PROJECT REPORT THE NEGOTIABLE INSTRUMENTS ACT, 1881

SUBMITTED TO:UPDESH SINGH SACHDEVASUBMITTED BY:Bidyut Biplab DasEnrollment no-13BSP0177IBS GURGAON

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ACKNOWLEDGEMENT

I would like to take this opportunity to thank all the people who have helped me in the completion of this project. Firstly, I express my sincere gratitude towards , Updesh Singh Sachdeva , who has helped me at every step , provided me with relevant study material for the project, rectified my mistakes, and always guided me in my research. This project would not have been possible without his help and guidance . I am also grateful to staff of Library for rendering cooperation .

Bidyut Biplab Das

NEGOTIABLE INSTRUMENTS ACT, 1881

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STRUCTURE

1.0 OBJECTIVES

1.1 INTRODUCTION

1.2 MEANING OF NEGOTIABLE INSTRUMENTS

1.3 CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

1.4 PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

1.5 TYPES OF NEGOTIABLE INSTRUMENT

1.5.1 PROMISSORY NOTES

1.5.2 BILL OF EXCHANGE

1.5.3 CHEQUES

1.5.4 BANK DRAFT

1.5.5 HUNDIS

1.6 PARTIES TO NEGOTIABLE INSTRUMENTS

1.6.1 PARTIES TO BILL OF EXCHANGE

1.6.2 PARTIES TO A PROMISSORY NOTE

1.6.3 PARTIES TO A CHEQUE

1.7 NEGOTIATION

1.7.1 MODES OF NEGOTIATION

1.8 ASSIGNMENT

1.8.1 NEGOTIATION AND ASSIGNMENT DISTINGUISHED

1.8.2 IMPORTANCE OF DELIVERY IN NEGOTIATION

1.9 ENDORSEMENT

1.10 INSTRUMENTS WITHOUT CONSIDERATION

1.11 HOLDER IN DUE COURSE

1.12 DISHONOUR OF A NEGOTIABLE INSTRUMENT

1.13 NOTING AND PROTESTING

1.14 OF REASONABLE TIME

1.15 OF COMPENSATION

1.16 SPECIAL RULES OF EVIDENCE

1.17 OF CROSSED CHEQUES

1.18 OF BILLS IN SETS

1.19 OF INTERNATIONAL LAW

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1.20 OF NOTARIES PUBLIC OF PENALTIES IN CASE OF DISHONOUR OF CERTAIN

CHEQUES FOR INSUFFICIENCYOF FUNDS IN THE ACCOUNTS

1.21 SUMMARY

1.22 THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND

MISCELLANEOUS PROVISIONS) BILL,  2002

1.23 Legal proceeding under section 138 of the Negotiable Instruments Act, 1881

1.24 Procedure For filing Complaint Under Section 138 Negotiable

Instrument Act

1.25 CHEQUES BOUNCING

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1.1 INTRODUCTION The Act called the Negotiable Instruments Act, 1881states that

Local extent. Saving of usages relating to hundis, etc. It

extends to the whole of India but nothing herein contained affects the

'Indian Paper Currency Act, 1871, (3 of 1871). section 21, or .affects

any local usage relating to any instrument in an oriental language :

Provided that such usages may be excluded by any words in the body

of

the instrument which indicate an intention that the legal relations of

the parties thereto shall be governed by this Act and it shall come

into force on the first day of March, 1882.

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 . 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 authorised 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

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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.

1.2 MEANING OF NEGOTIABLE INSTRUMENTS

According to Section 13 (a) of the Act, “Negotiable instrument means a

promissory note, bill of exchange or cheque payable either to order or to bearer,

whether the word “order” or “ bearer” appear on the instrument or not.”

In the words of Justice, Willis, “A negotiable instrument is one, the property in

which is acquired by anyone who takes it bonafide and for value notwithstanding

any defects of the title in the person from whom he took it”. Thus, the term,

negotiable instrument means a written document

which creates a right in favour of some person and which is freely transferable.

Although the Act mentions only these three instruments (such as a promissory

note, a bill of exchange and cheque), it does not exclude the possibility of adding

any other instrument which satisfies the following two conditions of negotiability:

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1. the instrument should be freely transferable (by delivery or by

endorsement. and delivery) by the custom of the trade;

2. The person who obtains it in good faith and for value should get it free

from all defects, and be entitled to recover the money of the instrument in

his own name. 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.

1.3 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.

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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.

1.4 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.

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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.

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1.5 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 recognised by statute are:

(i) Promissory notes

(ii) Bills of exchange

(iii) Cheques.

(iv) Bankers draft

Negotiable instruments recognised by usage or custom are:

(i) Hundis

(ii) Share warrants

(iii) Dividend warrants

(iv) Circular

(v) Bearer debentures

(vi) Debentures of Bombay Port Trust

(vii) Railway receipts

(viii) Delivery orders.

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.

1.5.1 Promissory notes

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,

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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.”

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”.

(3) Promise to pay must be unconditional: A conditional undertaking destroys

the negotiable character of an otherwise negotiable instrument. Therefore, the

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promise to pay must not depend upon the happening of some outside

contingency or event. It must be payable absolutely.

(4) It should be signed by the maker: The person who promise 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 pronate

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.

(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.

(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.

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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 inthe 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.

On demand (or six month after date) I promise to pay Peter or order the sum of

rupees one thousand with interest at 8 per cent per annum until payment.

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FIG:A promissory note used in INDIA

1.5.2 Bill of exchange

Section 5 of the Act defines, “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”. A bill of exchange, therefore, is a written

acknowledgement of the debt, written by the creditor and accepted by the

debtor. There are usually three parties to a bill of exchange drawer, acceptor or

drawee and payee. Drawer himself may be the payee.

Essential conditions of a bill of exchange

(1) It must be in writing.

(2) It must be signed by the drawer.

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

(4) The sum payable must also be certain.

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(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”.

(7) The order must be unconditional.

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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 no

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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

Inland bill: A bill is, named as an inland bill if:

(a) it is drawn in India on a person residing in India, whether

payable in or outside India, or

(b) it is drawn in India on a person residing outside India but

payable 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 Bill: A bill which is not an inland bill is a foreign bill. 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.

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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.

Bills in sets (Secs. 132 and 133): The foreign bills are generally drawn in sets of

three, and each sets is termed as a ‘via’. As soon as anyone of the set is paid,

the others becomes inoperative. These bills are drawn in different parts. 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.

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).

(2) Time 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.

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

demand bill.

(3) Trade and Accommodation Bill

Trade bill: A bill drawn and accepted for a genuine trade transaction is termed as

a “trade bill”.

Accommodation bill: A bill drawn and accepted not for a genuine trade

transaction but only to provide financial help to some party is termed as an

“accommodation bill”.

Example: A, is need of money for three months. He induces his

friend B to accept a bill of exchange drawn on him for Rs. 1,000 for three

months. The bill is drawn and accepted. The bill is an “accommodation

bill”. A may get the bill discounted from his bankers immediately, paying

a small sum as discount. Thus, he can use the funds for three months

and then just before maturity he may remit the money to B, who will

meet the bill on maturity.

In the above example A is the “accommodated party” while B is

the“accommodating party”. It is to be noted that an recommendation bill may be

for accommodation of both the drawer arid acceptor. In such a case, they share

the proceeds of the discounted 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).

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(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.

1.5.3 Cheques

Section 6 of the Act defines “A cheque is a bill of exchange drawn on a specified

banker, and not expressed to be payable otherwise than on demand”. A cheque

is bill of exchange with two more qualifications, namely, (i) it is always drawn on

a specified banker, and (ii) it is always payable on demand. Consequently, all

cheque are bill of exchange, but all bills are not cheque. A cheque must satisfy

all the requirements of a bill of exchange; that is, it must be signed by the

drawer, and must contain an unconditional order on a specified banker to pay a

certain sum of money to or to the order of a certain person or to the bearer of

the cheque. It does not require acceptance.

FIG:A Cheque

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Different types of cheques based on methods of issuing

Open cheque or bearer cheque: The issuer of the cheque would just fill the

name of the person to whom the cheque is issued, writes the amount and

attaches his signature and nothing else. This type of issuing a cheque is also

called bearer type cheque also known as open cheque or uncrossed cheque. The

cheque is negotiable from the date of issue to three months. The issued cheque

turns stale after the completion of three months. It has to be revalidated before

presenting to the bank.

 

A crossed cheque or an account payee cheque: It is written in the same as

that of bearer cheque but issuer specifically specifies it as account payee on the

left hand top corner or simply crosses it twice with two parallel lines on the right

hand top corner. The bearer of the cheque presenting it to the bank should have

an account in the branch to which the written sum is deposited. It is safest type

of cheques.

 

A self cheque: A self cheque is written by the account holder as pay self to

receive the money in the physical form from the branch where he holds his

account.

 

Pay yourself cheque: The account holder issues this type of crossed cheque to

the bank asking the bank deduct money from his account into bank’s own

account for the purpose buying banking products like drafts, pay orders, fixed

deposit receipts or for depositing money into other accounts held by him like

recurring deposits and loan accounts.

 

Post dated cheque (PDC): A PDC is a form of a crossed or account payee

bearer cheque but post dated to meet the said financial obligation at a future

date.

 

Various types of cheques based on their functionality

Local Cheque: A local cheque is a type of cheque which is valid in the given city

and a given branch in which the issuer has an account and to which it is

connected. The producer of the cheque in whose name it is issued can directly

go to the designated bank and receive the money in the physical form. If a given

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city’s local cheque is presented elsewhere shall attract some fixed banking

charges. Although these type of cheques are still prevalent, especially with

nationalised banks, it is slowly slated to be removed with at par cheque type.

