Negotiable Instruments Act, 1881 ISBS

8/10/2019 Negotiable Instruments Act, 1881 ISBS

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Negotiable

Instruments Act, 1881

1Presented by Advocate N.P . Noronha


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Object of the Act

The main object of the Negotiable Instruments Act isto legalise the system by which instrumentscontemplated by it could pass from hand to hand bynegotiation like any other goods. The purpose of the

Act was to present an orderly and authoritativestatement of leading rules of law relating to thenegotiable instruments To achieve the objective ofthe Act, the Legislature thought it proper to make

provision in the Act for conferring certain privilegesto the mercantile instruments contemplated under itand provide special procedure in case the obligationunder the instrument was not discharged.

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Meaning The word negotiable means transferable from one person to

another in return for consideration and instrument means awritten document by which a right is created in favour of some

person. Thus the term negotiable instruments literally means a

written document which creates a right in favour of somebody

and is freely transferable. Free negotiability is an important

characteristics of a negotiable instrument. A negotiable instrument is a document which entitles a person to

a sum of money and which is transferable from one person to

another by mere delivery or by indorsement and delivery.

The term negotiable instruments has not been defined in theNegotiable Instruments Act, but Sec. 13 of the Act gives its

meaning. According to Sec. 13, a negotiable instrument means a

promissory note, a bill of exchange or a cheque payable either toorder or bearer.

Presented by Advocate N.P.Noronha 3


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Characteristics of a Negotiable

Instrument1. Negotiable instruments must be in writing

2. Freely Transferable The property in a negotiable instrument

passes from one person to another by delivery, if the instrument is

payable to the bearer and by indorsement and delivery if it is

payable to order.3. Title of holder free from all defects A person, taking an

instrument bona fide and for value, known as a holder in due

course, gets the instrument free from all defects in the title of the

transferor.

4. Recovery The holder in due course can sue upon a negotiableinstrument in his own name for the recovery of the amount. It is not

necessary for him to give any notice of transfer to the party liable

for payment on the instrument



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Instrument5. Presumptions - Certain presumptions apply to all negotiable instruments,unless contrary is proved. These presumptions are dealt with in Sec. 118

and 119 which are as follows

a. Consideration Every negotiable instrument is presumed to have been

made, drawn, accepted, indorsed, negotiated or transferred for

consideration.b. Date Every negotiable instrument bearing a date is presumed to have

been drawn on such date.

c. Time of acceptanceWhen a bill of exchange is accepted, it is presumed

that it was accepted within a reasonable time of its date and before its

maturity.d. Time of transferEvery transfer of a negotiable instrument is presumed to

have been made before its maturity.



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Instrumente. Order of indorsement The indorsement appearing upon a

negotiable instrument are presumed to have been made in the order

in which they appear thereon.

f. Stamp When an instrument has been lost, it is presumed that it

was duly stamped.g. Holder presumed to be a holder in due course Every holder of a

negotiable instrument is presumed to be a holder in due course.

h. Proof of protest In a suit upon an instrument which has been

dishonoured, the Court, on proof of the protest, presumes the fact of

dishonour, until such fact is disproved.The presumptions are rebuttable by evidence. If anyone challenges any

of these presumptions, he has to prove his allegations. The

presumptions would not be applicable to a case where an instrument has

been obtained by an offense, fraud or unlawful consideration.

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Section 4. Promissory Note

A PromissoryNote is an instrument in writing (not

being a bank-note or a currency-note) containing an

unconditional undertaking, signed by the maker, to

pay a certain sum of money only to, or to the orderof, a certain person, or to the bearer of the

instrument.

The person who makes the promissory note and promisesto pay is called the maker.

The person to whom the payment is to be made is called

the payee

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I l lustrat ions(a) I promise to pay b or order Rs. 500.

(b) I acknowledge myself to be indebted to B inRs.1,000, to be paid on demand, for value

received.(c) Mr. B, I.O.U. Rs.1,000.

(d) I promise to pay B Rs. 500 and to deliver tohim my black horse on 1st January next.

The instruments marked (a) and (b) are promissorynotes. The instruments marked (c) and (d) are notpromissory notes.

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Usual form of Promissory note

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Rs. 500/- Pune, 1stAugust 2012

Three months after date, I promise to pay Mr. Rahul

or Order, the sum of rupees five hundred for value received

Mr. Arjun


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Essential features An instrument is a promissory note if there are present the following

elements:-

1. Writing : The first essential is that all negotiable instruments must be inwriting. An oral engagement to pay a sum of money is not an instrument,much less negotiable.

