Once an instrument passes through the hands of a holder in due course, it is purged of all defects. It is like a current coin. Who-so-ever takes it can recover the amount from all parties previous to such holder (Sec. 53).  It is to be noted that a holder in due course can purify a defective title but cannot create any title unless the instrument happens to be a bearer one.

Examples:

(i) A obtains Bs acceptance to a bill by fraud. A indorses it to C who takes it as a holder in due course. The instrument is purged of its defects and C gets a good title to it. In case C indorses it to some other person he will also get a good title to it except when he is also a party to the fraud played by A.

(ii) A bill is payable to “A or order”. It is stolen from A and the thief forges A’s signatures and indorses it to B who takes it as a holder in due course. B cannot recover the money. It is not a case of defective title but a case where title is absolutely absent. The thief does not get any title therefore, cannot transfer any title to it.

(iii) A bill of exchange payable to bearer is stolen. The thief delivers it to B, a holder in due course. B can recover the money of the bill.

2. Rights not affected in case of an inchoate instrument:

Right of a holder in due course to recover money is not at all affected even though the instrument was originally an inchoate stamped instrument and the transferor completed the instrument for a sum greater than what was intended by the maker. (Sec. 20)

3. All prior parties liable: All prior parties to the instrument (the maker or drawer, acceptor and intervening indorsers) continue to remain liable to the holder in due course until the instrument is duty satisfied. The holder in due course can file a suit against the parties liable to pay, in his own name (Sec. 36)

4. Can enforce payment of a fictitious bill: Where both drawer and payee of a bill are fictitious persons, the acceptor is liable on the bill to a holder in due course. If the latter can show that the signature of the supposed drawer and the first indorser are in the same hand, for the bill being payable to the drawer’s order the fictitious drawer must indorse the bill before he can negotiate it. (Sec. 42).

5. No effect of conditional delivery: Where negotiable instrument is delivered conditionally or for a special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively presumed and he acquired good title to it. (Sec. 46).

Example: A, the holder of a bill indorses it “B or order” for the express purpose that B may get it discounted. B does not do so and negotiates it to C, a holder in due course.

The plea of original invalidity was raised. D acquires a good title to the bill and can sue all the parties on it.

6. No effect of absence of consideration or presence of an unlawful consideration: The plea of absence of or unlawful consideration is not available against the holder in due course. The party responsible will have to make payment (Sec. 58).

7. Estoppel against denying original validity of instrument: The plea of original invalidity of the instrument cannot be put forth, against the holder in due course by the drawer of a bill of exchange or cheque or by an acceptor for the honour of the drawer. But where the instrument is void on the face of it e.g. promissory note made payable to “bearer”, even the holder in due course cannot recover the money.  Similarly, a minor cannot be prevented from taking the defence of minority. Also, there is no liability if the signatures are forged. (Sec. 120).

8. Estoppel against denying capacity of the payee to indorsee: No maker of promissory note and no acceptor of a bill of exchange payable to order shall, in a suit therein by a holder in due course, be permitted to resist the claim of the holder in due course on the plea that the payee had not the capacity to indorse the instrument on the date of the note as he was a minor or insane or that he had no legal existence (Sec 121)

9. Estoppel against indorser to deny capacity of parties: An indorser of the bill by his endorsement guarantees that all previous endorsements are genuine and that all prior parties had capacity to enter into valid contracts. Therefore, he on a suit thereon by the subsequent holder, cannot deny the signature or capacity to contract of any prior party to the instrument.

CHAPTER 4

PARTIES TO NEGOTIABLE INSTRUMENTS

1. Parties to Bill of Exchange

1. Drawer: The maker of a bill of exchange is called the ‘drawer’.

2. Drawee: The person directed to pay the money by the drawer is called the ‘drawee’,

3. Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more parts than one, upon one of such pares and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the ‘ acceptor’.

4. Payee: The person named in the instrument, to whom or to whose order the money is directed to be paid by the instrument is called the ‘payee’. He is the real beneficiary under the instrument. Where he signs his name and makes the instrument payable to some other person, that other person does not become the payee.

5. Indorser: When the holder transfers or indorses the instrument to anyone else, the holder becomes the ‘indorser’.

6. Indorsee: The person to whom the bill is indorsed is called an ‘indorsee’.

7. Holder: A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a ‘holder’. He is either the original payee, or the indorsee. In case the bill is payable to the bearer, the person in possession of the negotiable instrument is called the ‘holder’.

8. Drawee in case of need: When in the bill or in any endorsement, the name of any person is given, in addition to the drawee, to be resorted to in case of need, such a person is called ‘drawee in case of need’.

          In such a case it is obligatory on the part of the holder to present the bill to such a drawee in case the original drawee refuses to accept the bill. The bill is taken to be dishonoured by non-acceptance or for nonpayment, only when such a drawee refuses to accept or pay the bill.

9. Acceptor for honour: In case the original drawee refuses to accept the bill or to furnish better security when demanded by the notary, any person who is not liable on the bill, may accept it with the consent of the holder, for the honour of any party liable on the bill. Such an acceptor is called ‘Acceptor for honour’.

2. Parties to a Promissory Note

1. Maker. He is the person who promises to pay the amount stated in the note. He is the debtor.

2. Payee. He is the person to whom the amount is payable i.e. the creditor.

3. Holder. He is the payee or the person to whom the note might have been indorsed.

4. The indorser and indorsee (the same as in the case of a bill).

3. Parties to a Cheque

1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank.

2. Drawee. It is the drawer’s banker on whom the cheque has been drawn.

3. Payee. He is the person who is entitled to receive the payment of the cheque.

4. The holder, indorser and indorsee (the same as in the case of a bill or note).

Capacity of Parties

Capacity to incur liability as a party to a negotiable instrument is co-extensive with capacity to contract. According to Section 26, every person capable of contracting  according to law to which he is subject, may bind himself and be bound by making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.

Negatively, minors, lunatics, idiots, drunken person and persons otherwise disqualified by their personal law, do not incur any liability as parties to negotiable instruments. But incapacity. of one or more of the parties to a negotiable instrument in no way, dim1nishes the abilities and the liabilities of the competent parties. Where a . minor is the endorser or payee of an instrument which has been endorsed all the parties accepting the minor are liable in the event of its dishonour.

Liability of Parties

The provisions regarding the liability of parties to negotiable instruments are laid down in Sections 30 to 32 and 35 to 42 of the Negotiable Instruments Act. These provisions are as follows:

1. Liability of Drawer (Section 30)

           The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonor, has been given to or received by the drawer. The nature of drawer's liability is that by drawing a bill, he undertakes that (i) on due presentation, it shall be accepted and paid according to its tenor, and (ii) in case of dishonour, he will compensate the holder or any endorser, provided notice of dishonour has been duly given. However, in case of accommodation bill no notice of dishonour to the drawer is required.

 The liability of a drawer of a bill of exchange is secondary and arises only on default of the drawee, who is primarily liable to make payment of the negotiable instrument.

2. Liability of the Drawee of Cheque (Section 31)

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

As a cheque is a bill of exchange, drawn on a specified banker, the drawee of a cheque must always be a banker. The banker, therefore, is bound to pay the cheque of the drawer, i.e., customer, if the following conditions are satisfied:

(i) The banker has sufficient funds to the credit of customer's account.

         (ii) The funds are properly applicable to the payment of such cheque, e.g., the

        funds are not under any kind of lien etc.                                      .

    (iii) The cheque is duly required to be paid, during banking hours and on or after

        the date on which it is made payable.

If the banker is unjustified in refusing to honour the cheque of its customer, it shall be liable for damages.

3. Liability of "Maker" of Note and ''Acceptor' of Bill (Section 32)

In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity, according to the apparent tenor of the note or acceptance respectively. The acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand.

It follows that the liability of the acceptor of a bill corresponds to that of the maker of a note and is absolute and unconditional but the liability under this Section is subject to the contract to the contrary (e.g., as in the case of accommodation bills) and may be excluded or modified by a collateral agreement. Further, the payment must be made to the party named in the instrument and not to any-one else, and it must be made at maturity and not before.

