Banking Law MBL March2010

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Negotiable Instruments – Law & Procedure
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Transcript of Banking Law MBL March2010

Negotiable Instruments Law & Procedure

Module contents Justification for study of negotiable instruments Understanding negotiable instruments Parties to negotiable instruments Presentment Special provisions relating to cheques Discharge from liability Noting and protest Presumptions and estoppels Offences under the act Foreign instruments

Understanding the context (at macro level) Growing concept of securitization as a mode of finance What is securitization? securitization is a process in which pools of individual loans or receivables or actionable claims are packaged, under written and distributed to investors in the form of securities -- Kenneth Cox

POOLS OF ASSETS 1. LOANS & ADVANCES 2. BILLS 3. OTHER RECEIVABLES 4. DEBTORS

BELONGS TO THE ORIGINATOR (SUPPOSE A BANK OR A FINANCIAL INSTITUION)

RECEIVE THE LOAN AMOUNT

CREATION OF SPV POLLED ASSETS ARE BEING TRANSFERRED TO THE SPV FOR CONSIDERATION

THE SPV MAY BE A BANK OR A FINANCIAL INSTUTIONS GENERALLY

POOLED ASSETS ARE PASSED ON TO THE SPECIAL PURPOSE VEHICLE (SPV)

ASSET VALUE IN THE POOL IS DIVIDED NOTINALLY INTO SMALL SHARE OR SECURITY

SHARES / SECURITIES ARE SOLD FURTHER TO VARIOUS INVESTORS

SHARES / SECURITIES PAID BY THE SPECIAL PURPOSE VEHICLE

Justification for study Negotiable instruments form the backbone of todays complex commercial world Tradesmen prefer to use cheques, drafts, promissory notes etc., in their day to day transactions, rather than ready cash These instruments are used as mode of payment for almost all human activities (payment of salary, application cost, payment of fees etc.,)

Necessity of such instruments make the wheels of economy turn and transact-ability increases

Negotiable instruments an introduction Might have originated from negoce (French word) meaning business, trade or management of affairs negotiable is something which is legally capable of being transferred by endorsement or delivery, and negotiability is the legal character of being negotiable Blacks Law Dictionary A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer S. 13 of NIAct, 1882

Special indicators It gives certain rights to the person in lawful possession of such an instrument which no other instruments can ever give It represents money to a great extent; and Does not get tainted by any defect in title at the source so long as its acquisition is lawful Ex: if the maker of the instrument commits fraud or forgery the bona fide payee of the instrument is not affected It passes by delivery like cash Person in lawful possession of it can sue in his own name

Kinds of negotiable instruments The Act deals in three kinds of instruments1. Promissory Note; 2. Bill of Exchange; and 3. Cheque.

Application Indian Paper Currency Act, 1871; Any local usage relating any instrument in an oriental language Hundis; Rukka

Hundi The saving clause does not render the act altogether inapplicable to hundis local custom overrides the statute provided It is established by the party relying on it; and Such local usage is not specifically nullified by the instrument specifically (indicating the intent of the parties)

By excluding the applicability of the Act to instruments in oriental languages, necessary confusion in the state of law has been established. The law of negotiable instruments being closely related to the commercial world should be, by and large, uniform in its application Khergamvala on Negotiable Instruments Act Eleventh Report of the Law Commission of India (1958)

Punjab National Bank v Britannia India Ltd., [(2001) 106 Comp Cas 293 DB] the Negotiable Instruments Act, 1881 has been framed in order to assimilate and record the mercantile trade practices, prevailing as the law merchant in England and therefore any usage contrary to the provisions of the said Act may not be upheld by a court. It is presumed that the Act has taken into account, all the prevailing mercantile usages and any usage, contrary to the provisions of the Act cannot be given effect to

Promissory notesan instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument Sec. 4

two partiesDRAWER

DRAWEE

PERSON WHO DRAWS THE PROMISSORY NOTE

THE PERSON TO WHOSE FAVOUR THE PROMISSORY NOTE IS DRAWN

Pro Note for a loan

Bangalore , March 24, 2007 In consideration of loan of Rupees Five Thousands (Rs.5,000) advanced by Mr. Avtar Singh to me, I promise to repay the said loan of Rupees Five Thousand with interest at 6.5% per annum to Mr. Avtar Singh or order

Pratap Singh s/o Biswas Singh, Resident of 222, 72 cross, 4th Main, Rajajinagar, 6th Block, Bangalore-560 012

Pro Note payable on fixed dateDharwad, March 24, 2008 I, Ashok Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay, Shri. Chandrakant P Bellad, or order the sum of Rs.50,000(Rupees Fifty Thousand only) on the Seventh day of November two thousand eight.

Ashok R. Patil, s/o Ramappa Chendrashekhar Patil, Resident of No. 227 Pratap Chendra Nilaya College Road, Dharwad-580 001.

Pro Note payable on instalmentsDharwad, March 24, 2008 I, Ashok Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay, Shri. Chandrakant P Bellad, or order in ten equal instalments of Rs.30,000 (Rupees Thirty Thousand) each payable on the first day of every month commencing from the first day of every month of May 2008.