2. Promise to pay : Secondly, it must contain a promise to pay. A mereacknowledgement of debt is not a promissory note. I.O.U., E.A. Gay, thesum of seventeen dollars for value received.Has been held not to be a

promissory note. A mere receipt for money does not amount to apromissory note, even though it might contain the terms of repayment. InMange Lal Vs. Lal Chand, AIR 1995, Rajasthan High Court has heldthat a document which was in the form of a letter acknowledging receipt ofcertain sums and affixed with 20 paise revenue stamp was held to be areceipt and not a promissory note. In the case of Muthu Sastrigal Vs.Visvanatha AIR 1914 Madras High Court , it has been held that a

document containing the following words Amountof cash borrowed of youby me is Rs.350. I shall in two weeks time returning this sum with interest,get back this letter.Has been held to be a promissory note because thereis an unconditional undertaking to repay the borrowed money.

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Essential features 3. Unconditional : Thirdly, the promise to pay the money should be

unconditional, or subject only to a condition which according to theordinary experience of mankind is bound to happen. Thus in BeardsleyVs. Baldwin (1741), a written undertaking to pay a sum of money withinso may days after the defendantsmarriage, was not recognised as apromissory note because possibly the defendant may never marry andthe sum may never become payable. Similarly in Roberts Vs Peake(1757), an action was bought upon a promissory note made in the

following form.We promise to pay AB 116.11s value received, on the death ofGeorge Hindshaw, provided he leaves either of us sufficient money topay the said sum or if we shall be otherwise able to pay.

The court pointed out that if the note had merely been made payable onthe death of G.H., it would have been a good promissory note, becausedeath is an event so certain and necessary that it is bound to happen

and therefore the note must have become payable at one time or theother. But the other condition that it would be payable provided therewould be sufficient funds left behind made the instrument bad, becausethat was an uncertain event, and a note payable on an uncertaincontingency can never be a negotiable instrument.

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Essential features

4. Money only and a certain sum of money:Fourthly, the instrument must be payable in money and moneyonly. If the instrument contains a promise to pay something otherthan money or something in addition to money, it will not be apromissory note. The sum of money payable must also becertain. In Smith Vs Nightingale (1818) a promissory note

made in the following form was held bad. Ipromise to pay to JEthe sum of 65 with lawful interest for

the same, 3 months after date, and also all other the sums whichmay be due to him.

It was held that the instrument was too indefinite to beconsidered a promissory note. It contained a promise to pay

interest for a sum not specified and not otherwise ascertainedthan by reference to the defendantsbook.

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Essential features 5. Certainties of parties:

Fifthly, the parties to the instrument must be designated withreasonable certainity. There are two parties to a promissory note, viz ,the person who make the note and is known as the maker and thepayee to whom the promise is made. Both the maker and the payeemust be indicated with certainity on the face of the instrument. In BrijRaj Sharan Vs. Saha Raghunandan Sharan AIR 1955, Rajasthan HC,a letter was addressed to A continuing the following statement.

In your account Rs. 4668 15 0 are due from my son MaheshChandra, I shall pay the amount by December 1948. You restassured.

It was contended that it should not be treated as a promissory notebecause the person to whom the amount was to be paid was notindicated therein. However, C J Wanchoo, holding it be a good note,

said Bylooking to illustration bof Section 4it I cleared that if theperson to whom the payment is to be made is certain from the wordsused in the document, the fact that the name is not mentioned afterthe words I shall pay would not mean that the payee is uncertain.Since the letter was addressed to A it was clear that A was intended tobe the payee

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Essential features

6 Signed by the maker:

Lastly, the promissory note should be signed by the maker. Signaturemay be on any part of the document. Where an instrument is in thehand writing of a person and it is addressed by him to another, that issufficient evidence of his signature.

To consider whether a document is a promissory note or not thefollowing tests are helpful :

(i) Is the sum to be paid a sum of money and is that sum certain ?(ii) Is the payment to be made to or to order of a person who is certain or to

the bearer of the instrument ?

(iii) Has the maker signed the document ?

(iv) Is the promise to pay made in the instrument the substance of theinstrument ? and

(v) Did the parties intend that the document should be a promissory note ?

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Section 5 : Bill of Exchange

A bill of exchange is an instrument inwriting 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.