4. Liability of endorser (Section 35)

Every endorser incurs liability to the parties that are subsequent to him. Whoever endorses and delivers a negotiable instrument before maturity is bound thereby to every subsequent holder in case of dishonour of the instrument by the drawee, acceptor or maker, to compensate such holder of any loss or damage caused to him by such dishonour provided (i) there is no contract to the contrary; (ii) he (endorser) has not expressly excluded, limited or made conditional his own liability; and (iii) due notice of dishonour has been given to, or received by, such endorser. Every endorser after dishonour, is liable upon the instrument as if it is payable on demand.

He is bound by his endorsement notwithstanding any previous alteration of the

instrument (Section 88).                                                                       ·

5. Liability of Prior Parties (Section 36)

Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. Prior parties may include the maker or drawer, the acceptor and all the intervening endorsers to a negotiable instrument. The liability of the prior parties to a holder in due course is joint and several. The holder in due course may hold any or all prior parties liable for the amount of the dishonoured instrument.

6. Liability interse

            Various parties to a negotiable instrument who are liable thereon stand on a different footing with respect to the nature of liability of each one of them.

7. Liability of Acceptor of Forged Endorsement (Section 41)

An acceptor of a bill of exchange already endorsed is not relieved from liability by reason that such endorsement is forged. if he knew or had reason to believe the endorsement to be forged when he accepted the bill.

8. Acceptor's Liability on a Bill drawn in a Fictitious Name

An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer's order is not, by reason that such name is fictitious, relieved from liability to any holder In due course claiming under an endorsement by the same hand as the drawer's signature, and purporting to be made by the drawer.

Crossing of Cheques

A cheque is either "open" or "crossed". An open cheque can be presented by the payee to the paying banker and is paid over the counter. A crossed cheque cannot be paid across the counter but must be collected through a banker.

A crossing is a direction to the paying banker to pay the money generally to a banker or to a particular banker, and not to pay otherwise. The object of crossing is to secure payment to a banker so that it could be traced to the person receiving the amount of the cheque. Crossing is a direction to the paying banker that the cheque should be paid only to a banker or a specified banker. To restrain negotiability, addition of words "Not Negotiable" or "Account Payee Only" is necessary. A crossed bearer cheque can be negotiated by delivery and crossed order cheque by endorsement and delivery. Crossing affords security and protection to the holder of the cheque.

Kinds of Crossing (Sections 123-131A)

There are two types of crossing which may be used on cheque, namely: (i) General,

and (ii) Special. To these may be added another type, Le. Restrictive crossing.

It is general crossing where a cheque bears across its face an addition of two parallel transverse lines and/or the addition of the words "and Co." between them, or addition of "not negotiable". As stated earlier, where a cheque is crossed generally, the paying banker will pay to any banker. Two transverse parallel lines are essential for a general crossing (Sections 123-126).

In case of general crossing, the holder or payee cannot get the payment over the counter of the bank but through a bank only. The addition of the words "and Co." do not have any significance but the addition of the words "not negotiable" restrict the negotiability of the cheque and in case of transfer, the transferee will not give a better title than that of a transferor.

                                            

Where a cheque bears across its face an addition of the name of a banker, either with or without the words "not negotiable" that addition constitutes a crossing and the cheque is crossed specially and to that banker. The paying banker will pay only to the banker whose name appears across the cheque, or to his collecting agent. Parallel transverse lines are not essential but the name of the banker is the insignia of a special crossing.

In case of special crossing, the paying, banker is to honour the cheque only when it is prescribed through the bank mentioned in the crossing or it's agent bank.

Account Payee's Crossing: Such crossing does, in practice, restrict negotiability of a cheque. It warns the collecting banker that the proceeds are to be credited only to the account of the payee, or the party named, or his agent. If the collecting banker allows the proceeds of a cheque bearing such crossing to be credited to any other account, he will be guilty of negligence and will not be entitled to the protection given to collecting banker under Section 131. Such crossing does not affect the paying banker, who is under no duty to ascertain that the cheque is in fact collected for the account of the person named as payee.

Specimen of a general crossing                                 Specimen of a special crossing

Not Negotiable Crossing

A cheque may be crossed not negotiable by writing across the face of the cheque the words "Not Negotiable" within two transverse parallel lines in the case of a general crossing or along with the name of a banker in the case of a special crossing. Section 130 of the Negotiable Instruments Act provides "A person taking a cheque crossed generally or specially bearing in either case with the words "not negotiable" shall not have and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had". The crossing of cheque "not negotiable" does not mean that it is non-transferable. It only deprives the instrument of the incident of negotiability. Normally speaking, the essential feature of a negotiable instrument as opposed to chattels is that a person who takes the instrument in good faith, without negligence, for value, before maturity and without knowledge of the defect in the title of the transferor, gets a good title to the instrument. In other words, he is called a holder in due course who acquires an indisputable title to the cheque. (When the instrument passes through a holder-in-due course, it is purged of all defects and the subsequent holders also get good title). It is exactly this important feature which is taken away by crossing the cheque "not negotiable". In other words, a cheque crossed “not negotiable" is like any other chattel and therefore the transferee gets same title to the cheque which his transferor had. That is to say that the transferee cannot claim the rights of a holder-in-due-course. So long as the title of the transferors is good, the title of the transferees is also good but if there is a taint in the title to the cheque of one of the endorsers, then all the subsequent transferees' title also become tainted with the same defect-they cannot claim to be holders-in-due-course.

The object of this Section is to afford protection to the drawer or holder of a cheque who is desirous of transmitting it to another person, as much protection as can reasonably be afforded to him against dishonestly or actual miscarriage in the course of transit. For example, a cheque payable to bearer is crossed generally and is marked "not negotiable". It is lost or stolen and comes into the possession of X who takes it in good faith and gives value for it, X collects the cheque through his bank and paying banker also pays. In this case, both the paying and the collecting bankers are protected under Sections 128 and 131 respectively. But X cannot claim that he is a holder-in-due course which he could have under the normal circumstances claimed. The reason is that cheque is crossed "not negotiable" and hence the true owner's (holder's) right supercedes the rights of the holder-in-due-course. Since X obtained the cheque from a person who had no title to the cheque (i.e. from one whose title was defective) X can claim no better title solely because the cheque was crossed "not negotiable" and not for any .other reason. Thus "not negotiable" crossing not only protects the rights of the true owner of the cheque but also serves as a warning to the endorsees' to enquire thoroughly before taking the cheque as they may have to be answerable to the true owner thereof if the endorser's title is found to be defective.

"Not negotiable" restricts the negotiability of the cheque and in case of transfer, the transferee will not get a better title than that of a transferor.

If the cheque becomes "not negotiable" it lacks negotiability. A cheque crossed specially or generally bearing the words "not negotiable” lacks negotiability and therefore is not a negotiable instrument in the ,true sense. It does not restrict transferability but restricts negotiability only.

Maturity

Cheques are always payable on demand but other instruments like bills, notes, etc. may be made payable on a specified date or after the specified period of time. The date on which payment of an instrument falls due is called its maturity. According to Section 22 of the Act, "the maturity of a promissory note or a bill of exchange is the date at which it falls due". According to Section 21 a promissory note or bill of exchange payable "at sight" or "on presentment" is payable on demand. It is due for payment as soon as it is issued. The question of maturity, therefore, arises only in the case of a promissory note or a bill of exchange payable "after date" or "after sight" or at a certain period after the happening of an event which is certain to happen.

Maturity is the date on which the payment of an instrument falls due. Every instrument payable at a specified period after date or after sight is entitled to three days of grace. Such a bill or note matures or falls due on the last day of the grace period, and must be presented for payment on that day and if dishonoured, suit can be instituted on the next day after maturity. If an instrument is payable by instalments, each instalment is entitled to three days of grace. No days of grace are allowed for cheques, as they are payable on demand.

Where a note or bill is expressed to be payable on the expiry of specified number of months after sight, or after date, the period of payment terminates on the day of the month which corresponds with the date of instrument, or with the date of acceptance if the bill be accepted or presented for sight, or noted or protested for non-acceptance. If the month in whic~ the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month.

Illustration

(i) A negotiable instrument dated 31 st January, 2001, is made payable at one months after date. The instrument is at maturity on the third day after the 28th February, 2001, i.e. on 3rd March, 2001.