 

At par cheque: With the computerisation and networking of bank branches with

its headquarters, a variation to the local cheque has become common place in

the name of at par cheque. At par cheque is a cheque which is accepted at par at

all its branches across the country. Unlike local cheque it can be present across

the country without attracting additional banking charges.

 

Banker’s cheque: It is a kind of cheque issued by the bank itself connected to

its own funds. It is a kind of assurance given by the issuer to the client to alley

your fears. The personal account connected cheques may bounce for want of

funds in his account. To avoid such hurdles, sometimes, the receiver seeks

banker’s cheque.

 

Travelers’ cheques: They are a kind of an open type bearer cheque issued by

the bank which can be used by the user for withdrawal of money while touring. It

is equivalent to carrying cash but in a safe form without fear of losing it.

 

Gift cheque: This is another banking instrument introduced for gifting money to

the loved ones instead of hard cash.

 

Cheques per se have been around since the inception of banking system. The

cheque transactions are one of the safest ways of conducting business. Although

cheque is going to be still the mainstay of banking transactions, it leaves a good

amount of paper usage. With net banking becoming popular and made secure,

more and more people are looking forward to transacting their business using

net banking. ATMs are slowly replacing the self cheques for withdrawal of

money. Post dated cheques are getting replaced by periodic electronic clearing

instructions.

Distinction Between Bills of Exchange and Cheque

1. A bill of exchange is usually drawn on some person or firm,

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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.

1.5.4 Bank Draft

Bill of exchange drawn by a bank on itself, or on a correspondent bank in another

city or country. Bank drafts are commonly used by banks in dealings with other

banks, or when a creditor or seller is unwilling to accept an ordinary check from

a debtor or buyer in another city or country. (In local transactions a certified

check or a cashier's check serves the same purpose.) When

a customer (the drawer) requests a draft, the bank withdraws the amount of the

draft from his orher account and holds it to honor the draft on its presentment by

the drawee. Because, in normal circumstances, a draft is certain to be paid, it is

generally accepted as a cash equivalent. Also called banker's draft.

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Fig: A bank draft

1.5.5 Hundis

A “Hundi” is a negotiable instrument written in an oriental

language. The term hundi includes all indigenous negotiable instrument 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).

Kinds Of Hundis

Several varieties of Hundis are current amongst Indian traders. Hundis may be

either Darshani or Muddati. Darshani hundis are payable at sight while Muddati

hundis are payable after a certain period, after date of sight. The various kinds of

hundis which relate to these classes are as follows.

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1. Shah jog Hundi :

This is a hundi payable only to a shah i.e., a respectable person or a person of

worth in the market. This is the most widely used hundi in the country. Such a

hundi is not payable to bearer but only to a respectable bearer. A shah jog hundi

may pass from hand to hand till it reaches a shah, who , after making due

enquiries to secure himself presents it to the drawee for acceptance or payment;

then its negotiability ceases. It will not be paid unless the name of the shah by

whom it is presented is endorsed on it.

A shah jog hundi differs from a bill of exchange in two respects:

(1) The acceptance of the drawee is not generally written across it, but the

particulars are entered in the drawer’s book.

(2) It is not usually presented for acceptance before due date.

A shah jog hundi may be either darshani or muddati. It has all the characteristics

of negotiable instrument. It passes by mere delivery. But it is payable only to a

respectable person. A minor may be the holder of shah jog hundi and a payment

to whom may be a good payment.

2. Jokhmi Hundi :

This is a hundi drawn against goods shipped on the vessel named in the Hundi.

The drawer of the hundi is the consigner who draws for the value of the goods on

the consignee. It resembles a policy of marine insurance. A jokhmi hundi is

designed with a double purpose; namely – to put the drawer of the hundi in funds

and at the same time to affect an insurance upon the goods themselves. The

drawer negotiates the hundi to a broker and the broker charges a commission for

his services. The broker will get the money if the vessel arrives safe in port. If the

ship is lost the broker bears loss. Thus both the drawer and the drawee are

protected.

3. Nam jog Hundi :

This is a hundi payable to named party or his order. Its form is very much the

same as that of the shah jog hundi, except that in place of the word shah, the

name of the payee is inserted. Generally it contains a description of the person

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mentioned; when this is so it is not transferable. The alteration of a nam jog

hundi into a shah jog hundi is a material alteration and renders the hundi void.

4. Dhani jog Hundi :

This is hundi payble to Dhani or owner, i.e., a person who purchases it. It is

payable to any owner, holder or bearer. It is a negotiable instrument payable to

bearer; where it is endorsed in full, it ceases to be a bearer hundi. It is in the

form of promote.

5. Jawabi Hundi :

This is a hundi employed to send money to distant places and resembles a

money order. The drawer who is interested in sending the money writes to the

payee and delivers the letter along with the remittance to a banker. The banker

either endorses it on to any of his correspondents or negotiates its transfer. On

payment the payee signs his receipt on the letter which is then returned to the

remitter in the same way.

6. Firman jog Hundi:

This is a hundi which is payable to order.

7. Zickri Chit:

A Hundi may be accepted for honour under what is called a Zickri Chit or letter of

protection without being noted or protested. It is in use all over India in

connection with Marwari hundis. It is furnished, to the holder by some prior party

to the Hundi, when the hundi gets dishonored. It creates something like an

acceptor for honor, and it is valid in law.

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Fig :Shows a HUNDI used in india

Maturity

"Maturity". The maturity of a promissory note or bill of exchange is the date at

which it falls due.

Days of grace. Every promissory note or bill of exchange which is

not expressed to be payable on demand, at sight or on presentment is

at maturity on the third day after the day on which it is expressed to

be payable.

Calculating maturity of bill or note payable so many months

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afterdate or sight.

Calculating maturity of bill or note payable so many months after date or sight.

In calculating the date at which a promissory note or bill of exchange, made

payable a stated number of months after date or after sight, or after a certain

event, is at maturity, the period stated shall be held to terminate on the day of

the month which corresponds with the day on which the instrument is dated, or

presented for acceptance or sight, or noted for non- acceptance, or protested for

nonacceptance, or the event happens, or, where the instrument is a bill of

exchange made payable a stated number of months after sight and has been

accepted for honour, with the day on which it was so accepted. If the month in

which the period would terminate has no corresponding day, the period shall be

held to terminate on the last day of such month.

Illustrations

(a) A negotiable instrument, dated 29th January 2013, is made

payable at one month after date. The instrument is at maturity on the

third day after the 28th February 2013.

(b) A negotiable instrument, dated 30th August 2013, is made

payable three months after date. The instrument is at maturity on the

3rd December 2013.

(c) A promissory note or bill of exchange, dated 31st August

2013, is made payable three months after date. The instrument is at

maturity on the 3rd December ,2013.

When day of maturity is a holdiay.

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When day of maturity is a holdiay.When the day on which a

promissory note or bill of exchange is at maturity is a public

holiday, the instrument shall be deemed to be due on the next

preceding business day.

1.6 PARTIES TO NEGOTIABLE INSTRUMENTS

1.6.1 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

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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 toaccept 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

ofany party liable on the bill. Such an acceptor is called ‘acceptor for honour’.

1.6.2 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).

1.6.3 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 ofa bill or note).

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1.7 NEGOTIATION

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.

1.7.1 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.

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1.8 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.

1.8.1 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.

1.8.2 Importance of delivery in negotiation

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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. 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. 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.

1.9 ENDORSEMENT

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

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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 endorse 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

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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

andone 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

theinstrument.

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

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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.

When 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 any one 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

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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 some

times 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.

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(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

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‘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.

1.10 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 instrumentunless 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

39

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

compenent 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

holderin 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

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Forgery confers no title and a holder acquires no title to a forged instrument. A

forged instrument is treated as anullity. 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

41

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

been forced 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 dishonoured at

maturity. B cannot sue A on the bill. As between remote parties, the defence of

42

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 canrecover the full amount of Rs. 500.

1.11 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

43

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 (passessor) 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.

Example:

(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

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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.

4. 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.

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(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 indorers) 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. D acquires a good title to the

bill and can sue all the parties on it.

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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.

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1.12 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

nonacceptance 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)

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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

timeafter he has received it. (Sec. 95)

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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

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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.

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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).

1.13 NOTING AND PROTESTING

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 generally 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

As soon as a bill of exchange or a promissory note is dishonoured, the holder can

after giving the parties due notice of dishonour, sue the parties liable thereon.

Section 99 provides a mode of authenticating the fact of the bill having been

dishonoured. Such mode is by noting the instrument. Noting is a minute

recorded by a notary public on the dishonoured instrument or on a paper

attached to such instrument.

When a bill is to be noted, the bill is taken to a notary public who represents it

for acceptance or payment as the case may be and if the drawee or acceptor still

refuses to accept or pay the bill, the bill is noted as stated above.

Noting should specify in the instrument, (a) the fact of dishonour,(b) the date of

dishonour, (c) the reason for such dishonour, if any (d) the notary’s charges, (e)

a reference to the notary’s register and (f) the notary’s initials.

Noting should be made by the notary within a reasonable time after dishonour.

Noting and protesting is not compulsory but foreign bills must be protested for

52

dishonour when such protest is required by the law of the place where they are

drawn. Cheques do not require noting and protesting. Noting by itself has no

legal effect. Still it has some advantages. If noting is done within a reasonable

time protest may be drawn later on. Noting without protest is sufficient to allow a

bill to be accepted for honour.

Protest

Protest is a formal certificate of the notary public attesting the dishonour of the

bill by non-acceptance or by non-payment. After noting, the next step for notary

is to draw a certificate of protest, which is a formal declaration on the bill or a

copy thereof. The chief advantage of protest is that the court on proof of the

protest shall presume the fact of dishonour.