15Presented by Advocate N.P.Noronha


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A bill of exchange requires three parties1. The person who makes the bill of exchange, called the

Drawer

2. The person to whom it is addressed, called the Drawee

3. The Payee

Sometimes the drawer and the payee are the same person

as where is bill is drawn Payto me or my order. Therefore

can be only two parties to a bill of exchange however not

less than that.It was held in the case of Clutton V/s. Attenborough, 1897

that where the payee name in a bill is of a fictitious or nonexisting person, the bill is treated as payable to the bearer.

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Form of Bill of Exchange

Ram of Pune buys goods on credit from Shyam from Mumbai for

Rs. 500/- to be paid 3 months after date. Shyam buys goods from Krishna

of Nasik for Rs. 500 on similar terms . Now Shyam may order Ram to pay

the sum of Rs. 500/- to Krishna. The order will be a bill of exchange

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Rs. 500/- Mumbai 1st

August2012

Three months after date pay to Krishna or order the sum of rupees five

hundred, for value received

ToRam AcceptedPune Krishna Sd/-

Stamp

Shyam


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Characteristics and Requirements

An essential character of a bill of exchange is that it contains an

order to accept or to pay and that the acceptor should accept it, inthe absence of such a direction to pay, the document will not be abill of exchange or a hundi.

1) It must be in writing

2) The bill of exchange must contain an order to pay. The order topay may be in the form of a request, but it must be imperative. InRuff Vs Webb(1974), the plaintiff Ruff was a servant of defendantWebb. The defendant dismissed him from service and for hiswages gave him a draft in the following words: Mr Nelson willmuch oblige Mr Webb by paying to J. Ruff or order, twentyguineas on his account.

Lord Kenyon was of the opinion that paper was a bill of

exchange , that it was an order by one person to another to paymoney to the plaintiff or his order. It is quite apparent that thelanguage of the draft was very polite, but it has been said that theintroduction of the terms of gratitude does not destroy the promise(or order) to pay.



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Characteristics and Requirements But if the language of the draft does not show any orderto pay,the

draft will not be a bill of exchange. In Little Vs Slackford, thedefendant issued a paper addressed to the plaintiff in the followingwords:

MrLittle, please to let the bearer have 7 , and to place them to myaccount, and you will oblige. Yours humble servant, R. Slackford.

It was held that the paper does not purport to be a demand made bya party having a right to call on the other party to pay. The fair

meaning is you will oblige by doing it. The order must be such as to require the other to pay the money at

all events. Merely to give him the authority to pay is not sufficient.



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Difference between Promissory Note

and a Bill of ExchangePromissory note Bill of Exchange

In a promissory note there are twoparties i.e. the maker and payee

In a bill of exchange there are three partiesthe drawer, drawee and payee

A promissory note contains an

unconditional promise to pay

A bill of exchange contains an unconditional

order to pay.

The maker of a promissory note is thedebtor himself and he undertakes to pay.

The drawer of a bill of exchange is the

creditor who directs the drawee i.e. hisdebtor to pay.

A promissory note cannot be madepayable to the maker himself.

In a bill the drawer and the payee may beone and the same person

The liability of the maker of a promissorynote is primary and absolute

The liability of the drawer of a bill is

secondary and conditional as the bill needsacceptance.

A note needs no acceptance as it issigned by the person who is liable to pay

A bill payable after a certain period must be

accepted by the drawee before it is

presented for payment.

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Section 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 truncatedcheque and a cheque in the electronic form.



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Section 6 : Cheque

Explanation IFor the purpose of this section, the

expression(a) a cheque in the electronic form means a cheque

which contains the exact mirror image of a papercheque, and is generated, written and signed in a securesystem ensuring the minimum safety standards with theuse of digital signature (with or without biometricssignature) and asymmetric crypto system ;

(b)a truncated cheque means a cheque is truncatedduring the course of a clearing cycle (truncation means

make short), either by the clearing house or by the bankwhether paying or receiving payment, immediately ongeneration of an electronic image for transmission,substituting the further physical movement of the chequein writing.



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What are Biometric signatures

Biometric signatures are based upon

recording various characteristics of ones

signing style to carry out the process of

identification in the future. Amount ofpressure employed, angle of writing,

formation of letters and other traits, which are

categorized as behavioural biometrics, form

the basis of biometric signature recognitiontechnology.