          (ii) A negotiable instrument dated 30th August, 2001, is made payable three

             months after date. The instrument is at maturity on.3rd December, 2001.

               (iii) A negotiable instrument dated the 31^st August, 2001, is made payable           three months after date. The instrument is at maturity on 3^rd December, 2001.

         If the day of maturity falls on a public holiday, the instrument is payable on the preceeding business day. Thus, if a bill is at maturity on a Sunday, it will be deemed due on Saturday and pot on Monday.

The ascertainment of the date of maturity becomes important because all these instruments must be presented for payment on the last day of grace and their payment cannot be demanded before that date. Where an instrument is payable by instalments, it must be presented for payment on the third day after the day fixed for the payment of each instalment.

Effect of Crossing

Crossing effects modes of payment and after crossing, the cheque is no more payable to payee at the counter of the bank. So it is meant to ensure that a rightful holder can get the payment. Anybody who gets the crossed cheque then he has to open the account first and then his banker can receive the payment on his behalf. Even if some wrong person gets payment in this case then he can be traced because it is payment through cheque.  

                                                         CHAPTER 5

 Discharge from Liability

The discharge in relation to negotiable instrument may be either (i) Discharge of the instrument or (ii) discharge of one or more parties to the instrument from liability.

Discharge of the Instrument

A negotiable instrument is discharged:

(a) by payment in due course;

(b) when the principal debtor 'becomes the holder;

       (c) by an act that would discharge simple contract;

(d) by renunciation; and

(e) by cancellation.

  Discharge of a Party or Parties

When any particular party or parties are discharged, the instrument continues to be negotiable and the undischarged parties remain liable on it. For example, the non-presentment of a bill on the due date discharges the endorsers from their liability, but the acceptor remains liable on it.

A party may be discharged in the following ways:

(a) By cancellation by the holder of the name of any party to it with the intention

of discharging him.

(b) By release, when the holder releases any party to the instrument

(c) Discharge of secondary parties, i.e., endorsers.

(d) By the operation of the law, i.e., by insolvency of the debtor.

(e) By allowing drawee more than 48 hours to accept the bill, all previous parties

            are discharged.

   (f) By non-presentment of cheque promptly the drawer is discharged.

   (g) By taking qualified acceptance, all the previous parties are discharged.

   (h) By material alteration.

Material Alteration (Section 87)

An alteration is material which in any way alters the operation of the Instrument and the liabilities of the parties thereto. Therefore, any change in an instrument which causes it to speak a different language in legal effect from that which it originally spoke, or which changes legal character of the instrument is a material alteration.

A material alteration renders the instrument void, but it affects only those persons who have already become parties at the date of the alteration. Those who take the altered instrument cannot complain. Section 88 provides that an acceptor or endorser of a negotiable instrument is bound by his acceptance or endorsement notwithstanding any previous alteration of the instrument.    .

 

Examples of material alteration are:

Alteration (i) of the date of the instrument (ii) of the sum payable, (iii) in the time of payment, (iv) of the place of payment, (v) of the rate of interest, (vi) by addition of a new party, (vii) tearing the instrument in a material part.

There is no material alteration and the instrument is not vitiated in the following cases :

(i) correction of a mistake,

(ii) to carry out the common Intention of the parties,

 (iii) an alteration made before the instrument is issued and made with the consent of the parties,

 (iv) crossing a cheque,

 (v) addition of the words "on demand" in an instrument where no time of payment is stated.

DISHONOUR OF A NEGOTIABLE INSTRUMENT

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

Dishonour by non-acceptance (Section 91)

A bill of exchange can be dishonoured by non-acceptance in the following ways:

1. If a bill is presented to the drawee for acceptance and he does not accept it within 48 hours from the time of presentment for acceptance. When there are several drawees even if one of them makes a default in acceptance, the bill is deemed to be dishonoured unless these several drawees are partners. Ordinarily when there are a number of drawees all of them must accept the same, but when the drawees are partners acceptance by one of them means acceptance by all.

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

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

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

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

6. When presentment for acceptance is excused and the bill is not accepted. Where a drawee in case of need is named in a bill or in any indorsement thereon, the bill is not

dishonoured until it has been dishonoured by such drawee.

Dishonour by non-payment (Section 92)

A bill after being accepted has got to be presented for payment on the date of its maturity. If the acceptor fails to make payment when it is due, the bill is dishonoured by non-payment. In the case of a promissory note if the maker fails to make payment on the due date the note is dishonoured by non-payment. A cheque is dishonoured by non-payment

as soon as a banker refuses to pay.

An instrument is also dishonoured by non-payment when presentment for payment is excused and the instrument when overdue remains unpaid (Sec 76).

Effect of dishonour: When a negotiable instrument is dishonoured either by non acceptance or by non-payment, the other parties thereto can be charged with liability. For example if the acceptor of a bill dishonours the bill, the holder may bring an action against the drawer and the indorsers. There is a duty cast upon the holder towards those whom he wants to make liable to give notice of dishonour to them.

Notice of dishonour: Notice of dishonour means the actual notification of the dishonour of the instrument by non-acceptance or by non-payment. When a negotiable instrument is refused acceptance or payment notice of such refusal must immediately be given to parties to whom the holder wishes to make liable. Failure to give notice of the dishonour by the holder would discharge all parties other than the maker or the acceptor (Sec. 93).

Notice by whom: Where a negotiable instrument is dishonoured either by non- acceptance or by non-payment, the holder of the instrument or some party to it who is liable thereon must give a notice of dishonour to all the prior parties whom he wants to make liable on the instrument (Section 93). The agent of any such party may also be given notice of dishonour. A notice given by a stranger is not valid. Each party receiving notice of dishonour must, in order to render any prior party liable give notice of dishonour to such party within a reasonable time after he has received it (Sec. 95).

When an instrument is deposited with an agent for presentment and is dishonoured, he may either himself give notice to the parties liable on the instrument or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder. The principal, too, in his turn has the same time for giving notice as if the agent is an independent holder. (Sec. 96)

Notice to whom?-  Notice of dishonour must be given to all parties to whom the holder seeks to make liable. No notice need be given to a maker, acceptor or drawee, who are the principal debtors (Section 93).

Notice of dishonour may be given to an endorser. Notice of dishonour may be given to a duly authorised agent of the person to whom it is required to be given. In case of the death of such a person, it may be given to his legal representative. Where he has been declared insolvent the notice may be given to him or to his official assignee (Section 94). Where a party entitled to a notice of dishonour is dead, and notice is given to him in ignorance of his death, it is sufficient (Section 97).

Mode of notice: The notice of dishonour may be oral or written or partly oral and partly written. It may be sent by post. It may be in any form but it must inform the party to whom it is given either in express terms or by reasonable intendment that the instrument has been dishonoured and in what way it has been dishonoured and that the person served with the notice will be held liable thereon.

What is reasonable time? - It is not possible to lay down any hard and fast rule for determining what is reasonable time. In determining what is reasonable time, regard shall be had to the nature of the instrument, the usual course the dealings with respect to similar instrument, the distance between the parties and the nature of communication between them. In calculating reasonable time, public holidays shall be excluded (Section 105).

Section 106 lays down two different rules for determining reasonable time in connection with the notice of disnonour (a) when the holder and the party to whom notice is due carry on business or live in different places, (b) when the parties live or carry on business in the same place.

In the first case the notice of dishonour must be dispatched by the next post or on the day next after the day of dishonour. In the second case the notice of dishonour should reach its destination on the day next after dishonour.

Place of notice: The place of business or (in case such party has no place of business) at the residence of the party for whom it is intended, is the place where the notice is to given. If the person who is to give the notice does not know the address of the person to whom the notice is to be given, he must make reasonable efforts to find the latter’s address. But if the party entitled to the notice cannot after due search be found, notice of dishonour is dispensed with.

Duties of the holder upon dishonour

(1) Notice of dishonour. When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment the holder must give notice of dishonour to all the parties to the instrument whom he seeks to make liable thereon. (Sec. 93)

(2) Noting and protesting. When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument or upon a paper attached thereto or partly upon each (Sec. 99). The holder may also within a reasonable time of the dishonour

of the note or bill, get the instrument protested by notary public (Sec. 100).