Besides the protest for non-acceptance and for non-payment the holder may

protest the bill for better security. When the acceptor of a bill becomes insolvent

or suspends payment before the date of maturity, or when he absconds the

holder may protest it in order to obtain better security for the amount due. For

this purpose the holder may employ a notary public to make the demand on the

acceptor and if refused, protest may be made. Notice of protest may be given to

prior parties. When promissory notes and bills of exchange are required to be

protested, notice of protest must be given instead of notice of dishonour. (Sec.

102)

Inland bills may or may not be protested. But foreign bills must be protested for

dishonour when such protest is required by the law of the place where they are

drawn (Sec. 104).

Where a bill is required to be protested under the Act within a specified time, it is

sufficient if it is ‘noted for protest’ within such time. The formal protest may be

given at anytime after the noting (Sec. 104A)

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.

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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.

1.14 OF REASONABLE TIME

Reasonable time.

Reasonable time. In determining what is a reasonable time for presentment for

acceptance or payment, for giving notice of dishonour and for noting, regard

shall be had to the nature of the instrument and the usual course of dealing with

respect to similar instruments ; and, in calculating such time, public holidays

shall be excluded.

Reasonable time of giving notice of dishonour:

If the holder and -the party to whom notice of dishonour is given carry on

business or live (as the case may be) in different places, such notice is given

within a reasonable time if it is despatched by the next post or on the day next

after the day of dishonour.

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If the said parties carry on business or live in the same place, such notice is

given within a reasonable time if it is despatched in time to reach its destination

on the day next after the day of dishonour.

Reasonable time for transmitting such notice.

Reasonable time for transmitting such notice. A party receiving notice of

dishonour, who seeks to enforce his right against a prior party, transmits the

notice within a reasonable time -if he transmits it within the same time after its

receipt as he would have had to give notice if he had been the holder.

1.15 OF ACCEPTANCE AND PAYMENT FOR HONOUR AND REFERENCE IN

CASE OF NEED

Acceptance for honour.

When a bill of exchange has been noted or protested for nonacceptance 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.

How acceptance for honour must be made.

A person desiring to accept for honour must, by writing on the bill under his

hand, declare that he accepts under protest the protested bill for the honour of

the drawer or of a particular indorser whom he names, or generally for honour to

self.

Acceptance not specifying for whose honour it is made.

Where the acceptance does not express for whose honour it is made, it shall be

deemed to be made for the honour of the drawer.

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Liability of acceptor for honour:

An acceptor for honour binds himself to all parties subsequent to the party for

whose honour he accepts to pay the amount of the bill if the drawee do not ;

and such party and all prior parties are liable in their respective capacities to

compensate the acceptor for honour for all loss or damage sustained by him in

consequence of such acceptance.

But an acceptor for honour is not liable to the holder of the bill unless it is

presented, or (in case the address given by such acceptor on the bill is a place

other than the place where the bill is made payable) forwarded for presentment,

not later than the day next after the day of its maturity.

When acceptor for honour may be charged:

An acceptor for honour cannot be charged unless the bill has at its maturity

been presented to the drawee for payment, and has been dishonoured by him,

and noted or protested for such dishonour.

Payment for honour:

When a bill of exchange has been noted or protested for nonpayment, any

person may pay the same for the honour of any party liable to pay the same,

provided that the person so paying 1[or his agent in that behalf] has previously

declared before a notary public the party for whose honour he pays, and that

such declaration has been recorded by such notary public.

Right of payer for honour.

Right of payer for honour. Any person so paying is entitled to all the rights, in

respect of the bill, of the holder at the time of such payment, and may recover

from the party for whose honour he pays all sums so paid, with interest thereon

and with all expenses properly incurred in making such payment.

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Drawee in case of need:

Where a drawee in case of need is named in a bill of exchange, or in any

indorsement thereon, the bill is not dishonoured until it has been dishonoured

by such drawee.

Acceptance and payment without protest:

A drawee in case of need may accept and pay the bill of exchange without

previous protest.

1.15 OF COMPENSATION

Rules as to compensation:

The compensation payable in case of

dishonour of a promissory note, bill of exchange or cheque, by any

party liable to the holder or any indorsee, shall be determined

by the following rules:-

(a) the holder is entitled to the amount due upon the

instrument, together with the expenses properly incurred in

presenting, noting and protesting it ;

(b) when the person charged resides at a place different

from that at which the instrument was payable, the holder is

entitled to receive such sum at the current rate of exchange

57

between the two places;

(c) an indorser who, being liable, has paid the amount due on the same is

entitled to the amount so paid with interest at eighteen per centumper annum

from the date of payment until tender or realization thereof, together with all ex-

penses caused by the dishonour and payment;

(d) when the person charged and such indorser reside at different places, the

indorser is entitled to receive such sum at the current rate of exchange between

the two places;

(e) the party entitled to compensation may draw a bill upon the party liable to

compensate him, payable at sight or on demand, for the amount due to him,

together with all expenses properly incurred by him. Such bill must be

accompanied by the instrument dishonoured and the protest thereof (if any). If

such bill is dishonoured, the party dishonouring the same is liable to make

compensation thereof in the same manner as in the case of the original bill.

1.16 SPECIAL RULES OF EVIDENCE

Presumptions as to negotiable instruments-

Presumptions as to negotiable instruments- Until the contrary

is proved, the following presumptions shall be made: -

(a) of consideragion; that every negotiable instrument was

made or drawn for consideration, and that every such

instrument, when it has been accepted, indorsed, negotiated or transferred, was

accepted, indorsed, negotiated or transferred for consideration ;

58

b)as to date; that every negotiable instrument bearing a

date was made or drawn on such date ;

(c)as to time of acceptance; that every accepted bill of

exchange was accepted within a reasonable time after its date

and before its maturity ;

(d)as to time of transfer; that every transfer of a

negotiable instrument was made before its maturity;

(e)as to order of indorsements; that the indorsements

appearing upon a negotiable instrument were made in the order

in which they appear thereon;

(f)as to stamp; that a lost promissory note, bill of

exchange or cheque was duly stamped ;

(g)that holder is a holder in due course; that the holder of

a negotiable instrument is a holder in due course:provided

that, where the instrument has been obtained from its lawful owner, or from

any person in lawful custody thereof, by means of an SP offence or fraud. or has

been obtained from the maker or acceptor thereof by means of an offence or

fraud, or for unlawful consideration, the burthen of proving that the holder is a

holder in due course lies upon him.

Presumption on proof of protest.

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.Presumption on proof of protest. In a suit upon an instrument

which has been dishonoured, the Court shall, on proof of the protest,

presume the fact of is dishonour, unless and until such fact is

disproved.

Estoppel against denying original validity of instrument.

.Estoppel against denying original validity of instrument. No

maker of a promissory note, and no drawer of a bill of exchange or

cheque, and no acceptor of a bill of exchange for the honour of the

drawer shall, in a suit thereon by a holder in due course, be

permitted to deny the validity of the instrument as originally made or

drawn.

Estoppel against denying capacity of payee to indorse.

Estoppel against denying capacity of payee to indorse. No maker of a

promissory note and no acceptor of a bill of exchange 1[payable to order] shall,

in a suit thereon by a holder in due course, be permitted to deny the payee's

capacity, at the date of the note or bill, to indorse the same.

Estoppel against denying signature or capacity of prior party.

Estoppel against denying signature or capacity of prior party. No indorser of a

negotiable instrument shall, in a suit thereon by a subsequent holder, be

permitted to deny the signature or capacity to contract of any prior party to the

instrument.

1.17 OF CROSSED CHEQUES

Cheque crossed generally.

Cheque crossed generally. Where a cheque bears across its

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face an addition of the words "and company " or any abbreviation

thereof, between two parallel transverse lines, or of two parallel

transverse lines simply, either with or without the words " not

negotiable," that addition shall be deemed a crossing, and the cheque

shall be deemed to be crossed generally.

Cheque crossed specially.

Cheque crossed specially. 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 shall be deemed a crossing, and

the cheque shall be deemed to be crossed specially, and to be crossed

to that banker.

Crossing after issue.

Crossing after issue. Where a cheque is uncrossed, the holder

may cross it generally or specially.

Where a cheque is crossed generally, the holder may cross it

specially.

Where a cheque is crossed generally or specially, the holder

may add the words"' not negotiable".

Where a cheque is crossed specially, the banker to whom it is

crossed may again cross it specially to another banker. his

agent, for collection.

Payment of cheque crossed generally.

Payment of cheque crossed generally. Where a cheque is

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crossed generally, the banker on whom it is drawn shall not pay it

otherwise than to a banker.

Payment of cheque crossed specially. Where a cheque is crossed

specially, the banker on whom it is drawn shall not pay it otherwise

than to the banker to whom it is crossed, or his agent for collection.

Payment of cheque crossed specially more than once.

Payment of cheque crossed specially more than once.Where a

cheque is crossed specially to more than one banker, except when

crossed to an agent for the purpose of collection, the banker on whom

it is drawn shall refuse payment thereof.

Payment in due course of corssed cheque.

Payment in due course of corssed cheque.Where the banker on

whom a crossed cheque is drawn- has paid the same in due course, the

banker paying the cheque, and in case such cheque has come to the

hands of the payee) the drawer thereof, shall respectively be entitled

to the same rights, and be placed in the same position in all

respects, as they would respectively be entitled to and placed in if

the amount of the cheque bad been paid to and received by the true

owner thereof.

Payment of crossed cheque out of due course.