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Section 6 : Cheque

Explanation II -- For the purpose of this section, the

expression clearing house means the clearing housemanaged by the Reserve Bank of India or a clearing houserecognised as such by the Reserve Bank of India.



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Post dated cheque

A post dated cheque remains a bill of

exchange till the date written on the face of it.

On that date it becomes a cheque. One of the

effects is that liability for criminal prosecutionunder Section 138 would not be attracted and

6 months period would be reckoned from the

date appearing on the cheque.



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Distinguish between bill of

exchange and chequeBill of Exchange

Cheque

A bill of exchange may be drawnon any person, including a banker

A cheque is always drawn on abanker

A bill of exchange must beaccepted before the drawee can

be called upon to make paymentupon it.

A cheque does not requireacceptance

Every bill of exchange which is not

expressed to be payable ondemand is entitled to 3 days ofgrace.

A cheque is not entitled to any

days of grace.

A bill is never crossed

A cheque may be crossed

A bill of exchange requires stamp

duty

A cheque does not require stamp

duty

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Crossing of chequesThere are two types of cheques

Open cheque Crossed cheques

Open chequeA cheque which is payable in cash across the counter

of a bank is called an open cheque. When an open cheque is in

circulation it has a great risk, as if the holder loses it, its finder can go tothe bank and encash it.

Crossed chequea crossed cheque is one on which two parallel lines

are drawn. The payment of such a cheque can be obtained only

through a banker. Thus crossing is a direction to the drawee bank to

pay the amount of money on a crossed cheque generally to a banker or

a particular banker so that the party who obtains the payment of thecheque can be easily traced.

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Types of Crossing

1. General CrossingA cheque is said to be

generally crossed when it bears across its

face an addition of the words and company

between two parallel lines with or without thewords not negotiable.

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(2)andco

mpany

(1)

(3)&Co.

(4)Notneg

otiable


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Types of Crossing

2. Special Crossing When a cheque bears

across its face an addition of the name of a

specific banker, either with or without the words

not negotiable. The cheque is crossedspecially.

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(1)Banko

fIndia

(2)CanaraBank

(3)Banko

fIndia

Notneg

otiable


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Types of Crossing

Restrictive Crossing Another type of

crossing has been adopted by commercial

and banking usage is crossing by using

words A/c. Payee.The words A/c. payee on a cheque are a

direction to the collecting bank that the

amount collected on the cheque is to becredited to the account of the payee.

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Not negotiable

The meaning of the words not negotiable

is that, anyone who takes the cheque

marked notnegotiabletakes it at his own

risk.

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Who are the parties to a

negotiable instrument

Parties to a bill of exchange Drawer,

Drawee, Acceptor, Payee, Holder, Indorser,

Indorsee, Drawee in case of need andAcceptor for honour.

Parties to a promissory noteMaker, Payee,

Holder, Indorser, Indorsee,

Parties to a chequemaker, drawee, Payee,

Holder, Indorser and Indorsee.

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Who is a maker , drawer

The person who makes a promissory

note is called the maker.

The person who makes or draws abill of exchange or cheque is calleddrawer.

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Who is a Drawee, Acceptor

The person on whom the bill of exchange is

drawn and who is directed to pay is called the

drawee.

In case of cheque, a drawee is always thebanker. A cheque does not need acceptance.

In case of bill of exchange, the drawee

becomes the acceptor when he accepts thebill i.e. he signs his assent upon the bill.

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Who is a Payee

The person named in the bill, note or cheque,

to whom or to whose order the money is to

be paid is called the payee.

In a bill of exchange or cheque, the drawermay himself be the payee. When the payee is

some fictitious person or non existing person,

the bill is treated as payable to bearer.

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What is Indorsement

Indorsement in the literal sense means

writing on an instrument.

According to the Negotiable Instruments Act

indorsement means writing of a personsname other than the maker on the face or

back of a negotiable instrument or on a slip of

paper annexed thereto, for the purpose ofnegotiation.

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Indorser & Indorsee

The person who indorses the bill, note or

cheque to another is called indorser.

The person to whom the bill, note or cheque

is indorsed is called indorsee.

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Drawee in case of need When in the bill or in any endorsement thereon

the name of any person is given in addition to thedrawee to be resorted to in case of need - such

person is called a Draweein case of need.