(3) Suit for money. After the formality of noting and protesting is gone through, the holder may bring a suit against the parties liable for the recovery of the amount due on the instrument.

Instrument acquired after dishonour: The holder for value of a negotiable instrument as a rule, is not affected by the defect of title in his transferor. But this rule is subject to two important exceptions (i) when the holder acquires it after maturity and (ii) when he acquires it with notice of dishonour.

The holder of a negotiable instrument who acquired it after dishonour, whether by non-acceptance or non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights thereon of his transfer (Sec. 59).

PENALTIES FOR DISHONOUR OF CHEQUE

To ensure promptitude and remedy against defaulters and to make sure credibility of the holders of the negotiable instrument a criminal remedy of penalty was inserted in the Act, in form of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 that inserted Section 138 to 147 in the Act, which were further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.

The issue of dishonour of cheque is dealt under section 138 to 147 of the Act that provides for remedies and various forms of punishment in case of dishonour of cheque. Section 138 of the Act deals with the dishonour of cheque for insufficiency, etc, of funds in the account. It provides that a person shall be punishable for two years imprisonment or with fine, if the cheque issued by drawer returned by the bank unpaid. The cheque must be issued in discharge of whole or part, of any debt or other liability.

The presumption in favour of holder is drawn against the drawer and in favour of the holder under section 139 of the Act that cheque is received by the holder in discharge of whole or in part, of any debt or other liability. Further section 140 of the Act provides that a person drawing a cheque cannot take up the defence that when he drew the cheque he had no idea that his credit balance in the account was insufficient.

The offences by companies have been dealt under section 141(1) of the Act, which provides that if a person committing an offence under the section is a company, every person who at the time offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Section 142 of the Act states that the cognizance of an offence can be taken under section 138 upon a complaint in writing which must be made within one month by the payee or holder in due course from the date on which the cause of action arises under clause (c) of the proviso to section 138.If there is no proof of service of the notice of demand as required under section 138, the prosecution of the drawer is not permissible.

The summary trial of cases have been provided under section 143 of the Act, Notwithstanding anything contained in the code of Criminal Procedure, 1973 (2 of 1974) (in short code), all offences under this chapter shall be tried by a judicial magistrate of the first class or by a metropolitan magistrate and the provisions of sections 262 to 265 of the code shall, as far as may be, apply to such trials. Further under section 144 of the Act, mode of service of summons has been provided. Section 145 deals with the evidence on affidavit. Section 146 provides bank’s slip prima facie evidence of certain facts and section 147 states that all the punishable under the Act shall be compoundable.

b.      Judicial Perspective on Dishonour of Cheque:

The Supreme Court is also very strict to punish the persons who are liable for the dishonour of cheque when presented before the bank for the payment.  Our judiciary upheld the constitutional validity of the law, i.e., Section 138 of the Act.

In B. Venkat Narendra Prasad vs. State of A.P.,^[22] the court held that the proviso to section 138 of the Act, ordains that in order that section is applied, the cheque must be presented within a period of six months, the payee must make a demand for the payment of said amount, and the drawer fails to make payment within days of receipt of notice. The main enacting clause of section 138 Act comes into play only after those three conditions are fulfilled.

Mens Rea is not essential Ingredient: It is not the requirement of section 138 of the Act that there should be mens rea in dishonour of cheque. State of mind of accused person, his knowledge or reasonable beliefs are not necessary ingredients of an offence under section 138. It would be no defence under concerned provision that the drawer had no reason to believe that the cheque may be dishonured on presentation. Nonexistence of mens rea is no defence.

Recent Development in the law

Lok adalats can decide cheque bouncing: Recently, the Bombay High Court held that Lok adalats constituted under Legal Services Authority Act, 1985 can decide the issue of cheque bouncing cases, and their verdict is final in such matters.

IV.              LIABILITY ON DISHONOUR OF CHEQUE

In Anchor Capital of India vs. State of Gujarat, relates to the ingredients that are necessary to constitute an offence under section 138. The necessary ingredients are as follows:-

a.       the cheque must have been issued in favour of the payee;

b.      the cheque so issued must have been issued in discharge, either in whole or in part, of a legally enforceable debt or liability;

c.       the cheque should have been presented for encashment within six months of the date it bears or within its specific validity period which is earlier;

d.      the cheque should have been returned by the bank unpaid, because the amount of money standing to the credit of the account is insufficient or it exceeds the amount arranged;

e.       that the payee should have given a notice of dishonour to the drawer within 15 days of the receipt of information by him from the bank regarding dishonour of the cheque demanding payment of the cheque amount;

f.        that the drawer should have failed to make payment within 15 days of the receipt of notice.

g.       Under section 142 of the Act, the Magistrate is empowered to take the cognizance of any offence under section 138 only on a complaint in writing made by the payees or the holder in due course of the cheque provided that such complaint is made within one month from the date on which a cause of action has arisen under clause (c) of the proviso to section 138.

a.      Civil liability

Civil Liability also arises when the cheque is presented for the payment to the bank gets dishonoured. Section 138 also provides for civil liability which provides for fine twice the amount of dishonoured cheque.

b.       Criminal Liability

A criminal liability is provided under section 138 of the Act, which provides imprisonment for two years or with fine which may extend to twice the amount of the cheque, or with both.

In case of dishonour of cheque the drawer of it may be prosecuted under sections 417 and 420 of the Indian Penal Code, 1960 (IPC). However, it all depends on the circumstances of each case. Every dishonour of a cheque is not cheating.

In A Veerbhadra Rao vs. Government of A.P., it has been held by the Andhra Pradesh High Court that where the accused issues a post-dated cheque with knowledge that the funds in his account are insufficient and such cheque would be dishonoured; he commits offence of cheating under section 420 of IPC.

The punishment in the form of two years imprisonment has been provided in case of dishonour of cheque. The imprisonment generally given only for criminal activity and for dishonour of cheque considering criminal act, punishment for two years imprisonment provision has been made. Consequently, criminal liability has been imposed when the cheque gets dishonoured.

Exceptions to Criminal Liability

a.                  Cheque issued in Discharge of Liability: It is must that the cheque which is given should be in discharge, in whole or in part of any debt or other liability of the drawer towards the payee.

In K. Kumar vs. Bapsons Foot Wear, a complaint was filed for the dishonour of a cheque, it was alleged that in the course of business the accused issued a cheque. A petition was filed to quash the complaint. The court allowed the petition holding that the essential requirement for an offence under section 138 of the Act that the cheque must be drawn for discharge in whole or in part of any debt or other liability has not been fulfilled as according to the allegation in the complaint the cheque was issued in the course of their business by the accused.

b.                  Cheque must not be given as a gift: In B. Mohan Krishna vs. Union of India, the court held that if a cheque was not issued for the purpose of discharge of any debt or other liability, the maker of the cheque is not liable for prosecution. If the cheque is given by way of gift or present and if it is dishonoured by the bank, the maker of the cheque is not liable for prosecution. Unless the two conditions set out in section 138 were satisfied, no criminal liability can be fastened.

ii. Defence that may be taken

If the matter is examined critically, then the following may be a set of defence that may be taken are as follows:-

1.      Absence of a legally enforceable debt or liability.

2.      Cheque was not returned for the reasons constituting an offence.

3.      Complaint is not as per time period provided in sections 138 and 142, i.e., the plea of limitation.

4.      Absence of legal notice of 15 days.

5.      Lack of Jurisdiction.

6.      No return of cheque to the payee.

JURISDICTION IN CHEQUE BOUNCING CASES

Hon’ble Justice Vikramajit Sen held on First of August 2014, in the case of Dashrath Roopsingh Rathod vs. State of Maharastra and Anr., that the civil law concept as enshrined under section 20 of the Code of Civil Procedure is not strictly applicable to the cases under the negotiable cases. The Court further held that applying the general rule recognized under section 177 of the Cr.P.C that all offences are local, the place where the dishonor occurs is the place for commission of the offence vesting the Court exercising the territorial jurisdiction over the area with the power to try the offences.  