Ashok R. Patil, s/o Ramappa Chendrashekhar Patil, Resident of No. 227 Pratap Chendra Nilaya College Road, Dharwad-580 001.

Essentials it must be in writing and signed by the maker; it must contain an unconditional and definite promise to pay a certain sum, and nothing more; it must be payable either on demand or after the efflux of a fixed or determinable time in future; It must be payable to, or to the order of a specified person named in the note or to the bearer of the note; most importantly, an instrument to be regarded as promissory note must show a prima facie intention to make such a note and it must be delivered.

Writing No particular form of writing Pen, pencil, typed, etc., May be on paper or cloth etc.,

No need to use specifically the word promise Must be signed by the maker

Undertaking to pay Essential is express promise to pay No Promissory notes Mr. X, I owe you Rs.100 I have received Rs.100 which I borrowed of you, and I have to be accountable to you for the same with interest Deposited with me Rs.100 to be returned on demand

Good examples Rs.1000 balance due to you I am still indebted and do promise to pay Received from X Rs.1000 which I promise to pay on demand with interest I do acknowledge myself to be indebted to X in Rs.1000 to be paid on demand for value received

unconditional Unconditionality is essential to achieve the objective of certainty of promissory note It is indispensable statutory requisite [Black v Pilcher (1909)25 TLR 497] Notes that are payable on contingency are not negotiable

it would perplex the commercial transactions of mankind if paper securities of this kind were issued out in to the world, encumbered with conditions and contingencies and if persons to whom they were offered in negotiation were obliged to inquire when these uncertain events would probably be reduced to certainty.. -- Lord Kenyon in Carlos v FAncourt, (1794) 5 TR 484

Examples I promise to pay X, Rs.5000 in installments with a proviso that no payment shall be made after my death I promise to pay X, Rs.500 on As death, provided he leaves me sufficient money to pay the said sum I promise to pay AB, Rs.500 out of money due to me from XY as soon as XY pays I promise to pay on demand at my convenience

Certainty regarding the sum Bad promissory notes I promise to pay A, Rs.100 and all other sums which may be due to him I promise to pay A, Rs.100 after deducting any interest or money which he may owe me I promise to pay A the proceeds of a shipment of goods value of Rs.2000 I promise to pay A Rs.1000 and all fines according to rule

Payee must be certain The payees name may be set out in any part of the instrument; and so long as it appears on a reading of the whole instrument that the payee is specified with certainty the instrument is a promissory note, assuming other requirements of the definition are satisfied

Other formalities Must be stamped Although not obligatory Generally dated And the place of delivery is mentioned

There are in general two parties to a pro-note the maker and the payee. There can also be Joint makers and Joint Payees

Bill of Exchange 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 - Sec. 5 of NI Act

Essentials Must be in writing Must contain an order to pay Order contained in the bill shall be unconditional Must be signed by the drawer Drawee must be certain Sum payable must be certain Order to pay money and money only The payee must be certain

Three partiesDRAWER DRAWEE/ ACCEPTOR

PERSON WHO MAKES AND GIVES THE ORDER TO PAY

ONE WHO IS DIRECTED TO PAY AFTER SIGNING BECOMES ACCEPTOR

PAYEE

WHO OR TO WHOSE ORDER THE AMOUNT OF THE INSTRUMENT IS PAYABLE

Typical BoE (payable on demand)RUPEES FIFTY THOUSAND Dharwad, March 24, 2008 Pay to Chandrakant R Bellad, or order on demand the sum of Rs.50,000 (Rupees Fifty Thousand only).

Ashok R. Patil, To Bhavesh Solanki, College Road, Dharwad-580 001.

BOE shall contain an order Essence of BOE is an order by the drawer to the drawee to pay the money to payee Polite assertion may also do Please pay affixed to the order will not be invalid Mr. AB will much oblige Mr. CD by paying to the order of P was held to be good bill

BoE and Pro Note compared The liability of the maker In Pro Note it is primary In BOE it is secondary and conditional

Parties Pro Note two BOE three

BOE require specially Acceptance by the drawee; and presentment

cheque Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise on demand and it includes the electronic image of the truncated cheque and a cheque in the electronic form - Sec. 6 of NI Act There are two explanations Explaining a cheque in the electronic form and a truncated cheque; and Clearing house for the purpose of this section

Broadening the definition of cheque in 2002 The definition broadened to include electronic image of a truncated cheque; and cheque in the electronic form

The Information Technology Act, 2002 recognizes electronic transfers; and digital signatures

The present amendment was intended to tune the NI Act with Information Technology law

Three partiesDRAWER

BANKER

PERSON WHO MAKES AND GIVES THE ORDER TO PAY

ORDER IS TO A BANKER NO NEED OF ACCEPTANCE

PAYEE

WHO OR TO WHOSE ORDER THE AMOUNT OF THE INSTRUMENT IS PAYABLE

Some other considerations No condition attached Bevins v London & South Western Bank Ltd., (1900) 1 KB 270 A company issued a cheque to its bankers along with a receipt appended thereto and with marked provided the receipt form at foot hereof is duly signed, stamped and dated The cheque was held to be invalid because its payment was made conditional