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Rs. 500/- Mumbai 1stAugust 2012

Three months after date pay to Krishna or order the sum of rupees five

hundred, for value received

To

Ram Accepted Stamp

Pune Krishna Sd/-Shyam

In case of needPunjab National Bank


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Holder1. The holder of a promissory note, bill of

exchange or cheque means any person who isentitled in his own name

To possession and

To receive or recover the amount due thereon

from the parties.

2. In order to be entitled to receive or recover the

amount due, the holder must be

named as payee or

named as the indorsee in case the instrument is payable

to order.

The bearer in case the instrument is payable to bearer.

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Section 9 Holder In Due Course

Any person is a holder in due course if he

fulfils the following conditions1. By giving consideration he became the

a) Possessor when the instrument was payableto bearer or

b) Payee or indorsee when the instrument waspayable to order

2. He obtained the instrument before maturity

3. He took the instrument in good faith and withoutnotice of any defect either in the instrument orin the title of the person negotiating it to him.



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Negotiation

The transfer of an instrument by one party to

another so as to constitute the transferee a holder is

called negotiation.

One of essential characteristics of a negotiable

instrument is that it is freely transferable from oneperson to another.

Transfer may take place by

1. Negotiation or

2. Assignment



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Transfer by Negotiation

Section 14 which defines negotiations reads as

follows:

Negotiation - When a promissory note, bill of

exchange or cheque is transferred to any

person, so as to constitute that person theholder thereof, the instrument is said to be

negotiated.

There are two methods of transfer by

negotiation1. Negotiation by delivery

2. Negotiation by indorsement and delivery

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Negotiation by delivery

Negotiation by delivery- An instrument which

is payable to bearer is negotiated merely by

delivery.

Example - A is the holder of a negotiableinstrument payable to bearer. He delivers it to

Bsagent against the price of goods purchased

from B. The instrument has been negotiated.

Nego t iat ion by indorsement and del ivery -An

instrument payable to order can be negotiatedby indorsement and delivery

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Assignment

Transfer by Assignment - When a person

transfers his right to receive the payment of a

debt assignment of debt takes place.

Therefore when the holder of an instrumenttransfers it to another so as to confer a right

on the transferee to receive the payment of

the instrument, transfer by assignment takes

place.

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Section 15 Indorsement

Indorsement in the literal sense means writing on aninstrument.

According to the Negotiable Instruments Act

indorsement means writing of a persons name other

than the maker on the face or back of a negotiableinstrument or on a slip of paper annexed thereto, for the

purpose of negotiation.

The person who signs the instrument is called the

indorser

The person to whom the instrument is indorsed is calledthe indorsee.



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Who can indorse

The first indorsement can be made by the payee.

Subsequent indorsements can be made by any

person who becomes the holder of the instrument.

If the bill of exchange is drawn, payable to thedrawersorder, the first signature of the drawer as

a drawer is not an indorsement. If he signs the bill

second time for the purpose of negotiating it, the

second signature would be indorsement. A drawer, payee, indorsee may indorse and

negotiate a negotiable instrument.

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Essentials of a valid Indorsement

1. It must be on the instrument itself. If there is nospace on the instrument then it must be made on

a separate slip or paper attached to the

instrument.

2. It must be signed by the indorsement for thepurpose of negotiation.

3. It must be completed by the delivery of the

instrument. The delivery of the instrument withthe intention of passing the property in it to the

indorsee is important. The delivery must be made

by the indorser himself or someone on his behalf.

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Types of Indorsements

1. Blank or general indorsement

2. Full or special indorsement

3. Restrictive indorsement

4. Conditional indorsement

5. Partial indorsement

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Blank or general EndorsementsAn indorsement is said to be blank or general if the

indorser signs his name only on the face or back ofthe instrument.

A blank indorsement specifies no indorsee and theinstrument in consequence becomes payable to

bearer even though it was originally payable toorder.

Example A bill is payable to the order of Ram.Ram signs on the back of the bill. This is an

indorsement in blank by Ram. In this case theproperty in the bill may pass by mere delivery as ifthe bill is payable to bearer.



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Full or special endorsement

If an indorser signs his name and adds a directionto pay the amount mentioned in the instrument toor to the order of, a specific person, theindorsement is said to be in full.

Thus Pay to Ram or order or Pay to Ramfollowed by the signature of the indorser is anindorsement in full.

An indorsement in blank may be converted into anindorsement in full.