With respect to the Court having jurisdiction to decide the complaint regarding dishonor of cheque, the Hon’ble Court in the case of K. Bhaskaran vs. Sankaran Vaidhyan Balan and Anr (1999) 7 SCC 510 had held that “The offence under section 138 of the Act can be completed only with the concatenation of a number of acts. The following are the acts which are the components of the said offence:

(1)drawing of the cheque

(2)presentation of the cheque to the bank

(3) returning the cheque unpaid by the drawee bank

(4)giving notice in writing to the drawer of the cheque demanding payment of the cheque amount

(5)failure of the drawer to make payment within 15 days of the receipt of the notice.

It is not necessary that all the above five acts should have been perpetrated at the same locality. It is possible that each of those five acts could be done at five different localities. But a concatenation of all the above five is a sine qua non for the completion of the offence under section 138 of the Code. Thus, the Complainant can choose any one of those courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done.       

Other case laws:

In the case of Modi Cements Ltd v Kuchil Kumar Nandi (1998), the intention of Section 138 of the Negotiable Instruments Act, 1881 has been declared to increase the efficiency of functioning of banks and establish credibility in business transactions through the medium of cheques. Section 138 of the Act formulates a statutory wrong concerning the matter of disgrace oriented cheques based on the grounds of insufficiency of available funds in the account of the person that has been maintained with the concerning banks. Further, the amount greater than the one arranged to be delivered which is in the form of an agreement with the bank also falls within the ambit of Section 138. Dishonour of cheques amounts to a criminal offence in the form of enforcing a civil right. Therefore, both civil and criminal liabilities come into play when dishonour of cheques takes place.

The civil liability associated as laid down in Section 138 of the Negotiable Instruments Act, 1881 is charging a fine twice of what the amount was in the dishonoured cheque. In case of civil liability the interference of court takes place if the concerned payee files a suit under Order 37 of the Code of Civil Procedure, 1908, the court decides a judgment favouring the payee and in such a case the drawer is eligible to pay the same amount as mentioned by the court.

In case of criminal liability, Section 138 comes along with the punishment of two consecutive years and the prosecution of the drawer takes place under the provisions of Indian Penal Code, 1860, namely Section 417 and  Section 420. The offences acquired are bailable, compoundable and non-cognizable by nature.

In order to constitute the wrong under Section 138 of the Act the following grounds need to be considered which were framed in the case of Kusum Ingots And Alloys Ltd vs Pennar Peterson Securities Ltd (2000):

The drawer of the cheque should possess a legally bound debt towards the payee or the holder and the same is discharged by drawing a cheque.

There is a return of the cheque either due to deficient funds or greater amount that the bank agreed to provide with.

The presentation of the concerned cheque should be carried out within a period of six months or within the stipulated time frame.

The drawer must receive prior notice from the bank within a period of 30 days informing the former regarding the insufficiency of funds.

The payee does not receive the payment within a period of 15 days from the day of sending a notice to the drawer himself.

Dalmia Cements v. Galaxy Trading Agencies

The case of M/s. Dalmia Cement (Bharat) Ltd. v. M/s.Galaxy Traders & Agencies Ltd. & Ors. is one of the cases whose judgment became a landmark for the Supreme Court, in this case, reasoning behind the enactment of Section 138 of the Negotiable and Instruments Act, 1881 was given. The facts of the case revolve around dishonouring of the cheque because of which notice was issued to inform the accused. When the same was received by the complainant by that time the period of filing the complaint was given to expire. The same thing happened for the second time as well with the accused failing to provide with the amount.

The court basing its judgement on the existing facts said that Section 138 of the Act has been made keeping in concern any kind of infringement of legal right of the person whose payment has not been issued and therefore if any such situation arises which will make it impossible for the person to get the payment then in such case, the section should function the way it has been laid down to keep the objective of the Act. Thus, in this case, the court ordered actions to be carried out against the respondent as laid down in the Act.

Canara Bank v. Canara Sales Corporation

The case of Canara Bank v. Canara Sales Corporation (1987) serves as a basis of understanding the relationship shared between the banker and its customers that are tied with threads of duties and equity, during the times of negligence by either party or in case either party is involved with fraudulent activities.

In this case, the respondent had a current account in the plaintiff’s bank which was eventually found to be linked with fraudulent activity for the cheques which were encashed and didn’t bear the initials of the managing director, the respondents. Thus, forgery also took place in the given case. A suit was filed by the respondents to compensate with the amount that has been lost.

The Court highlighted that there was negligence on the part of both the creditor as well as the debtor but the beam balance of negligence weighed more for the banker than the company. Thus, mere negligence on the part of the bank cannot be a ground for not using the same. The court finally ruled that the company is eligible for compensation thereby dismissing the case.

M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta

The case of M/s Meters and Instruments Private Limited & Anr. v. Kanchan Mehta (2017) was where the Supreme Court took into concern the object associated with Section 138 along with other statutory provisions laid down in Chapter XVII of the Negotiable Instrument Act, 1881 and passed its verdict.

The facts of the case go as such that the complainant, Kanchan Mehta under Section 138 of the Act had filed a complaint against the plaintiff on grounds that the latter who was supposed to pay an amount to the former on monthly basis according to an existing agreement between the two of them had failed to do so. The company had provided a cheque to the complainant thereby discharging their legal liabilities. The same cheque returned back for the presence of insufficient funds. Legal notices were provided to the company for the completion of their payment but the same was not fulfilled and the company was responsible for the offence under Section 138 of the concerned Act. Further, when the director of the company was willing to pay the complainant, there was a refusal of the demand draft from the laters end. Thus, the company filed a suit against the complainant under Section 147 of the Act which was the provision for compoundable offences. The same was rejected by the concerned High Court on grounds that there was the absence of the consent of the complainant for holding the offence to be compounding by nature.

The Supreme Court passed a verdict saying that whatever offences have been laid down in Section 138 are civil by nature. Further, the provision of compoundable offence is present in Negotiable Instruments (Amendments and Miscellaneous Provision Act), 2002  which does require the consent of both the parties in concern. In the present case, as the company was willing to compensate the complainant, the court in the sake of proper delivery of justice thought of discharging the accused for the complainant was compensated with the amount that was necessary to be provided with.

Beyond the above-mentioned judgements, there are a number of case laws associated with the concerned Act. Questions aroused in the matter of jurisdiction of courts to handle cases associated with Section 138 the Act. The apex court in the case of Harman Electronics Pvt. Ltd.v National Panasonic India Pvt. Ltd. ( 2004) was of the decision that no action will be taking place by legal notice but only by the acceptance of such notice. It went on saying that Section 138 is just a condition laid down for taking cognizance and therefore a particular court cannot be provided with territorial jurisdiction just for a notice.

The court in the case of Smt. Asha Baldwa v. Ram Gopal where the petitioner had filed a suit under Section 482 of the Code of Criminal procedure for being handed with a dishonoured cheque held that only handing of such a cheque does not amount to an offence laid down under Section 138 of the Negotiable Instruments Act,1881 for it is not a reasonable ground. With each day passing by, development is taking place in a negotiable industry. In 2017, the verdict of the Delhi High Court in the case of Mayawati v. Yogesh Kumar Gosain approached a new pathway called the alternate dispute resolution mechanism to decide offences labelled under Section 138 of the Act which is criminally compoundable by nature. This verdict brought not only a change in dealing with the Act but also a change for the Indian judicial system. It further highlighted that as the offences labelled under the Negotiable Instruments Act, 1881 are different from other criminal offences, they can be given a preference to be resolved differently and in a speedy way.

Recent amendments to the Negotiable Instruments Act, 1881 with respect to award of interim compensation to payee of the cheque and directions to deposit a part of compensation amount by the drawer of cheque before Appellate Court:

During the late 1980s, The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument. By the above amendments, the Dishonour of cheque was made a criminal offence, by fixing criminal liability on the drawer of the cheque.

The basic idea of introducing the aforesaid amendment was to make sure that the defaulter is held accountable for his actions in a criminal trial if there was an intention to defraud. The purpose was to fix some kind of responsibility on the drawer of the cheque and seriousness for issuing the cheque. Later on the provisions stands amended and the dishonor of cheque for signature mismatch and stop payment was also covered.