Cheque must be drawn upon the banker R. Pillai v S. Ayyar, (1920) 43 Mad. 816 A dist. Board had its funds in a Government Treasury and used to withdraw money by issuing orders in the form of a cheque; Ayyar J, held that Treasury is not a bank and therefore, the order was not a cheque under Sec. 6 but a BOE u/s 5. The learned Judge cited the definition by Hart that, a banker is one who in the ordinary course of his business honours cheques drawn upon him by persons form and for whom he receives money on current accounts

Cheque must be payable on demand Therefore, a post-dated cheque is only a Bill of Exchange and no cheque But does become cheque on the date from which it becomes payable on demand A cheque may bear date of Sunday or a holiday

Cheque is peculiar BoE Cheque is a peculiar sort of instrument, in many respects resembling a BOE, but in some entirely different. A cheque does not require acceptance, in ordinary course it is never accepted; it is not intended for circulation, it is given for immediate payment; it is not entitled to days of grace - Parke B in Ramchurn Mullick v Luchmeechund Radhakissen [(1854) 9 Moore PC 46]

Holder and Holder in Due Course

Meaning Holder is one who is Entitled in his own name to the possession of the instrument; and Have the right to receive or recover the amount due thereon from the parties thereto.

Otherwise a holder means The payee; or The bearer; or The endorsee of an instrument

Sec. 8Holder The holder of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction

Holder in due course Holder in due course is a person who takes an instrument in good-faith and for value And he becomes the true owner of the instrument and is known technically as holder in due course

Sec. 9Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title

Ingredients of s. 91. Holder must have taken the instrument for value [consideration] 2. Must have obtained the instrument before its maturity 3. Instrument must be complete and regular on its face; and 4. Must have taken the instrument in good faith and without notice of any defect either in the instrument of the title of the person negotiating it to him

Consideration Negotiable instrument contains a contract hence to be supported by valid consideration A person who takes a bill or note without consideration cannot enforce it

However For the free circulation the following are to be noted Consideration is presumed if the defendant intends to set up the defence that value has not been given the burden lies upon him In simple contract only a person who can sue is one from whom the consideration moves; but in case of Negotiable instruments if there be a consideration for it, it does not matter from whom it moves

Before maturity Once an instrument reaches its maturity, it has exhausted its life and is no more negotiable No one can become its holder in due course [Sec. 59] negotiation after that maturity is out of the usual and ordinary course of dealing, that circumstance is sufficient of itself, to excite so much suspicion that the indorsee can stand in no better position than that of the indorser

An instrument payable on demand is current at least as long as no demand for payment is made S. 19 states that a note or bill or cheque where no time for payment is specified are payable on demand a promissory note payable on demand is current for any length of time

In Brooks v Mitchell, [(1841) 152 ER 7] a promissory note made in 1824 was received by the defendant in 1838; He acted in good faith and gave value for it. In an action against him to recover the note it was argued that a bill or note payable on demand must not be kept locked up for an unreasonable time; PARKE B, however, said that promissory note payable on demand could not be treated as overdue as long as payment was not demanded, because it is intended to be

a continuing security

Following the opinion the English Act was amended Now Sec. 86(3) provides that where a note payable on demand is negotiated, it is not deemed to be overdue, for the purpose of affecting the holder with defects of title of which he had no notice, by reason that it appears that a reasonable time for presenting it for payment has elapsed since its issue

Suppose a demand instrument, which is dishonored; and then the note is negotiated to a bona fide holder for value Does he become a holder in due course? If the demand or dishonor is apparent from the face of the note or from other circumstances he cannot become the holder in due course; But he is not to be prejudiced by any dishonor of which he had no notice.

An extreme instance If the instrument is not withdrawn from circulation, even after it is paid off; and a person bona fide comes in possession of the same (and it is endorsed to him for value) He is a holder in due course and is entitled for payment See S B Asirvatham v G Palaniraju Mudaliar, AIR 1973 Mad. 349

Complete and regular In Hogarth v Latham & Company [(1878) 3 QBD 643] the plaintiff took two bills of exchange without any drawers name and completed them himself; The court held that he could not recover upon the bills; Anybody who takes such an instrument as this, knowing that when it was accepted the bill had no name of any drawer upon it, takes it at his peril. An instrument may also be incomplete because it is not properly dated or stamped But a bill of exchange does not need acceptance to make it complete and regular Some unusual marks on the instrument may make it defective, such as the marks of dishonour, blanks, or restrictive or conditional indorsements

Chalmers Digest of Bills of Exchange stated If the bill itself conveys a warning, caveat emptor. Its holder, however honest, can acquire no better title than that of his transferor. The holder takes at his peril a blank acceptance, or a bill wanting in any material particular; so also a bill which has been torn and the pieces pasted together, at least if the tears appear to show an intention to cancel it. A post dated cheque is not irregular

Good faith subjective test court has to see the holders own mind; and the only question is did he take the instrument honestly?

objective test the court has to go beyond the holders mind and see whether he exercised as much care in taking the security as a reasonably careful person ought to have done; and The subjective test requires honesty, due care and caution.