Payment of crossed cheque out of due course.Any banker

paying a cheque crossed generally otherwise than to a banker, or a

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cheque crossed specially otherwise than to the banker to whom the same

is crossed, or his agent for collection, being a banker, shall be

liable to the true owner of the cheque for any loss he may sustain

owing to the cheque having been so paid.

Cheque bearing "not negotiable".

Cheque bearing "not negotiable". A person taking a cheque

crossed generally or specially, bearing in either case 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.

Non-liability of banker receiving payment of cheque.

Non-liability of banker receiving payment of cheque. A banker

who has in good faith and without negligence received payment for a

customer of a cheque crossed generally or specially 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 only of 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.]

[131A.Application of Chapter to drafts. The provisions of this

Chapter shall apply to any draft, as defined in section 85A, as if the

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draft were a cheque.]

1.18 OF BILLS IN SETS

Set of bills.

Set of bills. Bills 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 the parts

together make a set ; but the whole set constitutes only one bill, and

is extinguished when one of the parts, if a separate bill, would be

extinguished.

Exception.-When a person accepts or indorses different parts of

the bill in favour of different persons, he and the subsequent

indorsers of each part are liable on such part as if it were a

separate bill.

Holder of first acquired part entitled to all.

Holder of first acquired part entitled to all. As between

holders in due course of different parts of the same set, he who first

acquired title to his part is entitled to the other parts and the

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money represented by the bill.

1.19 OF INTERNATIONAL LAW

Law governing liability of maker, acceptor or indorser of foreign

instrument.

Law governing liability of maker, acceptor or indorser of

foreign instrument. In the absence of a contract to the contrary, the

liability of the maker or drawer of a foreign promissory note, bill of

exchange or cheque is regulated in all essential matters by the law of

the place where he made the instrument, and the respective liabilities

of the acceptor and indorser by the law of the place where the

instrument is made payable.

Illustration

A bill of exchange was drawn by A in California, where the rate

of interest is 25 per cent., and accepted by B, payable in Washington,

where the rate of interest is 6 per cent. The bill is endorsed in

3[India], and is dishonoured. An action on the bill is brought

65

against B in 3[India]. He is liable to pay interest at the rate of 6

per cent. only ; but if A is charged as drawer, A is liable to pay

interest at the rate of 25 per cent.

Law of place of payment governs dishonour.

Law of place of payment governs dishonour. Where a promissory

note, bill of exchange or cheque is made payable in a different place

from that in which it is made or indorsed, the law of the place where

it is made payable determines what constitutes dishonour and what

notice of dishonour is sufficient.

Illustration

A bill of exchange drawn and indorsed in 1[India], but accepted

payable in France, is dishonoured. The indorsee causes it to be

protested for such dishonour, and gives notice thereof in accordance

with the law of France, though not in accordance with the rules herein

contained in respect of bills which are not foreign. The notice is

sufficient.

Instrument made, etc., out of India, but in accordance with the law

ofIndia.

If a negotiable instrument is made, drawn accepted or endorsed 1[outside India],

but in accordance with the 1[law of India] the circumstance that any agreement

66

evidenced by such instrument is invalid according to the law of the country

wherein it was entered into does not invalidate any subsequent acceptance or

endorsement made thereon 1[within India]

1. The words “out of British India” were successively amended by the A.O. 1948,

the A.O. 1950 and Act 3 of 1951, sec. 3 and Sch to read abobe.

Instrument made, etc., out of India, but in accordance with the law of India. If a

negotiable instrument is made, drawn, accepted or indorsed outside India, but in

accordance with the law of India, the circumstance that any agreement

evidenced by such instrument is invalid according to the law of the country

wherein it was entered into does not invalidate any subsequent acceptance or

indorsement made thereon 4[within India].

Presumption as to foreign law.

Presumption as to foreign law. The law of any foreign country regarding

promissory notes, bills of exchange and cheques shall be presumed to be the

same as that of India, unless and until the contrary is proved.

1.20 OF NOTARIES PUBLICOF PENALTIES IN CASE OF DISHONOUR OF

CERTAIN CHEQUES FOR INSUFFICIENCYOF FUNDS IN THE ACCOUNTS

Dishonour of cheque for insufficiency, etc., of funds in the account.

Dishonour of cheque for insufficiency, etc., of funds in the

account. Where any cheque drawn by a person on an account maintained

by him with a banker for payment of any amount of money to another

person from out of that account for the discharge, in whole or in

part, of any debt or other liability, is returned by the bank unpaid.

either because of the amount of money standing to the credit of that

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account is insufficient to honour the cheque or that it exceeds the

amount arranged to be paid from that account by an agreement made

with that bank, such person shall be deemed to have committed an

offence and shall, without prejudice. to any other provision of this

Act, be punished with imprisonment for a term which may extend to one

year, or with fine which may extend to twice the amount of the cheque, or with

both:

Provided that nothing contained in this section shall apply

unless-

(a)the cheque has been, presented to the bank within a

period of six months from the date on which it is drawn or

within the period of its validity, whichever is earlier;

(b)the payee or the holder in due course. of the cheque as

the case may be, makes a demand for the payment of the

said amount of money by giving a notice, in writing, to the

drawer of the cheque, within fifteen days of the receipt of

information by him from the bank regarding the return of the

cheque as unpaid; and

(c)the drawer of such cheque fails to make the payment of

the said amount of money to the payee or, as the case may be,

to the holder in due course of the cheque, within fifteen

days of the receipt of the said notice.

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Explanation.-For the purposes of this section, "debt or other

liability" means a legally enforceable debt or other liability.

Presumption in favour of holder.

Presumption in favour of holder. It shall be presumed, unless

the contrary is proved, that the holder of a cheque received the

cheque of the nature referred to in section 138 for the discharge, in

whole or in part, of any debt or other liability.

Defence which may not be allowed in any prosecution under section

138.

Defence which may not be allowed in any prosecution under

section 138. It shall not be a defence in a prosecution for an offence

under section 138 that the drawer had no reason to believe when he

issued the cheque that the cheque may be dishonoured on presentment

for the reasons stated in that section.

Offences by companies:

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(1) If the person committing an offence under section 138 is a company, every

person who, at the time the offence was committed, was in charge of, and was

responsible to, the company for the conduct of the 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:

Provided that nothing contained in this sub-section shall render any person

liable to punishment if he proves that the offence Was committed without his

knowledge, or that he had exercised all due diligence to prevent the commission

of such offence.

(2)Notwithstanding anything contained in sub-section (1), where any offence

under this Act has been committed by a company and it is proved that the

offence has been committed with the consent or connivance of, or is attributable

to, any neglect on the part of, any director, manager, secretary or other officer of

the company, such director, manager, secretary or other officer shall also be

deemed to be guilty of that offence and shall be liable to be proceeded against

and punished accordingly.

Explanation.-For the purposes of this section,-

(a)"company" means any body corporate and includes a firm

or other association of individuals; and

(b) "director", in relation to a firm, means a partner in the

firm.

Cognizance of offences:

Cognizance of offences. Notwithstanding anything contained in the Code of

Criminal Procedure, 1973 (2 of 1974),-

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(a)no court shall take cognizance of any offence

punishable under section 138 except upon a complaint, in

writing, made by the payee or, as the case may be, the holder

in due course of the cheque;

(b)such complaint is made within one month of the date on

which the cause of action arises under clause (c) of the

proviso to section 138;

(c)no court inferior to that of a Metropolitan Magistrate

or a Judicial Magistrate of the first class shall try any

offence punishable under section 138.

1.21 SUMMARY

A negotiable instrument is a piece of paper which entitles a person to a sum of

money and which is transferable from one person to another by mere delivery or

by endorsement and delivery. The characteristics of a negotiable instrument are

easy negotiability, transferee gets good title, transferee gets a right to sue in his

own name and certain presumptions which apply to all negotiable instruments.

There are two types for negotiable instruments (a) Recognised by statue:

Promissory notes, Bill of exchange and cheques and (b) Recognised by usage:

Hundis, Bill of lading, Share warrant, Dividend warrant, Railway receipts,Delivery

orders etc. The parties to bill of exchange are drawer, drawee, acceptor,payee,

indorser, indorsee, holder, drawee in case of need and acceptor for honour. The

parties to a promissory note are maker, payee, holder, indorser and indorsee

while parties to cheque are drawer, drawee, payee, holder, indorser and

indorsee. Negotiation of an instrument is a process by which the ownership of

the instrument is transferred by one person to another. There are two methods

of negotiation: by mere delivery and by endorsement. In its literal sense, the

term ‘indorsement’ means writing on an instrument butin its technical sense,

under the Negotiable Instrument Act, it means the writing of a person’s name on

71

the face or back of a negotiable instrument or on a slip of paper annexed

thereto, for the purpose of negotiation. A bill may be dishonoured by non-

acceptance (since only bills require acceptance) or by non-payment, while a

promissory note and cheque may be dishonoured by non-payment only. Noting

means recording of the fact of dishonour by a notary public on the bill or paper

or both partly. Protest is a formal notarial certificate attesting the dishonour of

the bill. The term ‘discharge’ in relation to negotiable instrument is used in two

senses, viz., (a) discharge of one or more parties from liability thereon, and (b)

discharge of the instrument.

THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) BILL,     2002

72

A

BILL

further to amend the Negotiable Instruments Act, 1881, the Bankers' Books

Evidence Act, 1891 and the Information Technology Act, 2000.

BE  it enacted by Parliament in the Fifty-third Year of the Republic of India as

follows:—

CHAPTER I

PRELIMINARY

1. Short title and commencement.-(1) This Act may be called the Negotiable

Instruments (Amendment and Miscellaneous Provisions) Act, 2002.

(2)  It shall come into force on such date as the Central Government may, by

notification in the Official Gazette, appoint and different dates may be appointed

for different provisions of this Act.