But after almost three decades of introducing the amendment and making the dishonor of cheque, criminal offence, it was observed that the cheque bounce cases are being treated as of other civil disputes. As of late it was being observed that the cheque bounce criminal trials is losing its creditability.

 The making of payments through cheques plays a pivotal role in the commercial transactions. Though other modes of payments are prevalent but still the mode of payment through cheque is most prevalent.

The Negotiable Instruments Act 1881 has been amended from time to time so as to provide, inter alia, speedy disposal of cases relating to the offence of dishonour of cheques. But inspite of that the Central Govt was receiving several representations from the public, including the trading community, relating to the pendency of cheque bounce cases. The same may be imputed to the delay tactics adopted by unscrupulous drawers of the dishonored cheques on account of ease of filing Appeals and obtaining stay on the proceedings. Such delays compromised the sanctity of the cheque transactions.

In order to address the above issues, it was proposed to amend the said Act with a view to address the issue of undue delay in final resolution of cheque dishonour cases so as to provide relief to payees of dishonoured cheques and to discourage frivolous and unnecessary litigation which would save time and money. It was stated that proposed amendments will strengthen the credibility of cheques and help trade and commerce in general by allowing lending institutions, including banks, to continue to extend financing to the productive sectors of the economy.

In order to strengthen the ease of doing business in India, the parliament passed the Negotiable Instruments (Amendment) Act 1881 and thereby inserted/introduced following two provisions: -

Section- 143A

With the amendment, the new provision entitles any Court while trying a cheque dishonour offence, to order the drawer of the cheque to pay interim compensation to the complainant, where the drawer pleads not guilty to the accusation made in the complaint and in any other case, upon framing of charge. The provision further stated that the interim compensation shall not exceed twenty percent of the amount of the cheque and it was also provided for that this interim compensation has to be paid within a prescribed time period of 60 days from the date of the passing of the Order by the Court, or within the extended period of 30 days, if allowed/ directed by the Court on justifying significant cause for the delay in payment.

It has been specifically provided in the amended provision that if the drawer of the cheque is acquitted, the Court shall direct the complainant to repay to the drawer, the amount of interim compensation, with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial year, within sixty days from the date of the order, or within such further period not exceeding thirty days as may be directed by the Court on showing sufficient cause.

Further it has been provided that the interim compensation payable under this section may be recovered as if it were a fine under section 421 of the CrPC 1973. Later on the amount of fine imposed under section 138 or the amount of compensation awarded under section 357 of the CrPc, shall be reduced by the amount paid or recovered as interim compensation.

But Section 143 is not made applicable retrospectively.

Section- 148

The amendment inserted a new section that is section 148 and stated that in case of an Appeal filed by the drawer against conviction under section 138, the Appellate Court may order the Appellant to deposit such sum which shall be minimum of twenty percent of the fine or the total compensation awarded by the trial Court. The provision further stated that the amount payable shall be in addition to any interim compensation paid by the Appellant under section 143A.

Further the provision stated that the above amount shall be deposited within sixty days of the date of order or within such further period not exceeding thirty days as may be directed by the Court on sufficient cause being shown by the Appellant. The Appellate Court has been further given the power to release the said amount in favour of the Complainant at any time during the pendency of the Appeal. However, if the defaulter/Appellant is acquitted from the offence, then the Court instruct the complainant to repay the amount to the Appellant.

The Hon’ble Supreme Court of India in a recent judgement titled Surinder Singh Deswal vs Virender Gandhi MANU/SC/0793/2019 has held that “Therefore irrespective of the provisions of Section 357(2) of the Code of Criminal Procedure, pending appeal before the first appellate court, challenging the order of conviction and sentence under Section 138 of the N.I. Act, the Appellate Court is conferred with the power to direct the Appellant to deposit such sum pending appeal which shall be a minimum of 20% of the fine or compensation awarded by the trial Court”. The Hon’ble Supreme court further held that “though it is true that in amended Section 148 of the N.I. Act, the word used is "may", it is generally to be construed as a "rule" or "shall" and not to direct to deposit by the appellate court is an exception for which special reasons are to be assigned.”

The Hon’ble High Court of Punjab & Haryana in Ginni Garments & Anr. v/s Sethi Garment & Anr.  has held that Section 143-A has no retrospective effect while Section- 148 only applies to the pending appeals on date of enactment of the new amendment.

The Supreme Court in its recent decision dated April 16, 2021, observed that there are around 35 lakh cheque bounce cases pending before various courts. If the deterrent effect of the present provision was working, then such a huge pendency would not have arisen.

The SC, in Makwana Mangaldas Tulsidas Vs State of Gujarat, said that decriminalisation of cheque bounce cases involving small amounts may be left to the civil jurisdiction, hinting at decriminalisation. The judiciary has increasingly favoured compensation rather than punishment in cheque bounce cases. In Meters and Instruments Vs Kanchan Mehta, the SC even dispensed with the requirement of consent for compounding the offence, if the accused was willing to pay the compensation.

Moreover, pursuing a criminal remedy, may lead to delays. If, in the meantime, the limitation period under the civil action route is exhausted, then the payee is left without any legal recourse. Hence, decriminalisation is necessary. The Section 138 of the Negotiable Instruments Act 1881, treated cheque bounce as a civil wrong, until 1988, when it was brought under ‘criminal offence’, with a prison term of up to two years, while leaving the right to approach a civil court unaffected. This made violation of Section 138, both a civil wrong as well as a criminal act. Between 2002 and 2018, the Section underwent a myriad of amendments and has been subject of various judicial interpretations. In June 2020, the Ministry of Finance proposed the decriminalisation of various minor economic offences, including the offence of cheque bounce under Section 138. While comments were invited, no conclusive decision has yet been taken till date.

Compensation, not punishment

Those who support the decriminalisation note that the main purpose of the provision is compensation and not punishment. The Negotiable Instruments (Amendment) Act, 2018 inserted Section 143A which linked the interim compensation to be paid to the payee with the cheque amount. Moreover, the offence under Section 138, is compoundable and hence, the main focus is on compensation rather than on punishment. As per the ‘reformative theory’, the State should make an attempt to reform an offender rather than merely punishing them. A cheque bounce case is an economic offence and hence, reformation can be brought about by imposing suitable compensation. To imprison someone for the offence may not necessarily lead to reformation, but lead to further debasement. The second argument is that giving both civil and criminal redress to the offence of cheque bounce has clogged the judicial system and has led to multiplicity of proceedings. This concern was also recently identified by the Supreme Court wherein directions were given to dispose of Supreme Court cases expeditiously. Directions were given by the Supreme Court to club together multiple Section 138 cases against an individual (in the last 12 months) in a single proceeding. Such multiplicity of proceedings arose because there were two ways through which remedies could be obtained; payees often explored both, leading to increased load on the judiciary.

Those who oppose decriminalisation anchor themselves in the ‘retributive theory’– severely punish an offender so that it sets an example in the society. They argue that decriminalisation would enable people to issue post-date cheques without an intent to pay, without impunity. The government has not yet made up its mind. Decriminalisation is a welcome step but it should not obstruct the smooth operation of economic activity and sufficient measures should be in place to assure the payees that the cheques presented to them would be honoured.

Conclusion

The indicial Judicial system is facing huge backlog of cases and as per the 213th Law Commission Report, about 20% of the case relating to litigation, pertains to cheque bounce. So the newly introduced provisions would give some life into the dead provisions of the Negotiable Instruments Act 1881. No doubt the cheque offence cases are penal in nature and bring home criminal offence, but still the provisions of summary trial is on papers and further making the offence bailable has made the cheque bounces cases, almost similar to civil disputes. In that way, newly introduced provisions would indeed a proactive step towards safeguarding the credibility of cheques.

Once the accused persons/drawer of cheques or in case of Appeal, Appellant/drawer of cheques, deposit a considerable amount, then they would take the matters seriously.

Though it is a positive direction in the cheque offence cases, but still more is to be done, to make the cheque bounce cases practical and summary trial has to be given its true meaning, otherwise the whole purpose behind introducing cheque bounce a criminal offence would lost its importance.