1758 The rule of honesty as good faith originated 1758 Miller v Race, (1758) 1 Sm LC 524 was decided

1824 to 1836 the rule of honesty was replaced by due care and caution 1824 Gill v Cubit

1836 rule of honesty was reinstated 1836 Goodman v Harvey [per Lord Denman CJ] Bills of Exchange Act, 1882 (sec. 90) put the controversy to rest

A thing is deemed to be done in good faith where it is in fact done honestly, whether it is done negligently or not

Good faith as honesty established In Miller v Race [(1758) 1 Sm LC 524] A bank note sent by general postage was taken and carried away by a robber; The next day the same note came into the hands of the Plaintiff. He received it for full and valuable consideration in the usual course of his business and without any notice of the banknote being taken out of the mail; Lordship said here an innkeeper took it bona fide, in his business, from a person who made the appearance of a gentleman. Here is no pretence or suspicion of collusion with the robber. He took it for full and valuable consideration and in the course of business.

This is the point of origination of the rule of honesty

In Lawson v Weston [(1801) 170 ER 640] the plaintiff had discounted a bill of 500 in the usual course of their business for a person who was unknown to them; It was insisted upon by the defendants that a banker or any other person should not discount a bill for person unknown without using due diligence to inquire into the circumstances; But Lord Kenyon rejected the argument and said to adopt the principle of the defencewould be at once to paralyze the circulation of all the paper in the country, and with it all its commerce. The circumstance of the bill having been lost might have been material if they could bring knowledge of that fact home to the plaintiff.

Good faith as due care & caution Gill v Cubit In this case a bill broker had instructed his assistant to discount bills for anyone of familiar features. A stolen bill was brought to him by a person having a respectable appearance and whose features were familiar; He discounted it without enquiring his name or address; The question was whether he had acted in good faith? Court felt that it is the duty of the court to lay down such rules as will tend to prevent fraud and robbery and not give encouragement to them. And therefore no person should take a security of this kind from another without using reasonable caution.

Test of honesty reestablished In Goodman v Harvey, Lord Denman CJ, said I believe we are all of the opinion that gross negligence only would not be a sufficient answer, where the party has given the consideration for the bill. Gross negligence may be evidence of mala fides, but it is not the same thing. We have shaken off the last remnant of the country doctrine. Where the bill has passed to the plaintiff without any proof of bad faith there is no objection to his title.

And thus the rule of honesty was reestablished.

Re-affirmation Proposition was confirmed by the House of Lords; and Later on codified in the Bills of Exchange Act, 1882, Sec. 90 A thing is deemed to be done in good faith where it is in fact done honestly, whether it is done negligently or not.

In addition to good faith, Sec. 29 of the same Act provides that the holder should have no notice of any defect in the title of the person who negotiated it.

Final position To defeat the title of a holder for value there must be bad faith or dishonesty it must be shown that he had either knowledge or suspicion of something wrong Ordinarily he need not inquire but if circumstances are clouded with suspicion he must not take without inquiry

The Indian position Sec. 9 of the Indian act does not use the words good faith It provides that without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title

In other words, to defeat the title of a holder for value it must be shown that when he took the instrument he had some cause to believe that there was something wrong The court has to see the holders own mind

Whitley Stokes [the first great commentator on the Act] Mere negligence in taking a bill seems immaterial if a man takes honestly an instrument made or become payable to the bearer he has a good title, with whatever degree of negligence he may have acted, unless his gross negligence induce the jury to find fraud

Khergamwalas view pointHowever, under the Act, the words used in sec. 9 are without having sufficient cause to believe therefore, the legislature seems to have intended to make due care and caution on the part of the holder, a test of his bona fides and that mere good faith on his part would not suffice. Accordingly, it seems negligence on the part of a holder at the time of taking a negotiable instrument, would disentitle him to the rights of a holder in due course. There will be sufficient cause to believe in the existence of defects if the holder was in fact negligent or careless, though he was acting honestly and in good faith.

Rights and privileges of holder in due course

PRESUMPTIONS [S. 18] The first privilege is that every holder is deemed prima facie to be a holder in due course If the defendant intends to set up the defence that there was something wrong in the inception or subsequent negotiations of the bill the burden of proving that lies on him Once it is shown that the history of a bill is tainted with fraud or illegality the burden is shifted to the holder to prove that he is a holder in due course

PRIVILEGE AGAINST INCHOATE STAMPED INSTRUMENTS [S. 20] the logical order of operations with regard to a bill is, the bill should be first filled up, then it should be signed by the drawer, then it should be accepted, then it should be negotiated, and then it should be indorsed by the persons who become successively holders; but it is common knowledge that parties very often vary, in a most substantial manner, the logical order of those proceedings, Sec. 20 is intended to deal with those cases

from reading of the provision, it is clear that Sec. 20 is itself authority to the holder of the inchoate stamped and signed instrument to fill up the blanks and to negotiate the instrument. The instrument may be wholly blank or incomplete in particulars and in either case the holder has the authority to make or complete the instrument as a negotiable one Madras High Court

The section may be illustrated Suppose A signs his name on the blank but stamped instrument. He gives the paper to B with authority to fill it up as a promissory note for Rs. 250 only. But B fraudulently fills the paper for Rs.1000, the stamp put upon it being sufficient to cover the amount. He then hands it to H for Rs.1000, who takes it without notice of fraud A will be bound to pay the full amount to H, because under this section it does not lie in the mouth of the signer to say that in filling the instrument his authority has been exceeded.