Eg. A is the holder of a bill which is indorsed by Bin blank. So A is the indorsee and B is theindorser. If A writes over Bssignature Payto C ororder. There is an endorsement in full from B to C.



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Restrictive Indorsement

An indorsement is said to be restrictivewhen it prohibits or restricts the further

negotiability of a negotiable instrument.

The indorser may, by express words, restrictor exclude the right of future negotiation or

merely constitute the indorsee an agent to

indorse the instrument, or receive itscontents for the indorser or some other

specified person.



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Restrictive Indorsement

Illustrations

B signs the following endorsements on different negotiableinstruments payable to bearer:

a) Paythe contents to C only

b) PayC for my use.

c) I payC or order for the account of Bd) Thewithin must be credited to C

These endorsements exclude the rights of furthernegotiation by C

e) PayC.f) PayC value in account with the Oriental Bank.

These endorsements do not exclude the rights of furthernegotiation by C.



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Sans Recours Indorsement

The holder of a bill may indorse a bill in such a way that he does

not incur liability of an indorser to the indorsee.The holder can limit his liability by adding the words Sansrecoursi.e. without recourse.

Eg. PayA or order without recourse to meor

PayA or order Sans recours.

If in case the instrument is dishonoured, the subsequent holderor the indorsee cannot look to the indorser for payment of thesame.

However if an endorser excludes his liability and afterwardsbecomes the holder of the instrument, all intermediate endorsers

are liable to him.Eg. A the holder of a bill. Indorses it sans recours to B. Bindorses it to C, C to D, D to E and E to A. A can recover theamount of the bill from B,C,D or any of them.

u54Presented by Advocate N.P.Noronha

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Partial Indorsement When an indorsement purports to transfer to the

indorsee only a part of the amount of instrument , theinstrument is said to be partial. However a partialindorsement does not operate as a negotiation of theinstrument.

An instrument cannot be indorsed for a part of itsamount.

Example:

A is the holder of a bill for Rs. 1000/-. He indorses itPayB or order Rs. 500/-.

This is a partial indorsement and is invalid for thepurpose of negotiation.


A d


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Noting And Protest

Sec. 99 When a promissory note or bill of

exchange has been dishonoured by non-acceptanceor 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. Such note must be made within a reasonable time

after dishonour and must specify the date of

dishonour, the reason, if any, assign for such

dishonour or if the instrument has not beenexpressly dishonoured the reason why the holder

treats it as dishonoured, and the notaryscharges.



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Noting And Protest When a promissory note or a bill of exchange has been dishonoured

by non acceptance of non payment, in order to create a proof of thisfact the holder may approach a notary public and have the fact ofdishonour noted either on the instrument itself or on a separatepiece of paper or partly upon each.

Noting must be made within a reasonable time after dishonour.Upon such request being received the notary inquires from the

party liable to pay and if he still dishonours, the notary makes a noteof the fact of dishonour. The note should contain the followingparticulars: (1) The fact that the instrument has been dishonoured;(2) That date on which it was dishonoured; (3) The reason, if anyassigned for the dishonour; 4) If the instrument has not beenexpressly dishonoured the reason why the holder treats it asdishonoured, and (5) Notary charges.

The advantage of noting is that it creates evidence of the fact ofdishonour.



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Protest Sec: 100 When a promissory note or a bill or

exchange has been dishonoured by non acceptance ornon payment, the holder may, within a reasonable time,

cause such dishonour to be noted and certified by a

notary public. Such certificate is called a protest.

Protest for better security When the acceptor of a bill ofexchange has become insolvent, or his credit has been

publicly impeached before the maturity of the bill, the

holder may, within a reasonable time, cause a notary

public to demand better security of the accepter, and on

it being refused may, within a reasonable time, cause

such facts to be noted and certified as aforesaid. Such

certificate is called a protest for better security.



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Protest Protest for better security is a measure of protection

against the consequences of the acceptersinsolvency. When the accepter of a bill of exchangebecomes insolvent all his credit has been publiclyimpeached, and this has happened before thematurity of the bill, the holder may approach a

notary public and ask him to demand from theacceptor a better security than the mere bill. Thisshould be done within a reasonable time. If theacceptor refuses to oblige with any security, theholder should have the fact of refusal noted and

certified by the notary. Such a certificate is called aprotest for better security. This should be donewithin a reasonable time after the acceptors refusalto provide security


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Contents of Protest

Section 101 requires a protest to contain certain particulars

for its validity. The particulars are as follows:1. It should contain the instrument itself or a literal transcript

of it and of everything written or printed on the instrument.