                                                                 CHAPTER 6

                                                             MISCELLANEOUS

Acceptance of a Bill of Exchange

The drawee of a bill of exchange, as such, has no liability on any bill addressed to him for acceptance or payment. A refusal to accept or to pay such bill gives the holder no rights against him. The drawee becomes liable only after he accepts the bill. The acceptor has to write the word 'accepted' on the bill and sign his name below it.. Thus, it is the acceptor who is primarily liable on a bill.

The acceptance of a bill is the indication by the drawee of his assent to the order of the drawer. Thus, when the drawee writes across the face of the bill the word "accepted" and signs his name underneath he becomes the acceptor of the bill.

 

  An acceptance may be either general or qualified. A general acceptance is absolute and as a rule, an acceptance has to be general. . Where an acceptance is made subject to some condition or qualification, thereby varying the effect of the bill, it is a qualified acceptance. The holder of the bill may either refuse to take a qualified acceptance or non-acquiescence in it. Where he refuses to take it, he can treat the bill as dishonoured by non-acceptance, and sue the drawer accordingly.

Acceptance for Honour

When a bill has been noted or protested for non-acceptance or for better security, any person not being a party already liable thereon may, with the consent of the holder, by writing on the bill, accept the same for the honour of any party thereto. The stranger so accepting, will declare under his hand that he accepts the protested bill for the honour of the drawer or any particular endorser whom he names.

       The acceptor for honour is liable to pay only when the bill has been duly presented at maturity to the drawee for payment and the drawee has refused to pay and the bill has been noted and protested for non-payment. Where a bill has been protested for non-payment after having been duly accepted, any person may intervene and pay it supra protest for the honour of any party liable on the bill. When a bill is paid supra' protest, it ceases to be negotiable. The stranger, on paying for honour, acquires all the right of holder for whom he pays.

Presentment for Acceptance

It is only bills of exchange that require presentment for acceptance and even these of certain kinds only. Bills payable on demand or on a fixed date need not be presented. Thus, a bill payable 60 days after due date on the happening of a certain event may or may not be presented for acceptance. But the following bills must be presented for acceptance otherwise, the parties to the bill will not be liable on it:

(a) A bill payable after sight. Presentment is necessary in order to fix maturity of

               the bills; and

(b) A bill in which there is an express stipulation that it shall be presented for

               acceptance before it is presented for payment.

Section 15 provides that the presentment for acceptance must be made to the drawee or his duly authorised agent. If the drawee is dead, the bill should be presented to his legal representative, or if he has been declared an insolvent, to the official receiver or assigner.

The following are the persons to whom a bill of exchange should be presented:

         (i) The drawee or his duly authorised agent.

1. If there are many drawees, bill must be presented to all of them.

      (iii)The legal representatives of the drawee if drawee is dead.

      (iv) The official receiver or assignee of insolvent drawee.

      (v) To a drawee in case of need, if there is any. This is necessary when the     original drawee refuses to accept the bill.

(vi)  The acceptor for honour. In case the bill is not accepted and is noted or protested for non-acceptance, the bill may be accepted by the acceptor for honour. He IS a person who comes forward to accept the bill when it is dishonoured by non-acceptance.

The presentment must be made before maturity, within a reasonable time after it is drawn, or within the stipulated period, if any, on a business day within business hours and at the place of business or residence of the drawee. The presentment must be made by exhibiting the bill to the drawee; mere notice of its existence in the possession of holder will not be sufficient.

 When presentment is compulsory and the holder fails to present for acceptance, the drawer and all the endorsers are discharged from liability to him.

Presentment for Acceptance when Excused

Compulsory presentment for acceptance is excused and the bill may be treated as dishonoured in the following cases:

(a) Where the drawee cannot be found after reasonable search.

(b) Where drawee is a fictitious person or one incapable of contracting.

(c) Where although the presentment is irregular, acceptance has been refused

on some other ground.

Presentment for Payment

All notes. bills and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively by or on behalf of the holder during the usual hours of business, and if at banker's within banking hours.

Presentment for Payment when Excused

            No presentment is necessary and the instrument may be treated as dishonoured in the following cases:

       (a) Where the maker, drawer or acceptor actively does something so as to

            intentionally obstruct the presentment of the instrument, e.g., deprives the

              holder of the instrument and keeps it after maturity.

       (b)  Where his business place is closed on the due date.

       (c)  Where no person is present to make payment at the place specified for

              payment.

       (d)  Where he cannot, after due search be found. (Section 61)

       (e)  Where there is a promise to pay notwithstanding non-presentment.

       (f)  Where the presentment is express or impliedly waived by the party entitled to

              presentment.

       (g)  Where the drawer could not possibly have suffered any damage by

              non-presentment.

       (h) Where the drawer is a fictitious person, or one incompetent to contract.

        (i) Where the drawer and the drawee are the same person.

        (j) Where the bill is dishonoured by non-acceptance.

        (k) Where presentment has become impossible, e.g., the declaration of war

              between the countries of the holder and drawee.

        (l) Where though the presentment is irregular, acceptance has been refused on

              some other grounds.

Noting and Protest (Sections 99-104 A)

When a negotiable instrument is dishonoured the holder may sue his prior parties i.e the drawer and the indorsers after he has given a notice of dishonour to them. The holder may need an authentic evidence of the fact that a negotiable instrument has been dishonoured. When a cheque is dishonoured general1y the bank who refuses payment returns back the cheque giving reasons in writing for the dishonour of the cheque. Sections 99 and l00 provide convenient methods of authenticating the fact of dishonour of a bill of exchange and a promissory note by means of ‘noting’ and ‘protest’.

Noting

 

Where a note or bill is dishonoured, the holder is entitled after giving due notice of dishonour, to sue the drawer and the endorsers. Section 99 provides a convenient method of authenticating the fact of dishonour by means of "Noting". Where a bill or note is dishonoured, the holder may, if he so desires, cause such dishonour to be noted by a notary public on the instrument, or on a paper attached thereto or partly on each. The noting or minute must be recorded by the notary public within a reasonable time after dishonour and must contain the fact of dishonour, the date of dishonour, the reason, if any, assigned for such dishonour if the instrument has not been expressly dishonoured the reasons why the holder treats it dishonoured and notary's charges.

Protest

The protest is the formal notarial certificate attesting the dishonour of the bill, and based upon the noting which has been effected on the dishonour of the bill. After the noting has been made, the formal protest is drawn up by the notary and when it is drawn up it relates back to the date of noting.

Where the acceptor of a bill has become insolvent, or has suspended payment, or his credit has been publicly impeached, before the maturity of the bill, the holder may have the bill protested for better security. The notary public demands better security and on its refusal makes a protest known as "protest for better security".

      Foreign bills must be protested for dishonour when such protest is required by the law of the place where they are drawn. Foreign promissory notes need not be so protested. Where a bill is required by law to be protested, then instead of a notice of dishonour, notice of protest must be given by the notary public.

                                                                                                                                             

A protest to be valid must contain on the instrument itself or a literal transcript thereof,the names of the parties for and against whom protest is made, the fact and reasons for dishonour together with the place and time of dishonour and the  signature of the notary public. Protest affords an authentic evidence of dishonour to the drawer  and the endorsee.

Contents of protest

Section 101 of the Act lays down the contents of a regular and perfect protest which are as follows:

1. The instrument itself or a literal transcript of the instrument; and of everything written or printed thereupon.

2. The name of the person for whom and against whom the instrument has been protested.

3. The fact of and reasons for dishonour i.e. a statement that payment or acceptance or better security, as the case may be, has been demanded of such person by the notary public from the person concerned and he refused to give it or did not answer or that he could not be found.

4. The time and place of demand and dishonour.

5. The signature of the notary public.

6. In the case of acceptance for honour or payment for honour the person by whom or for whom such acceptance or payment was offered and effected.

                                                             KEYWORDS

Negotiable instrument: A negotiable instrument is one, the property and the title in which is acquired by anyone who takes it as bonafide and for value notwithstanding any defect in the title of the person from whom he/she took it.

Promissory note: A promissory note is an instrument in writing (not being a bank note or 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.