Sec. 20 and cheques Sec. 20 does not squarely apply to cheques because they are not required to be stamped The court does not apply S. 20 to incomplete cheques. [C T Joseph v I V Philip, AIR 2001 Ker 300].

PRIOR DEFECTS [S. 58] The party liable to pay an instrument cannot, contend that he had lost the instrument or that it was obtained form him by means of an offence or fraud, or for an unlawful consideration

Negotiation and LiabilityPART II

Assignment v negotiation The transfer of an instrument by one party to another so as to constitute the transferee as holder is called negotiation A bearer instrument is transferable by simple delivery [s. 14] An instrument payable to order can be transferred by endorsement and delivery [ss.

15 and 46].

When a person transfers his right to receive the payment of a debt is called assignment of a debt. The holder of a life insurance policy transfers the right to receive the payment to another person that is an assignment

The rights which the transferee of an instrument by negotiation acquires are substantially superior to those of an assignee

Notice of Assignment An assignment does not bind the debtor unless a notice of the assignment has been given to him and he has, expressly or impliedly, assented to it But no information of the transfer of a negotiable instrument has to be given to the debtor The acceptor of a bill and the maker of a promissory note are liable on maturity to the person who is at the time the holder in due course of the instrument

Presumptions Consideration is presumed in case of The burden lies upon the opposite party to show that there is no consideration But there are no such presumptions in favor of an assignee -- He has to prove that, he has given consideration for the assignment.

Negotiation by delivery Sec. 47 An instrument payable to bearer can be negotiated by simple delivery The person to whom the instrument is delivered becomes the holder Delivery, though simple, is an important formality, for without it no possessor is constituted as the holder of the instrument A person who steals or finds a bearer instrument is not the holder

Negotiation by endorsements Sec. 48 An instrument payable to order is negotiated by indorsement and delivery Indorsement is made by signing the name of the indorser, usually on the back of the instrument But when the back is already full - indorsements may be signed on a slip of paper annexed to the instrument Such a slip is called allonge and becomes part of the instrument

Endorsement & delivery An indorsement is completed by the delivery of the instrument to the indorsee An indorsement means an indorsement completed by delivery Thus when a person indorses an instrument to another and keeps it in his papers where it is found after his death and then delivered to the indorsee, the latter gets no rights on the instrument Similarly, where a person finds or takes away an instrument duly indorsed to him he gets no rights on the instrument A note cut in into two pieces and posted one-half to a person whom he wanted to remit money, was held entitled to withhold delivery of the other half, because a partial delivery does not make a complete indorsement

Tukaram Bapuji v Belgaum Bank, AIR 1976 Bom. 185 after sending a bank draft to the payee by post, the sender issued instruction to the bank not to pay the draft The court held that a draft cannot be cancelled by the sender after it has been delivered to the payee and The delivery in this case became effective from the date of posting

Who may endorse Sec. 51 The payee of an instrument is the rightful person to make the first indorsement Thereafter, by the holder in due Ordinarily the maker of a note and the drawer of a bill cannot endorse But if any one of them has become holder in his own right, he may endorse the instrument.

Sec. 51, enables all parties to an instrument to indorse

Kinds of endorsement

Endorsement in blank Ss. 16 and 54 Where the endorser signs only his name on the back of the instrument for the purpose of negotiating it that is an indorsement in blank The effect of a blank endorsement is to convert the order instrument into bearer It may be negotiated by simple delivery and the bearer is entitled to its payment It remains so until the indorsement in blank is converted by the holder into indorsement in full

Endorsement in full Sec. 16 Where the indorser adds to his signature the name of a person whom or to whose order he wants the instrument to be paid, that is an indorsement in full For Example pay B or order. Sd/- A is the usual form He may not add the words or order This is the usual form, but no form is prescribed Any words will do so long as they show clearly the indorsers intention

The effect is that the instrument can be paid only to the indorsee and can be further negotiated only by his indorsement

Restrictive endorsement Sec. 50 when this right of further negotiation is, by express words in the indorsement, restricted or taken away, that is called restrictive indorsement The indorser may altogether exclude the right of further negotiation or only restrict it or may merely constitute the indorsee an agent to indorse the instrument, or to receive its contents for the indorser or for some other specified person

Liability of parties

Liability of acceptor or maker Sec. 32 The liability of the acceptor of a bill of exchange and of the maker of a promissory note is the same They are liable to pay the instrument on its maturity In default, they become liable to compensate any subsequent party for the loss caused to him by the dishonour