CHAPTER  II

AMENDMENTS TO THE NEGOTIABLE INSTRUMENTS ACT, 1881

2. Substitution of new section for section 6.-For section 6 of the Negotiable

Instruments Act, 1881 (26 of 1881) (hereinafter referred to as the principal Act),

the following section shall be substituted, namely:—

‘6. “Cheque”.-A “cheque” is a bill of exchange drawn on a specified

banker and not expressed to be payable otherwise than on demand and it

includes the electronic image of a truncated cheque and a cheque in the

electronic form.

Explanation I.—For the purposes of this section, the expression—

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(a) “a cheque in the electronic form” means a cheque which

contains the exact mirror image of a paper cheque, and is generated,

written and signed in a secure system ensuring the minimum safety

standards with the use of digital signature (with or without biometrics

signature) and asymmetric crypto system;

(b) “a truncated cheque” means a cheque which is truncated during

the course of a clearing cycle, either by the clearing house or by the

bank whether paying or receiving payment, immediately on generation

of an electronic image for transmission, substituting the further physical

movement of the cheque in writing.

Explanation II.—For the purposes of this section, the expression

“clearing house” means the clearing house managed by the Reserve Bank of

India or a clearing house recognised as such by the Reserve Bank of India.’.

3. Amendment of section 64.-Section 64 of the principal Act shall be re-

numbered as sub-section (1) thereof,  and after sub-section (1) as so re-

numbered, the following sub-section shall be inserted, namely:—

“(2) Notwithstanding anything contained in section 6, where an

electronic image of a truncated cheque is presented for payment, the

drawee bank is entitled to demand any further information regarding the

truncated cheque from the bank holding the truncated cheque in case of any

reasonable suspicion about the genuineness of the apparent tenor of

instrument, and if the suspicion is that of any fraud, forgery, tampering or

destruction of the instrument, it is entitled to further demand the

presentment of the truncated cheque itself for verification:

Provided that the truncated cheque so demanded by the drawee bank

shall be retained by it, if the payment is made accordingly.”.

4. Amendment of section 81.-Section 81 of the principal Act shall be re-

numbered as sub-section (1) thereof, and after sub-section (1) as so re-

numbered, the following sub-sections shall be inserted, namely:—

“(2) Where the cheque is an electronic image of a truncated cheque,

even after the payment the banker who received the payment shall be

entitled to retain the truncated cheque.

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(3) A certificate issued on the foot of the printout of the electronic image

of a truncated cheque by the banker who paid the instrument, shall be prima

facie proof of such payment.”.

5.  Amendment of section 89.-Section 89 of the principal Act shall be re-

numbered as sub-section (1) thereof, and after sub-section (1) as so re-

numbered, the following sub-sections shall be inserted, namely:—

“(2)   Where the cheque is an electronic image of a truncated cheque,

any difference in apparent tenor of such electronic image and the truncated

cheque shall be a material alteration and it shall be the duty of the bank or

the clearing house, as the case may be, to ensure the exactness of the

apparent tenor of electronic image of the truncated cheque while truncating

and transmitting the image.

(3)   Any bank or a clearing house which receives a transmitted

electronic image of a truncated cheque, shall verify from the party who

transmitted the image to it, that the image so transmitted to it and received

by it, is exactly the same.”.

6. Amendment of section 131.-In section 131 of the principal

Act, Explanation shall be re-numbered as Explanation I thereof, and

after Explanation I as so re-numbered, the following Explanation shall be

inserted, namely:—

“Explanation II.—It shall be the duty of the banker who receives

payment based on an electronic image of a truncated cheque held with him,

to verify the prima facie genuineness of the cheque to be truncated and any

fraud, forgery or tampering apparent on the face of the instrument that can

be verified with due diligence and ordinary care.”.

7. Amendment of section 138.-In section 138 of the principal Act,—

(a) for the words “a term which may be extended to one year”, the

words “a term which may be extended to two years” shall be substituted;

(b)  in the proviso, in clause (b),  for the words “within fifteen days”, the

words “within thirty days” shall be substituted.

8. Amendment of section 141.-In section 141 of the principal Act, in sub-

section (1), after the proviso, the following proviso shall be inserted, namely:—

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“Provided further that where a person is nominated as a Director of a

company by virtue of his holding any office or employment in the Central

Government or State Government or a financial corporation owned or

controlled by the Central Government or the State Government, as the case

may be, he shall not be liable for prosecution under this Chapter.”.

9. Amendment of section 142.-In section 142 of the principal Act, after

clause (b), the following proviso shall be inserted, namely:—

“Provided that the cognizance of a complaint may be taken by the Court

after the prescribed period, if the complainant satisfies the Court that he had

sufficient cause for not making a complaint within such period.”.

10. Insertion of new sections after section 142.-After section 142 of  the

principal Act, the following sections shall be inserted, namely:—

“143. Power of Court to try cases summarily.-(1) Notwithstanding

anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), 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 (both inclusive) of the said Code shall, as far as may be, apply to such

trials:

Provided that in the case of any conviction in a summary trial under this

section, it shall be lawful for the Magistrate to pass a sentence of

imprisonment for a term not exceeding one year and an amount of fine

exceeding five thousand rupees:

Provided further that when at the commencement of, or in the course of,

a summary trial under this section, it appears to the Magistrate that the

nature of the case is such that a sentence of imprisonment for a term

exceeding one year may have to be passed or that it is, for any other

reason, undesirable to try the case summarily, the Magistrate shall after

hearing the parties, record an order to that effect and thereafter recall any

witness who may have been examined and proceed to hear or rehear the

case in the manner provided by the said Code.

(2)  The trial of a case under this section shall, so far as practicable,

consistently with the interests of justice, be continued from day to day until

its conclusion, unless the Court finds the adjournment of the trial beyond the

following day to be necessary for reasons to be recorded in writing.

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(3)  Every trial under this section shall be conducted as expeditiously as

possible and an endeavour shall be made to conclude the trial within six

months from the date of filing of the complaint.

144. Mode of service of summons.-(1) Notwithstanding anything

contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the

purposes of this Chapter, a Magistrate issuing a summons to an accused or a

witness may direct a copy of summons to be served at the place where such

accused or witness ordinarily resides or carries on business or personally

works for gain, by speed post or by such courier services as are approved by

a Court of Session.

(2)  Where an acknowledgement purporting to be signed by the accused

or the witness  or an endorsement purported to be made by any person

authorised by the postal department or the courier services that the accused

or the witness refused to take delivery of summons has been received, the

Court issuing the summons may declare that the summons has been duly

served.

145. Evidence on affidavit.-(1) Notwithstanding anything contained in

the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the

complainant may be given by him on affidavit and may, subject to all

just  exceptions be read in evidence in any enquiry, trial or other proceeding

under the said Code.

(2)  The Court may, if it thinks fit, and shall, on the application of the

prosecution or the accused, summon and examine any person giving

evidence on affidavit as to the facts contained therein.

146. Bank’s slip prima facie evidence of certain facts.-The Court shall, in

respect of every proceeding under this Chapter, on production of bank’s slip

or memo having thereon the official mark denoting that the cheque has

been dishonoured, presume the fact of dishonour of such cheque, unless and

until such fact is disproved.

147. Offences to be compoundable.-Notwithstanding anything contained

in the Code of Criminal Procedure, 1973 (2 of 1974), every offence

punishable under this Act shall be compoundable.

CHAPTER III

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AMENDMENT TO THE BANKERS’ BOOKS EVIDENCE ACT, 1891

11. Amendment of section 2.-In section 2 of the Bankers’ Books Evidence

Act, 1891 (18 of 1891),—

(a) for clause (3), the following clause shall be substituted, namely:—

‘(3) “bankers’ books” include ledgers, day-books, cash-books,

account-books and all other records used in the ordinary business of the

bank, whether these records are kept in written form or stored in a

micro film, magnetic tape or in any other form of mechanical or

electronic data retrieval mechanism, either onsite or at any offsite

location including a back-up or disaster recovery site of both’.”

(b)  in clause (8), after sub-clause (b), the following sub-clause shall be

inserted, namely:—

“(c) a printout of any entry in the books of a bank stored in a micro

film, magnetic tape or in any other form of mechanical or electronic

data retrieval mechanism obtained by a mechanical or other process

which in itself ensures the accuracy of such printout as a copy of such

entry and such printout contains the certificate in accordance with the

provisions of section 2A.”.

CHAPTER  IV

AMENDMENTS TO THE INFORMATION TECHNOLOGY ACT, 2000

12. Amendment of section 1.-In the Information Technology Act, 2000 (21 of

2000) (hereinafter referred to as the principal Act),  in section 1, in sub-section

(4), for clause (a), the following clause shall be substituted, namely:—

“(a) a negotiable instrument (other than a cheque) as defined in section

13 of the Negotiable Instruments Act, 1881 (26 of 1881);”.

13. Insertion of a new section 81A.-After section 81 of the principal Act, the

following section shall be inserted, namely:—

‘81A. Application of the Act to electronic cheque and truncated cheque.-

(1) The provisions of this Act, for the time being in force, shall apply to, or in

relation to, electronic cheques and the truncated cheques subject to such

modifications and amendments as may be necessary for carrying out the

purposes of the Negotiable Instruments Act, 1881 (26 of 1881) by the

78

Central Government, in consultation with the Reserve Bank of India, by

notification in the Official Gazette.