2. The name of the person for whom and against whom theinstrument has been protested, that is, the name of theparty making the protest and against whom the protest ismade.

3. It should contain a statement that acceptance, or paymentor better security has been demanded from such person by

the notary public, the terms of his answer, or a statementthat he gave no answer or that he could not be found.


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Contents of Protest4. When the protest is against the dishonour of a bill or note, the

protest should specify the time and place of dishonour. Whenthe protest is against refusal of better security, the place andtime of refusal should be noted.

5. The signature of the notary public making the protest.


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Dishonour Of Cheques

Penalties in case of dishonour of cheque for insufficiency ,

etc. of funds in the account: Sec. 138 dishonour of cheque for insufficiency, etc. of funds in

the account where any cheque drawn by a person on anaccount maintained by him with a banker for payment of anyamount of money to another person from out of that account forthe discharge, in whole or in part, of any debt or other liability, is

returned by the bank unpaid, either because of the amount ofmoney standing to the credit of that account is insufficient tohonour the cheque or that it exceeds the amount arranged to bepaid from that account by an agreement made with that bank,such person shall be deemed to have committed that offence

and shall, without prejudice to any other provision of this Act, bepunishable with imprisonment for a term which may extend to 2years of with fine which may extend to twice the amount of thecheque or with both:


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Dishonour Of Cheques Provided that nothing contained in the section shall apply

unless

(a) The cheque has been presented in the bank within aperiod of 6 months from the date on which it was drawnor within the period of its validity, which ever 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 30 days of the receiptof information by him from the bank regarding the returnof 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 thecase may be , to the holder in due course of the cheque ,within 15 days of the receipt of the said notice.




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Dishonour Of Cheques The Supreme Court in the case of Electronics Trade and

Technology Development Corporation Limited Vs IndianTechnologists and Engineers Electronics Private Limited (1996)

has observed that the object of Section 138 is to inculcate faith in theefficacy of banking operations and credibility in transacting business onnegotiable instruments. Despite civil remedy, Section 138 intended toprevent dishonesty on the part of the drawer of a negotiable instrumentin drawing a cheque without sufficient funds in his accounts and ininducing the payee or holder in due course to act upon it. Section 138

is based upon the presumption that one commits the offence if heissues the cheque dishonestly. Once such a cheque againstinsufficient funds has been drawn and issued to the payee and thepayee has presented the cheque and thereafter, if any instructions areissued to the bank for non payment and the cheque is returned to thepayee with such an endorsement, it amounts to dishonour of thecheque and it comes within the meaning of Section 138. If, after the

cheque is issued to the payee or to the holder in due course andbefore it is presented for encashment and the drawer informs thepayee not to present the cheque and yet the payee or holder in duecourse returns the cheque to the bank for payment and when it isreturned on instructions, Section 138 does no get attracted.


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In a subsequent ruling on the point, in the case of

Goa Plast (P. Limited) Vs Chico Ursula Dsouza ,AIR 2004 the Supreme Court referred to this pointof the statement and sad that if this were acceptedas good law, the very object of introducing section138 would be defeated.

In another Supreme court decision, the object havebeen reinstated as follows: Chapter XVII containingSs 138142 was introduced in the Act by the 1988amendment with the object of inculcating faith in theefficacy of banking operations and giving credibility

to negotiable instruments in business transactions.The said provisions were intended to discouragepeople from not honouring the commitments by wayof payment through cheques.


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Dishonour Of ChequesIngredients of Liability under Section 138

The ingredients of liability under the Section have been stated in terms ofthe following points.

The cheque is drawn on the bank for the discharge of a legallyenforceable debt or other liability.

The cheque is returned by the bank unpaid.

The cheque is returned unpaid because the amount available in thedrawersaccount is insufficient for paying the cheque.

The payee has given a notice to the drawer claiming the amount within30 days of the receipt of the information form the bank.

The drawer has failed to pay within 15 days from the date of the receiptof the notice.

If the aforementioned ingredients are satisfied then the person who hasdrawn the cheque shall be deemed to have committed an offence.

Punishment Maximum 2 years imprisonment on the defaulting party with fine which

may extend to twice the amount of cheque or with both.

Negotiable Instruments Act, 1881 ISBS

Documents

Transcript of Negotiable Instruments Act, 1881 ISBS