Liability of the drawer of the bill Sec. 30 The drawer of a bill of exchange is primarily liable until the bill has been accepted by the drawee After the acceptance the acceptor becomes primarily liable Thus the liability of the drawer of a bill can be put in terms of the following propositions by drawing and issuing the bill he engages that, it shall be accepted and paid by the drawee according to its apparent tenor; and that if it is dishonoured either by non-acceptance or by non-payment, he shall compensate the holder or every endorser who has been compelled to pay the loss suffered by him

Drawer of a cheque The drawer of a cheque gives a guarantee to the holder that, it shall be paid by the banker when it is duly presented for payment If the cheque is dishonored, the drawer is liable to compensate the holder provided that he has received notice of dishonor however The liability of the drawer of a cheque is primary and not secondary This is so because the holder of a bill can sue the acceptor, but the holder of a cheque has no remedy against the banker His remedy is only against the drawer

Criminal liability (drawer of a cheque) Ss. 138 to 142 The amendment of 1988 added a new chapter to the Act Vide Sec. 4 of Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act,1988 [Act 66 of 1988] Came into effect on 01.04.1989 First edition Ss. 138 to 142 Latest addition Ss. 143 to 147 [vide Amendment Act of 2002]

to enhance the acceptability of cheques in settlement of liabilities by making the drawer liable for penalties, in case of bouncing of cheques due to insufficiency of funds in the accounts or for the reason that it exceeds the arrangement made by the drawer, with adequate safeguards to prevent harassment of honest drawers The object is to inculcate faith in the efficacy of banking operations and credibility in transacting business on the basis of negotiable instruments

Ingredients (sec. 138)1. The cheque should have been issued in discharge of a legally enforceable debt or liability; 2. The cheque should have been dishonored within the period of its validity; 3. The cheque should have been dishonored for want of funds in the account of the drawer; 4. The payee or holder of the cheque should have issued, within a specified time limit, a notice in writing to the drawer demanding the amount of cheque; and 5. The drawer must have failed to make payment within 15 days of receipt of the notice.

Dishonor of the cheque for want of funds

Notice of dishonor within 30 days to the drawer

Drawer fails to fulfill his obligation within 15 days

CAUSE OF ACTION HAS ARISEN

Whether mens rea is necessary? such person shall be deemed to have committed an offence Thus, if the conditions stated therein are satisfied, the court has to deem that the offence has been committed, regardless of the state of mind of the drawer Sec. 140 excludes the defence of the belief of the person about the sufficiency of funds For offences by companies as envisaged in Sec. 141, also show the exclusion of mens rea

Civil remedies after Chapter XVII As earlier the civil remedy is always available Both civil and criminal proceedings against the drawer can continue simultaneously

Legally enforceable debt A cheque should presumably have been issued for payment in discharge, wholly or partly, of a legally enforceable debt or liability

legally enforceable debt Is a liquidated amount of money owed and payable to another whether in present or in future It is pecuniary liability recoverable by action in respect of money demand The provision includes not only debt but other liability as well The world liability denotes the state of being liable

Hencethe following are outside the purview of s. 138 A cheque given as gift or donation Discharge of mere moral obligation For an unlawful or illegal consideration

The debt or liability shall be legally enforceable Time barred debt

A V Murthy v B S Nagabasavamma, (2002) A cheque drawn from a loan given four year prior to the date of cheque does not cease to be legally enforceable for the purpose of prosecution

Presumption of legally enforceable debit Sec. 139 The legal presumption that the holder received it for the discharge of debt or liability The initial burden (very light one) is on the complainant Then the burden shifts upon the drawer

Rebuttal of presumption (by drawer) He may rely upon (generally) circumstantial evidence The rebuttal has to be by proof and cogent evidence and not by mere explanation

Liability of the drawee (i.e. banker) of a cheque

Liability of the drawee of the cheque The drawee of a cheque is always a banker The bankers duty is only owed to the customer and not to the payee Therefore, if the cheque is dishonored the holder has no remedy against banker [even if

the cheque is been marked good for payment]

On marked cheque.writers are of the opinion that marking or certification is neither in form nor in effect an acceptance. Their Lordships are of the opinion that the certification relied on as constituting acceptance of the cheque is not an acceptance within the meaning of the English and Indian Acts. It is not necessary to hold that a cheque can never be accepted; it is enough to say that it is done in very unusual and special circumstances No cases is reported in England or in India of a banker being held liable or even sued, as an acceptor of a cheque drawn upon him -- Lord Wright

Special reference to US (regarding marked cheques) In US marked cheques are in common use Hence there is specific statutory recognition Sec. 187 of Uniform Negotiable Instruments Law States that, certification of a cheque by banker is equivalent to acceptance; and The banker becomes bound to pay And the drawer and endorsers are discharged from liability (if it is a marked cheque)

Liability of unjustified dishonourThe drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and in default of such payment, must compensate the drawer for any loss or damage by such default Sec. 31

ingredients Sufficient funds There should be sufficient credit balance in the customers account

Funds properly available & the funds are not properly available if The banker has exercised his right of set off for amounts due from the customer; There is an order passed by a court; restraining the bank from making payment

Bankers liability (for wrongful dishonour) The banker is liable (only to the drawer and not the holder) for any loss of damage which might have occurred to the drawer

Protection to the paying banker

Three important provisionsSec. 10 Payment in due course (generic)