(2)  Every notification made by the Central Government under sub-

section (1) shall be laid, as soon as may be after it is made, before each

House of Parliament, while it is in session, for a total period of thirty days

which may be comprised in one session or in two or more successive

sessions, and if, before the expiry of the session immediately following the

session or the successive sessions aforesaid, both Houses agree in making

any modification in the notification or both Houses agree that the

notification should not be made, the notification shall thereafter have effect

only in such modified form or be of no effect, as the case may be; so,

however, that any such modification or annulment shall be without prejudice

to the validity of anything previously done under that notification.

Explanation.—For the purposes of this Act, the expressions “electronic

cheque” and “truncated cheque” shall have the same meaning as assigned

to them in section 6 of the Negotiable Instruments Act, 1881 (26 of 1881).’.

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STATEMENT OF OBJECTS AND REASONS

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 encourge the culture

of use of cheques and enhancing the credibility of the instrument. The existing

provisions in the Negotiable Instruments Act,1881, namely, sections 138 to 142

in Chapter XVII have been found deficient in dealing with dishonour of cheques.

Not only the punishment provided in the Act has proved to be inadequate, the

procedure prescribed for the Courts to deal with such matters has been found to

be cumbersome. The Courts are unable to dispose of such cases expeditiously in

a time bound manner in view of the procedure contained in the Act.

2. A large number of cases are reported to be pending under sections 138 to

142 of the Negotiable Instruments Act in various courts in the country. Keeping

in view the large number of complaints under the said Act pending in various

courts, a Working Group was constituted to reveiw section 138 of the Negotiable

Instruments Act, 1881 and make recommendations as to what changes were

needed to effectively achieve the purpose of that section.

3. The recommendations of the Working Group along with other

representations from various institutions and organisations were examined by

the Government in consultation with the Reserve Bank of India and other legal

experts, and a Bill, namely, the Negotiable Instruments (Amendment) Bill, 2001

was introduced in the Lok Sabha on 24th July, 2001. The Bill was referred to

Standing Committee on Finance which made certain recommendations in its

report submitted to Lok Sabha in November, 2001.

4. Keeping in veiw the recommendations of the Standing Committee on

Finance and other representations, it has been decided to bring out, inter alia,

the following amendments in the Negotiable Instruments Act,1881, namely:—

(i) to increase the punishment as prescribed under the Act from one

year to two years;

(ii) to increase the period for issue of notice by the payee to the drawer

from 15 days to 30 days;

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(iii) to provide discretion to the Court to waive the period of one month,

which has been prescribed for taking cognizance of the case under the Act;

(iv) to prescribe procedure for dispensing with preliminary evidence of

the complainant;

(v) to prescribe procedure for servicing of summons to the accused or

witness by the Court through speed post or empanelled private couriers;

(vi) to provide for summary trial of the cases under the Act with a view

to speeding up disposal of cases;

(vii) to make the offences under the Act compoundable;

(viii) to exempt those directors from prosecution under section 141 of

the Act who are nominated as directors of a company by virtue of their

holding any office or employment in the Central Government or State

Government or a financial corporation owned or controlled by the Central

Government, or the State Government, as the case may be;

(ix) to provide that the Magistrate trying an offence shall have power to

pass sentence of imprisonment for a term exceeding one year and amount

of fine exceeding five thousand rupees;

(x) to make the Information Technology Act, 2000 applicable to the

Negotiable Instruments Act,1881 in relation to electronic cheques and

truncated cheques subject to such modifications and amendments as the

Central Government, in consultation with the Reserve Bank of India,

considers necessary for carrying out the purposes of the Act, by notification

in the Official Gazette; and

(xi) to amend definitions of "bankers' books" and "certified copy" given

in the Bankers' Books Evidence Act,1891.

5. The proposed amendments in the Act are aimed at early disposal of cases

relating to dishonour of cheques, enhancing punishment for offenders,

introducing electronic image of a truncated cheque and a cheque in the

electronic form as well as exempting an official nominee director from

prosecution under the Negotiable Instruments Act,1881.

6. The Bill seeks to achieve the above objects.

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Legal proceeding under section 138 of the Negotiable Instruments Act, 1881

Introduction:

 In this age of globalization and commercialization, the transfer and

settlement of payment has been made more flexible to facilitate and boost up

the business dealings and transactions. To this context cheque is considered to

be the most recognized and convenient instrument which can be issued more

quickly to settle payments and obligations in a contract more. The cheque is

currently the most visible and significant mode of payment all over the world.

Cheques are the creation of ancient business people or western business world.

Advent of cheques in the market have given a new dimension to the commercial

and corporate world, its time when people preferred to carry and execute a small

piece of paper called cheque than carrying the currency worth the value of

cheque. Dealings in cheque are vital and important not only fro banking

proposes but also for the commerce and industry and the economy of the

country. But pursuant to the rise in dealings with cheques also rises the practice

the practice of giving cheques without any intention.

Prior to 1988 there was no fruitful legal provision to restrain people from

issuing cheque without having adequate amount in their account or any

stringent  provision to punish them in the vent of such cheque not being honored

by their bankers and returned unpaid. In case of dishonor of cheque, there is

definitely a a civil liability accrued. However in practice the procedure of seeking

civil justice becomes a long drawn process and recovery by way of civil suit takes

an inordinately long time. To ensure prompt remedy against defaulters and to

ensure credibility to the holders of the negotiable instruments a criminal remedy

of penalty was inserted in Negotiable Instruments Act. Section 138 is

incorporated In Negotiable Instruments Act, 1881 in order to encourage the

culture of use of cheques and enhancing the credibility of the instrument. Many

issues under this section such as what happens in case of default, who will be

liable to the holder of the cheque, what are the procedures involved to make the

case adept in the eyes of the court.  The NI Act contains sufficient safe guards to

protect the drawer of cheques by giving him an opportunity to make good the

payment of dishonored cheque when a demand is made by the payee.

History of the Act and objective of amendment:

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 The Negotiable Instrument Act, 1881 was amended by the Banking, Public

Financial Institutions and Negotiable Instruments Laws (Amednment)  Act, 1988

to insert a new chapter XVII with sections 138-142. These new sections came

into force in 1989.The Act was further amended in 2002 by inserting sections

143 to 147  w.e.f. 06.02.2003 to deal with certain deficiencies noticed in the Act.

Salient features of amendment are acceptance of Bankers memo  of dishonor as

prima facie evidence, evidence of witness or accused on affidavit, serving of

summons by post/courier for speedy trial/ prosecution, increase of period for

issuance of notice by payee and enhancement of punishment.

Nature of liability under section 138:

The object of bringing in this section as mentioned above is to inculcate faith

in the efficacy of banking operations and credibility in transacting business on

negotiable instrument. The ingredients which are to be satisfied for making out a

case under S.138 of the Act are:

The cheque is drawn on a bank for the discharge of any legally enforceable

debt or other liability. This means that the cheque must have been drawn for

payment of money to a person other than the drawer for the full or partial

discharge [8] of any legally enforceable debt or liability. Thus what we see here

is that if a cheque was given merely as a security, then a suit cannot be filed

upon that and S.138 will not be attracted. Also to bring it under the ambit of this

section, a cheque should have presumably been issued and not merely drawn for

payment in discharge of a debt.

The cheque so dishonored must have been presented to the drawee/ bank

within a period of six months from the date on which it is drawn or within the

period of its validity, whichever is earlier.[9]

The cheque is returned by the bank unpaid.

The cheque is returned unpaid because the amount available in the drawer’s

account is insufficient for paying the cheque.

The payee has given a notice to the drawer claiming the amount within 15

days of the receipt of the information from the bank.[10]

The drawer has failed to pay within 15 days from the date of the receipt of

notice.

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The offence under this section is not complete till a statutory opportunity is

offered to the drawer of the cheque for making the default good within 15 days

of the receipt of notice to that effect. It is only the failure of the drawer to avail of

this opportunity and meet the demand for the amount of the cheque that

becomes the cause of action under the S.138. This position was laid down

inMahalakshmi Enterprises v. Sri Vishnu Trading Co,[11] and has been deemed

to be one of the essential ingredients of this section.

The payee has a limitation period of 30 days, within which he can file a

complaint.

 

 

 

Procedure and Practice: 

The offence under S.138 is a non-cognizable offence by virtue of S.142 of the

Act on account of the non-obstante clause as comprised in section 142 of the

Act, the magistrate must proceed immediately on complaint. For a complaint

however, first a statutory notice must be sent to the drawer and if the drawer

does not reply accordingly within 15 days, it opens itself for prosecution.

Notice:

A notice is one of the essential characteristic of S.138. The period for cause

of action is to be counted from the date of receipt of notice by the accused.

Notice has to be sent to the drawer within 30 days of the receipt of information

from the bank about the dishonor.[44] As regards liability of dishonor of cheques

it is essential to prima facie show that after 15 days of receipt of notice, the

accused failed to pay the amount. In the case of Padmini Polymers Ltd v. Unit

Trust of India,[45] it has been held that a notice is must and mandatory. Unless

and until the intention is clear on the part of the part of the person giving notice

that the payment by the drawer of the cheque should be made within 15 days of

receipt thereof, any communication between the parties insisting for making the

payment cannot be termed as notice under S.138 of the Act. Otherwise the

purpose of presenting the cheque time and again during the period of validity

would have no meaning. So far as the question of giving notice is concerned, it is

stated that every person who becomes liable upon an action for dishonor of the

instrument and only by such dishonor either the holder thereof or some party

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thereto who remains liable thereon may give notice to such parties as entitled to

immediate notice. But the holder may give notice to such parties as he desires to

charge; but he cannot by giving notice make a person liable who is not otherwise

liable under law, e.g., drawee in the case of dishonor of cheques.[46]

Serving the notice:

An important question that arises here is that when is a notice deemed to be

served and upon who is the burden of proving service?