Bills of exchange: A bill of exchange is an instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

Accommodation bills: Those bills, which are drawn without any actual consideration, merely, to help out friends and relatives are known as accommodation bills.

Banker’s draft: It is a bill of exchange in which a bank orders its branch or another bank, as the case may be, to pay a specified amount to a specified person or to the order of the specified person.

Cheque: Cheque is a kind of bill of exchange, which is always drawn upon a specific bank and is payable on demand.

Crossing of a cheque: When two angular parallel lines are drawn on the face of the cheque, then the cheque said to be crossed.

Usances: The time fixed by the custom of countries for payment of bills drawn in one country but are payable in another country is known as a usance.

Payment in due course: Payment in due course means payment of the instrument after the expiry of the duration of the instrument, in good faith and without any negligence, to the possessor thereof and without the existence of any circumstances that may lead one to believe that the person receiving the payment is not entitled to it.

Assignment: Assignment of any object means the transfer of its tile to another person through a written and registered deed under the Transfer of Property Act.

CHAPTER 7

GENERAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER

The relationship between a banker and his customer is basically contractual. It is regulated by:

• The general rules of contract

• The rules of agency where applicable

• Banking practice.

Of the several possible relation ships between a banker and his customer, the primary one is that of debtor and creditor. But who is what at a particular moment depends on the state of customer’s accounts. If the account shows a credit balance, obviously the banker is a debtor and the customer a creditor. Reverse shall be the position when the customer’s account shows an overdrawing. Then there are three possible other relationships depending upon the receptive state of circumstances, viz.,

• Bailer and bailee

• Principal and agent and

• Trustee and beneficiary.

Debtor and creditor relationship: The general relationship between a banker and his customer is basically that of debtor and creditor. If the account shows a credit balance, the banker will be a debtor and the customer a creditor. But in case of debit balance or overdraft, the banker will be the creditor and the customer the debtor.

When the customer deposits money in the bank by opening an account, it amounts to lending money to the banker. The bank can make use of this money as it is absolutely at the disposal of the bank. The bank undertakes to repay the amount on demand. It has been rightly said that a banker is normally a debtor of his customer and is bound to discharge his indebtedness by honoring his customer’s cheque. One important point to be understood in this connection is that the banker is no bound to pay the customer unless demand is made. However, when the demand is made, the bank can pay the amount deposited by the customer in any kind of notes and coins, thus a bank is no a mere depository of trustee.

The banker only undertakes to ray a sum equivalent to the amount deposited with his and the customer has no right whatsoever to claim the identical coins or notes deposited with him.

The usual debtor-creditor relationship between a banker and a customer is governed by the following conditions, which are not applicable to similar commercial debts:

1. Demand for Payment: A bank is not an ordinary debtor in the sense that it is under no obligation to refund the customer’s deposits unless demand is made. Even in case of fixed deposit the bank is not required to return the money on its own accord. The customer must make a demand for repayment of funds deposited except when the bank is being wound up.

2. Proper place and time: The obligation to repay the amount deposited is limited to the branches where the account is kept. The customer can issue cheques only on the branch of the bank where the account is kept. The demand for payment must be made during the working hours and on working days of the branch concerned.

3. Demand in proper manner: The demand for payment should be made in proper manner as allowed by the law or custom. The demand should not be made verbally or through a telephonic message. The proper manner may be cheque; draft or anything, which may prove the geniuses of demand buy the customer whose identity, must be disclosed and authenticated to the satisfaction of the bank.

4. No time bar: The depositor with a bank does not become time barred on the expiry of three years as in the case of other commercial debts. This is because of the reason that the amount does not be come due unless it is demanded.

Banker as a trustee: The bankers assumes the position of trustee when they accepts securities or valuables from the customer for safe custody. The articles deposited with the bank for safe custody continue to be owned by the customer. The banker is to deal with the articles as per the instructions of the customer. The banker is a trustee of the customer in respect of cheques and bills deposited buy the customer for collection till they are collected. He becomes the debtor once it is collected and credited to the account of the customer. If the bank is liquidated before the cheques is realized the bank remains a trustee of the customer. Therefore, the customer can claim back the cheque or the proceeds of the cheque in full.

Banker as agent: A banker acts as an agent of his customer and performs a number agency function for the convenience of his customer.

For example: some banks have established tax service departments to take up the tax problems of their customers.

Bailee and bailor: Another relation between the banker and the customer is that of bailee and bailor. The bank functions as bailee when it keeps valuable articles, diamond, gold, securities and other documents of its customers. The bank works, as the custodian of these things and it is implied responsibility of the bank to return these things safely. Thus the bank is a bailee and the customer is a bailor or beneficiary.

SPECIAL RELATIONSHIP BETWEEN BANKER AND CUSTOMER

The relationship between the banker and the customer creates certain obligations on the part of the banker. These obligations alongwith the rights of the banker create special relationship. The various special features of the relationship are detailed below:

1. Banker has an obligation to honor the cheques of the customer up to the amount standing to the credit of the customer’s account.

2. The banker has to maintain the secrecy of his customer’s account.

3. The banker can charge interest all compound rates for defaults in payments of loan by the customer or for overdrawn amounts.

4. Banker is allowed to produce certified copies of the entries made in the original books of account as proof of transaction in legal proceedings under certain circumstances and cases in accordance with the provisions of banker’s book evidence Act, 1891.

5. A banker is under the obligation of law to suspend the operation of accounts by the customer in case of receipt of garnishee order from the court.

Obligations of a banker: Though the primary relationship between a banker and his customer is that of a debtor and creditor or vice-versa the special features of this relationship as noted above impose the following additional obligations on the banker:

1. Obligation to honor the cheques: Section 31 of Negotiable Instrument act, 1881 imposes upon bank the obligation to honor the cheques. The text of the act is as follows:

“The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheques must pay the cheque when duly required so to

do and in default of such payment must compesate the drawer for any less or damage caused buy such default.”

2. Time and Place of Payment: The demand of payment by the creditor must be made to the debtor at the proper palace and in proper time. Transactions in the banks are carried out up to 2 p.m. on working days and up to 12 noons on every Saturday. A commercial bank, having a number of branches is considered to be one entity but the depositor enter into relationship with only that branch where an account is opened in his name.

3. Demand made in proper order: The statutory definition of banking system explains that deposits are withdrawal by cheque, drafts, order or otherwise. This is to be done as per the common usage amongst the bankers.

Cases in which the Banker Refuses Customer’s Cheques

(A) When may a banker refuse to honour a customer’s cheque?

• When the balance to the credit of the customer not sufficient to meet the cheque.

• When money deposited by the customer cannot be withdrawn on demand e.g., fixed deposits.

• When the cheque is state i.e. it has become older than six months and has not been presented for payment with in reasonable time of the date of the issue.

• When the account is in joint names and all the persons have not signed the cheque.

(B) When the banker must reuse to honour customer’s cheques:

• When the customer has stopped the payment of the cheque.

• When the banker is served with “garnishee order” or a prohibitory order by any court.

• When the bank comes to know of the defect in the title of the person presenting the cheque before the bank.

• When the holder of the cheque gives a notice of its loss to the bank.

• When the cheque is post-dated and is presented for payment before its ostensible date.

Garnishee Order: A garnishee order is an order issued by the court under order 21 rules 46 of the code of civil Procedure, 1908, generally served on banks. Such order prohibits a banker from making payments from a particular a particular account named therein. When a debtor does not repay the debt owed by him to his creditor, the latter may apply to the court for the issue of a Garnishee Order on the banker of his debtor. Such order attaches the debts not secured by a negotiable instrument. The important features of a garnishee order are as under the order attaches either the entire deposit or a specified sum.

It attaches only the balance in the account at the time the order is received. Cheques etc. are sent for collection and the amounts deposited by the customer after the order is received are not attached. However, uncleared effects already placed to customer’s credit are attached.

A Garnishee order is issued in two parts. In the first instance the court issue an order, called order nisi directing the banker to stop payments from the accounts of the judgement-debtor. The banker is also required to submit explanation, if any, as to why the funds in the said account should not be utilised for meeting the claim or the judgement. After the receipt of order nisi, the banker stops all payments from the said accounts and informs his customer accordingly.