Protection to the paying banker (specific) Sec. 85

PROTECTION TO THE PAYING BANKER

Altered instrument and making payment (generic) Sec. 89

S. 10 payment in due coursepayment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which does not afford a reasonable ground from believing that he is not entitled to receive payment of the amount therein mentioned

Ingredients The payment shall be In accordance with the apparent tenor of the instrument Payment made in good faith Payment made without negligence To the person in possession of the instrument; and No belief that the person in possession of the instrument is not entitled to receive payment of the amount in the instrument

s. 85 specific protection to the banker1. where the cheque is payable to order purports to be endorsed by or on behalf of the payee the drawee is discharged by payment in due course 2. Where the cheque is originally expressed to be payable to bearer the drawee is discharged by payment in due course to the bearer thereof

Bhutoria Trading Company v Allahabad Bank, AIR 1977 Cal. 363 BTC sold some jute to WFD (another limited Company) in payment of which WFD issued an uncrossed cheque payable to BTC or order The same was delivered to one of the officials of the BTC That official used the official seal and endorsed the cheque as manager and en-cashed over the counter BTC later sued the bank for recovery of the money

the cheque is an uncrossed cheque payable to the plaintiff or order. The cheque was endorsed by the plaintiff through its Manager. The fact that Jethmall is the Manager is borne out of the seal of the Company which is unquestionably an authentic seal. The seal of the Manager is also equally authentic. That the payment was made in good faith has not been disputed for all practical purposes. There is not a grain of evidence before the court from which it remotely appears that the payment was not made in good faith

there was no circumstances which afforded any reasonable ground for believing that he was not entitled to receive payment of the cheque. It must be held that the bank made the payment in due course. The learned judge, in our opinion has rightly pointed out that payment in due course is necessarily payment in the ordinary course

Madras Provincial Cooperative Bank Ltd., v Official Liquidator, South Indian Match Factory Ltd., AIR 1945 Mad. 30 The Official Liquidator of the Company had sold certain properties of the company -- payment was made by the purchaser by giving a cheque in favor of the liquidator The liquidator collected cash over the counter and misappropriated the same Held it is no payment in due course

they knew or must have deemed to have known that this money could only be collected by the payee through his own bank and therefore it was most improper on his part to ask for payment over the drawees counter. In our judgment there was a clear breach of a statutory duty placed upon the bank and the learned judge was right in holding the bank liable

Bank of Maharashtra v M/s Automotive Engineering Co., (1993) 2 SCC 97 The respondent a partnership firm, opened a current account with the appellant bank The said banks branch was in the outskirts of Bombay (where forgery of cheques were rampant) although other banks were provided with ultraviolet ray lamps; the said branch was not provided with such lamp

A Cheque was presented for collection (through Union Bank of India) by one Mr. Shah on 29 May 1967 for Rs.6,500 The appellant bank passed the cheque and debited the amount to the Respondent Upon objection the cheque was examined through ultraviolet ray-lamp then found out that it was originally issued to one Mr. G R Pardawala for Rs.95.98 The writing of the cheque was chemically altered with regard to date, the name of the payee and also the amount

All subordinate courts & High Court found the bank guilty of negligence (as they did not use the ultraviolet lamp) Then an appeal was preferred to the SC, which was allowed

simply because the ultraviolet ray lamp was not kept in the branch and the said cheque was not subjected to such lamp, would not be sufficient to hold the appellant bank guilty of negligence more so when it has not been established on evidence that the other branches of the appellant bank or the other commercial banks had been following a practice of scrutinizing each and every cheque or cheques involving a particular amount under such lamp by way of extra precaution

Bareilly Bank Ltd., v Naval Kishore, AIR 1964 All. 78 N opened an account and made a cash deposit of Rs.19,900; he was also issued a cheque book of 25 leaves After 17 months of operation N drew a cheque for the first time for Rs.5,900 which was dishonoured by the bank N was informed that, 11 months back 3 cheques aggregating to Rs.19,500 were pad by the bank, which N denied (about their issuance) And he also sued the bank for recovery of the money

In evidence it came out that 3 cheques used to withdraw, were not from the cheque book issued to N There was some difference between the specimen signature and the signature on the cheques Held that bankers are responsible

S. 89 altered instrument and payment

Forged cheque & bankers liability

Proposition When the cheque is forged there is no mandate to the bank to pay Hence, banker is not entitled to debit the customers account (on the basis of that forged cheque)

Canara Bank v Canara Sales Corporation and Others [(1987) 2 SCC 666] The current account of the company was to be operated by the MD The accountant of the company had the custody of the cheque book, who forged the signature on 42 cheque leaves and took out Rs.3,26,047.92 over a period of time Upon detection demanded the amount back from the bank, which was denied

Company filed the suit for recovery; this attempt was successful at the initial level The bank appealed to the Supreme Court, which dismissed the same

since the relationship between the customer and the bank is that of creditor and debtor, the bank had no authority to make payment of a cheque containing a forged signature. The bank would be acting against the law in debiting the customer with the amount of the forged cheque as there would be no mandate on the bank to pay.