The problem that arises is that the section does not only say delivery of

notice, but ‘receipt of the notice’, such wordings in the section can be put to

numerous interpretations. The question is if ‘receipt of notice, postulates actually

delivery, then the drawer can easily preempt action against him by deliberately

staying away from his premises and the likes. It would be inequitable that such a

person be let off the hook, while another drawer who stays on and accepts the

notice would subject himself to prosecution.

In the case of V.Raja Kumari v. P.Subbarama Naidu and Anr[47] the question

that came up was what is meant by a proper notice and if there is no proper

would the complaint be quashed. “In Clause (c) of the proviso the drawer of the

cheque is given fifteen days from the date of receipt of said notice for making

payment. This affords clear indication that ‘giving notice’ in the context is not

the same as receipt of notice. Giving is the process of which receipt is the

accomplishment. The payee has to perform the former process by sending the

notice to the drawer in his correct address, if receipt or even tender of notice is

indispensable for giving the notice in the context envisaged in Clause (b) an

evader would successfully keep the postal article at bay at least till the period of

fifteen days expires. Law shall not help the wrong doer to take advantage of his

tactics. Hence the realistic interpretation for the expression ‘giving notice’ in the

present context is that, if the payee has dispatched notice in the correct address

of drawer reasonably ahead of the expiry of fifteen days, it can be regarded that

he made the demand by giving notice within the statutory period. Any other

interpretation is likely to frustrate the purpose for providing such a notice.” Thus

from here we see that there can be deemed notice even where actual notice has

not been given. However this is a rebuttable presumption and its for the

complainant to prove that the notice was served and that the person either

refused to accept the notice or was unavailable.

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Though this is the popular position yet, many courts differ in opinion and it

has been held that where the delivery is done by post, then reading S.138 with

S.27 of the General Clauses Act

Ingredients:

Though no form of notice is prescribed, the requirement is that the notice

shall be given in writing within fifteen days (now thirty with the amendment).

Secondly when a notice is served, it must demand the “said amount” i.e. the

cheque amount in it. If no such demand is made the notice falls short of legal

requirement.[48] However if apart from the “said amount” other amounts by

way of interest, costs, etc is mentioned, such a notice would be a valid notice

under the Section. The legislative intent of the Section is quite clear, the drawer

of the cheque will be liable for conviction if the demand is not met within 15days

of the receipt. Thus if the cheque amount is paid within the statutory period or

before a complaint is filed the legal liability under S.138 will cease and for

recovery of additional costs, a civil suit will lie.

Also the stating of the cheque number, though seems essential so that the

drawer should know of which cheque the notice relates to, yet it has been held

that S.138 does not lay down any such condition and if the cheque number is

absent or wrong, depending on the facts and circumstances, the notice will

deemed good or bad in law.[49]

PENALTIES AND LIABILITIES FOR DISHONOUR:

 

Dishonoring of a cheque:

In order to begin a discussion on the issue of dishonor under the Act, it is

important to first consider the meaning of the term dishonor and what does it

constitute. This finds mention in S.91 and S.92 of the Act.

Dishonor of negotiable instruments may be of two kinds:

Dishonor by non-acceptance.

Dishonor by non-payment is said to be dishonoured.[13]

S.91 [14] of the Act speaks of dishonor by non-acceptance. What we see

from this definition is a condition of presentment of the negotiable instrument,

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however presentment for acceptance is required only in the case of a bill of

exchange. Usually acceptance and payment go together and this usually

happens in case an instrument is payable after sight, thus often it is difficult to

distinguish the two because dishonour by non-payment is usually dishonor by

non-acceptance,[15] and thus it is only this bill of exchange which can be

dishonored by non-acceptance and not a cheque as in the case of a cheque no

acceptance is required to be taken to the banker and cheques are mainly

instruments payable at sight .[16]

The second kind of dishonor is that of dishonour by non-payment. A

negotiable instrument is said to be dishonored by non-payment when the drawee

of a cheque makes default in payment upon being duly required to pay the

same.[17] A drawee can dishonor a cheque

Thus it is well established that cheques are always dishonored only for the

reason of non-payment and not non-acceptance.

Apart from the broad heads mentioned above, cheques can be dishonored

by the banker for several reasons. (i) payment countermanded, (ii) insufficiency

of funds, (iii) non-applicability of funds, (iv) improper presentation, (v) notice of

death of account holder, (vi) court’s order prohibiting payment, (vii) post-dated

cheques, (viii) stale cheques, (ix) lunacy, (x) insolvency, etc. the researcher will

proceed to deal with only few of these instances.

Payment countermanded:

When the drawer of the cheques issues instructions to the bank not to make

any payment of a particular cheque issued by him, the bank then stands revoked

from making payment on that cheque, this is known as countermand of cheques

by the drawer.[18] It must be noted here that any payment by the bank after

such notice will not be considered as good payment. When a drawer wishes to

stop payment he must give notice to the Bank, though it is usually the drawer

who gives such notice, however a payee can give a notice to the banker that the

cheque is stolen or lost. In such a case the banker must inform the drawer, so

that the latter can give necessary instructions.[19]

Insufficiency of funds:

When there are no funds to meet the cheque or the account of the drawer

does not hold sufficient funds to meet the whole credit amount of the cheque,

the banker is then justified in refusing the payment of such a cheque. However

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where the account has sufficient funds, the banker is under an obligation to its

customer of honoring the cheque presented to it.

A cheque when dishonored for the purpose of insufficiency of funds, the

drawer of such cheque is liable to penal consequences as under S. 138 of the

Act. However there maybe an agreement to the contrary whereby the banker

has undertaken to meet the customer’s cheques even though there may not be

sufficient funds in his account, then in such a case the banker is bound to honor

the cheque failing which the banker would be liable by way of breach of contract

for an overdraft facility[20] and the necessary legal consequences will ensue.

One issue that arises here and has been under constant debate, is that

whether a cheque returned by the banker endorsed with the words “refer to

drawer” would amount to a dishonor under S.138. after a number of decisions on

the point, there has been a sort consensus on the point and courts have often

said that refer to drawer meant nothing but that the drawer lacked sufficient

funds in his account and therefore S.138 would be attracted in certain

circumstances.

Non-applicability of funds:

Under S.31 of the Act it is the banker’s duty to honour the cheque when

funds which are lying in the account of the drawer are applicable for the purpose.

Thus when the funds in the account are lying for other purposes, the will

necessarily dishonour the cheque presented before it for payment. An example

of such a situation is when the banker may have a lien over the funds lying in the

account of the drawer under S.171 of the Indian Contract Act. Another situation

might be where the funds in the account of the drawer is meant for a trust and a

cheque is drawn in breach of a trust.[21]

Effects of dishonor of cheque:

Firstly, taking of a legal action. The payee/holder can take action against the

drawer of such a bill may take action on the exact time of dishonoring of the bill.

Thus the holder need not wait for the bill to mature and then to take action for

dishonoring the same.[22] Secondly, when a cheque is said to be dishonored it

loses its basic characteristic of negotiability with immediate effect. Thirdly, on

the dishonoring of a cheque, nothing prevents the holder thereof to present it

again particularly on being asked by the drawer of the cheque. Lastly, under

S.138, mere dishonoring of cheques does not give rise to a cause of action in

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favour of the complainant but it accrues only after the issue of demand notice

and failure of the drawer to make the payment.[23]

The payee or holder of a cheque has the right to present the cheque for

payment for any number of times and he may have it repeatedly dishonored, but

he can prosecute the drawer only once.[24]

Burden of proof:

Under this law all presumptions are made against the drawer of such

cheques and thus the onus of proof is left on the accused rather than the

prosecutor.

Conclusion 

Though insertion of the penal provisions have helped to curtail the issue of

cheque arising out of its dishonor either honestly or with dishonest intention and

the trading community now feels more secured in receiving the payment through

cheques. However there being no provision for recovery of the amount covered

under the dishonored cheque, in a case where accused is convicted under

section 138 and the accused has served the sentence but, unable to deposit

amount of fine, the only option left with the complainant is to file civil suit. The

provisions of the Act do not permit any other alternative method of realization of

the amount due to the complainant on the cheque being dishonored for the

reasons of “insufficient fund” in the drawer’s account. The proper course to be

adopted by the complainant in such a situation should be by filing a suit before

the competent civil court, for realization/ recovery of the amount due to him for

the reason of dishonored cheque which the complainant is at liberty to avail of if

so advised in accordance with law. Thus what we see is that the section is not

full proof, however there is no denying that this provision has done away with

the rigorous and time consuming methods of criminal law. In support of this we

can see that the section also provides for summary proceedings, making the

issue penalty a lot simpler, because if a cheque gets dishonored today and

proceedings go on as usual, then the person may only get relief after say three

or four years, this defeats the purpose of a cheque which is meant for immediate

acceptance and distribution of cheque amount.

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Procedure For filing Complaint Under Section 138 Negotiable

Instrument Act

 a)Under provisions of negotiable instruments act.sec.138  a legal notice on

behalf of complainant is issued to the defaulter whose cheque is dishonored. It

should be issued within 15 days of dishonor of cheque by RPAD. All facts

including the nature of transaction, amount of loan and or any other legally

enforceable debt against which the said cheque was issued and the date of

deposit in bank and date of dishonor of cheque should be mentioned in the

notice.

 b) The person who has issued cheque is directed to make the payment of

amount of dishonored cheque within 15 days. In case the said payment is made

within 15 days of service of notice then the matter ends.

c) But in case the said payment is not made within 15 days then the complainant

has to file a criminal case in the court within 30 days from the expiry of notice

period of 15 days.

 d) The court will hear arguments of complainant/ advocate for complainant and

issue process under section 138 of N.I. Act.

 e) The summons are sent and served through police station where accused is

residing.

 f) Kindly note that in N.I. Act. Sec.138 cases, police is limited to only service of

summons and in case accused remains absent on court date after service of

summons then only warrant is sent to police station to produce accused in court.