Additional proposition In a joint account if one the signatures is forged same consequence will follow As there is no mandate banker cannot debit the customers account

Crossing of cheques

Introduction Crossing is a feature which is unique to cheques and distinguishes cheques from other negotiable instruments Crossing is a usage born of commercial practice The objective give direction to the banker that, he is not to pay the cheque across the counter but to pay it only to another banker

Crossing of a cheque accords a protection or safeguards the interest of the drawer If wrongful person seeks payment it can be traced back (as he has acted through another banker)

Kinds of crossing General crossing Special crossing

General crossing Sec. 123 where a cheque bears across its face an addition the words and company or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either with or without word not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally

Special crossing Sec. 124 where a cheque bears across its face an addition of the name of 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

Classification of crossingcrossing

General crossing

Special crossing

A/C payee crossing

Not negotiable crossing

General crossing ingredients Two parallel transverse lines on the face Either with or no writing between them The words and company, & Co., or not negotiable between them As law mandates drawing of parallel transverse lines is important

Specimens

dc An

o

y an mp

Co &

Special crossing Two transverse parallel lines may or may not be drawn Name of the banker should e written across the cheque The words not negotiable may also be included

specimensi ia Ind nd I f of ko k n an ba b e te Th sta ee ay p nt u I co SB Ac le ab ti go e tn No td. aL

Account payee crossing account payee crossing does not restrict the negotiability of the cheque It is only an indicating to the banker to pay the monies in to the bank account of the holder or payee If the banker receives payment of such cheque on behalf of third person (any one other than payee/holder or one who does not have account) he will be guilty of negligence

Not negotiable Sec. 130 decals with the concept of not negotiable Earlier notion (of both English and India law) That by striking order or bearer the cheque is made non transferable But now Sec. 13 states the mere absence of the word does not mean that it is non transferable

Hence, only way is crossing it with not negotiable marking

Who can cross the cheque? Crossing can be done By the drawer By the payee By the holder; or By the banker

Sec. 125

Proposition of law crossing by itself does not amount to material alteration However Intensity of the crossing can not be reduced by subsequent holder The banker crossing the cheque should do so only in favour of another banker

Can the crossing be cancelled? The answer (by analogy) of law is NO However the practice is different Whereby the crossing is cancelled by writing with initials please pay cash However the banker is probably to take some risk in such situations

London Clearing House Bankers resolutionThat no opening of cheques be recognized unless the full signature be appended to the alteration and then only when presented for payment by the drawer or by his known agent

Protection of the collecting banker

Collecting banker Collecting banker is one who collects money on behalf of the holder This is essential as a crossed cheque can be paid only by bankers and to another banker Sec. 131

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

Discharge from liability

introduction Discharge in legal sense means release from liability In our context discharge means release of liability on the instrument Discharge of parties and discharge of instrument The former is releasing one party; and The other is extinguishment of all rights over the instrument

Classification for easier understanding

DISCHARGE

BY ACT OF PARTIES SEC. 82

BY OPERATION OF LAW

OTHER CIRCUMSTANCES SEC. 83-90

CANCELLATION

RELEASE

PAYMENT

INSOLVENCY

MERGER

LAPSE OF DISCHARGE OF TIME

ONE OF THE JOINT DRAWERS ETC.

By act of the parties By cancellation When the holder or his agent deliberately cancel the bill and make such cancellation apparent on the face of it The bill is discharged and the parties to the bill are released from their liability If the cancellation is not apparent then the instrument remains valid in the hands of holder in due course

Ingham v Primorse A accepted a bill and gave it to B for the purpose of getting it discounted (and hand over the proceeds to A) The bill could not be discounted, hence A upon return of bill tore it in half to indicate cancellation and threw it into the street The said bill was collected and pasted carefully in such a manner that, the bill seemed to have been folded for safe custody rather than cancelled

Then B put back the bill into circulation The Plaintiff (holder in due course subsequently) sued A, on the basis of the bill Held, A is liable

because the tearing of the bill into two pieces was not so clearly manifested on the face of the bill as to indicate to a reasonably careful person that it had been cancelled. Tearing of the instrument must be such that a man of ordinary intelligence and caution should at once come to know that it has been cancelled..

release Holder of the instrument can release the acceptor or endorser from liability This can be done By separate agreement; or By an act which has the effect of discharging them

By payment Most obvious method (i.e. by payment) But the payment should be in due course

By operation of law Due to insolvency In the insolvency proceedings the maker, acceptor or endorser is discharged by the court Then he will be discharged of his liability on the bill

By merger Merger is simply joining When the acceptor of the bill becomes the holder of it in due course (of course in his own right) then the bill is discharged

Lapse of time If the holder does not file a suit for recovery of the bill amount till the lapse of time prescribed by the Limitation law His remedy to enforce his right is extinguished Hence, in effect the acceptor is discharged unless he wants to pay the time barred debt

Discharge of one party It operates only in few cases where circumstances exists so Discharge of one of the several joint drawers would release the remaining also from their liability

Other circumstances Qualified acceptance Sec. 84

Delay in presenting the cheque Material alteration Ss. 87, 88 & 89