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 g) But it is observed in several cases that accused persons are harassed by

concerned persons who are directed to serve notice/warrant.

 h) Hence it is advisable that accused should not be afraid of this court case and

regularly attend court dates so that warrant will not be issued and further

unnecessary harassment will be prevented.

i) Kindly note that offence under section 138 of N.I. Act is a bailable offence as

the punishment provided for said offence is two years.

 j) Accused has to submit surety with all surety documents including ownership

documents of house or land owned by surety, his address proof including ration

card, election identity card, photo and address proof of surety and accused. On

receiving summons from the court the accused and surety should remain

present in court with all abovementioned documents and court will accept the

surety and on signing bonds by accused and surety, the bail will be granted and

accused will be released by court.

 k) Then the complainant will file the affidavit for his evidence with all original

documents in support of his complaint. This is called exam in chief of

complainant. Then accused/his advocate will cross examine the complainant.

l) Complainant can submit additional witnesses in support of complaint.

m) Then once witnesses of Complainant are over then statement of accused is

recorded under sec.313 of Crpc .Accused will be asked to give reply to the

questions and allegations against him.

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 n) Then witnesses of accused to prove his innocence will be produced and the

evidence will be recorded by the court.

 o) Last stage is of arguments of advocate of complainant and argument of

advocate of accused

 p) Court will pass the Judgment. In case accused is acquitted then matter ends.

But in case accused is convicted then immediately accused should submit bail

application and give surety and pray for time to appeal to sessions court. Court

will direct him to deposit fine as per judgment in the court immediately then he

will be released. He should appeal to sessions court within one month from the

date of judgment of lower court.

 q) Criminal appeal with application for suspension of sentence and for bail will

be given hearing by the dist and sessions court and on furnishing surety as per

directions of court including deposit of some amount towards compensation

ordered as per judgment the accused will be released on bail.

r). Kindly note that the dispute may go on from district and sessions court to

high court and then to supreme court.

s). Kindly note that there is amendment in the negotiable instruments act. The

offence is made compoundable. Hence in case the matter is settled between the

parties , then on an application in the court , the court may allow to compound

the case and close the case.

 t) Kindly note that these are general guidelines for knowledge and reference of

all concerned who are harassed by the complainants by forcing the borrowers to

issue blank signed cheques in advance at the time of sanction of loan.

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 u) If a complainant withdraws the case under sec.138 of the NI Act, court fee will

be refunded as:

·        In India, the Negotiable Instruments Act regulates commercial transactions

which take place through cheques, promissory notes and bills of exchange.

·        The Maharashtra government announced in a gazette notification in May 2011

that a claim for refund of court fees can be made after the withdrawal of the

complaints for the cases, which are filed under section 138 of the Negotiable

Instruments Act, 1881.

·        According to the Maharashtra government resolution (GR), the state

government, in exercise of its powers conferred by section 43(2) of the Bombay

Court Fees Act, 1959 will provide part of the court fees paid by the complainant

under article 18 of schedule I, appended to the Act.

·        Such refund will be paid to the complainant under two broad circumstances

and conditions.

o       First, under section 138 of the Negotiable Instruments Act, 1881, a refund of

50% of the total court fees will be made when the complainant withdraws a

complaint, or when the offence was compounded, before framing of

particulars/charges, provided the claim is made within one year from the date of

withdrawal of the complaint.

Similarly, 25% of the court fee will be refunded provided the complaint is

withdrawn, or the offence is compounded, after farming of particulars/charges, or

any subsequent stages of the complaint. Here again, a claim has to be made

within a year.

CHEQUES BOUNCING

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Cheque is a negotiable instrument.  Normally, cheques are issued either for the

reason of statutory requirement or for the reason of securing proof of payment. 

Crossed and account payee cheques are not negotiable by any person other than

the payee.  It has to be deposited into his bank account.  In legal parlance,

author of the cheque is called ‘drawer’, the person in whose favour it is drawn is

called ‘payee’ and the bank who is directed to pay the amount is called

‘drawee’.  It is always safe to issue crossed “Account Payee Only” cheques in

order to avoid its misuse.  Blank cheques are not safe.  It is better to date the

cheque invariably.  A cheque is valid for payment only for six months from the

date mentioned in the cheque.  After the period of six months, such a cheque is

called ‘stale cheque’.

BOUNCING

A cheque becomes due for payment on the date mentioned on it.  Before issuing

a cheque author of the cheque should ensure that he has sufficient funds in his

account. Lest, it would bounce with remarks ‘insufficient funds’.  Bouncing in

common parlance is referred to dishonour of  cheques.

Bouncing of a ball is a fun but bouncing of a cheque is a criminal offence.  The

Negotiable Instruments Act, 1881 is applicable for the cases of dishonour of

cheque. This Act has been amended many times since 1881 and I am going to

discuss the provisions of this Act as it stands today.

WHAT HAPPENS WHEN A CHEQUE IS DISHONOURED?

Immediately upon dishonour the drawee bank issues a ‘Cheque Return Memo’ to

the banker of the payee citing the reason for non-payment.  In turn the payee’s

banker shall handover the dishonoured cheque and the memo to the payee.  

WHAT IS TO BE DONE THEN?

The payee has an option open to him either to re-present the cheque if and when

he thinks the cheque could be honoured but within six months from the date of

the cheque or proceed legally to prosecute the drawer.  The payee may

prosecute the drawer for dishonour of cheque only if the amount mentioned in

the cheque is towards discharge of a debt or any other legal liability of the

drawee towards payee.  Mere issuance of a cheque say for the purposes of gift,

or towards lending a loan or for unlawful purposes would not amount to legal

liability and the drawer cannot be prosecuted in such cases.

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TO PROCEED LEGALLY

If he decides to proceed legally, then the drawer should be given an opportunity

of making good the cheque amount immediately.  Such an opportunity has to be

afforded only by means of a notice in writing. 

LEGAL PROVISIONS

Under Section 138 of the Negotiable Instruments Act, 1881 as amended up to

date, the notice has to be sent by the payee to the drawer in writing within thirty

days from the date of receiving Cheque Return Memo from the bank and

demand the cheque amount to be paid to him within fifteen days from the date

of receipt of such a notice by the drawer.

CONDITIONS FOR PROSECUTION

Law prescribes certain conditions to be fulfilled in order to attract provisions of

Section 138. 

A)     The cheque should have been drawn by the drawer on an account

maintained by him.

B)     It should have been returned unpaid either because of the amount of

money standing to the credit of that account is insufficient to honour the cheque

or that it exceeds the amount arranged to be paid from that account by an

agreement made with that bank.

C)    Cheque must have been issued towards discharge of a debt or legal liability.

D)    If after receiving the notice, the drawer does not make payment within

fifteen days from the date of receiving such a notice, then he commits an offence

punishable under Section 138 of the Negotiable Instruments Act. 

PUNISHMENT

Punishment prescribed for such an offence is fine which may extend to twice the

amount of the cheque or imprisonment for a term which may be extended to two

years or both.

FILING COMPLAINT

If the drawer makes payment of the cheque amount within fifteen days from the

date of receipt of the notice, then drawer does not commit any offence. 

Otherwise, the payee may proceed to file a complaint in the court of the

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jurisdictional magistrate within one month from the date of expiry of fifteen days

prescribed in the notice. 

If the payee fails to file the complaint within thirty days, the complaint becomes

barred by limitation of time.  The jurisdictional magistrate court may refuse to

entertain such a belated complaint.  However, if the payee has sufficient reasons

to justify delay in filing the complaint, he may make an application before the

magistrate along with the complaint, to explain the reasons for delay and seek

condoning of delay.  Cognizance of the complaint may be taken if the Court is

satisfied that the payee had sufficient cause for not making the complaint within

the prescribed period.

After the complaint is filed and taken on record the proceedings against the

drawer being.   

CIVIL ACTION

The payee may also initiate money recovery procedure in a jurisdictional civil

court apart from prosecuting the drawer for criminal offence.  It is essential in

this case to consult an advocate who is well versed and experienced in this area

of practice to proceed further in the matter.

FINER POINTS

The procedure of filing complaint and prosecuting the drawer in a court of

magistrate involves certain finer points like cause of action, preparation of legal

notice and complaint in accordance with legal requirements, modes of sending

the written legal notice, service of summons and non-bailable warrants,

conducting the criminal case etc.  It is advisable to consult an advocate who is

well versed and experienced in this area of practice.

 

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References:

 

1.Negotiable Instruments Act, 1881.

2.Commercial Law including Company Law and Industrial Law by Sen &

Mitra

3.Mercantile Law by M.C Kucchal.

4.Elements of Mercantile Law by N.D. Kapoor

4.Initiation of legal proceeding for dishonor of cheque. Available:

http://www.lawyersnjurists.com/resource/legal-documentations-litigations/

legal-opinion/initiation-of-legal-proceedings-for-dishonour-of-cheque-ac-mr-x/

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5.Dishonor of Cheque.

Available:   http://www.amlaw.pk/pakistan-law-site/criminal-law-dishonoring-of-

cheque/faq-faqs-dishonor-dishonour-cheque-check-criminal-la/

6.Legal Proceeding of dishonor of cheque.

Available: http://www.articlesbase.com/criminal-articles/dishonour-of-cheque-

2060793.html

7.Critical study of the Dishonor of Cheque Under Negotiable Instruments Act,

1881

http://www.caclubindia.com/articles/critical-study-of-dishonour-of-cheques-

under-negotiable-instruments-act-1881-10283.asp

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