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The Law on Negotiable Instruments in India: Summarized

Negotiable Instruments (NI)
The Law of Negotiable Instrument is regulated by The Negotiable Instruments Act ( Hereinafter referred to as NI Act ) 1881, subject to s.31 and 32 of RBI Act.

The S.31 of RBI Act lays down that only the RBI and The Central Govt of India has the power to issue promissory notes payable to the bearer (both demand and order instruments). Also with respect to Bills of Exchange a Bill can be drawn payable to the bearer (but not on demand).

S.32 prescribes punishment for the violation of any provisions of s. 31.

Definition of a Negotiable Instrument by Thomas:
A negotiable instrument is one which is, by law, transferable by delivery or indorsement and delivery such that:

  1. The holder of the instrument becomes entitled to sue in his own name in matters related to that instrument.
  2. The property passes to the transferee for value, notwithstainding any defect in the title of the transferor.

Definition under NI Act
S. 13(1) NI Act : A negotiable instrument under the act means a promissory note, a bill of exchange or a cheque payable either to order or to bearer.

Features of a Negotiable Instrument: By thomas and willis
  1. Transferability:
    The first characteristic of a negotiable instrument is that it is transferable from one person to another any number of times. Transfer of a negotiable instrument operates through two modes: Transfer to the bearer or Transfer to a specific person ( called transfer to order)

    1. A negotiable instrument can be payable to the bearer which means that anyone who has the hold of the instrument is the owner of it.
    2. Or it can be transferred to order meaning that the instrument can be transferred to a specific person by writing his name on the instrument (endorsement).

    According to S.13(2) A negotiable instrument can be made payable to two or more persons collectively or alternatively.
     

  2. Right to Sue:
    The transferee of a negotiable instrument gets the right to sue in his own name. This is different from the transfer of an actionable claim under TPA, where the right to sue of a transferee accrues only after giving a notice to the original debtor or Alternatively, a transferee of a negotiable instrument has to join the original creditor in the recovery action. This is not the case in NIA, and the transferee is need not to join his indorser and can can maintain a suit in his own name.
     
  3. Independent Title:
    The general rule of transfer of property is that (nemo dat quod non habet) I.e a person cannot transfer a better title than the one he has himself. However, in NIA, a transfer made in a bona fide manner shall create complete title in favour of the transferee and he will be deemed to be a holder in due course ( provided that the transferee recieved it in a bonafide manner and was unaware of the title defect).
     
  4. Presumptions in favour of Negotiable Instruments: S.118 of NI Act 1881.
    1. Consideration:
      Its is presumed by law that every Negotiable instrument was drawn for a consideration and in case it was accepted, transferred or indorsed, the same was done for a consideration as well. While in the Indian Contract Act, the burden of proving the consideration lies on the plaintiff, the NI act shifts the burden of disproving the consideration lies on the defendant.
       
    2. Date: it is presumed that every N.Instrument bearing a date was drawn on that date.
       
    3. Time of acceptance:
      It shall be presumed that every accepted bill of Exchange was accepted within a reasonable time after its draw date and it and its maturity.
       
    4. Time of Transfer: Unless, the contrary is proven, it shall be presumed that every transfer of negotiable instrument was made before its maturity.
       
    5. With regard to the endorsements appearing on a negotiable instruments appearing on a negotiable instrument, it shall be presumed that they were made in the order in which they appear on the instrument.
       
    6. In case a negotiable instrument is lost, it shall be presumed that the instrument was duly stamped.
       
    7. Holder is a holder in due course:
      In bona fide transactions, the holder of a negotiable instrument is presumed to be a holder in due course. However in cases of an instrument obtained through fraud or other unlawful means, the burden of proving that the holder is a holder in due course shall lie on the defendant.

Instruments which are not negotiable instruments:
  1. Money orders and postal orders, Deposit receipts.
  2. Share certificates;
  3. Dock warrants
  4. Bills of lading, etc
Some of these instruments are negotiable by indorsement but they do not confer a better title on the transferee than what the transferor has, thus they are called quasi-negotiable instruments.

Three types of Negotiable Instruments:
S.4- Promissory note:

Note: Section 1 of the Act saves from application of this act to other customary negotiable instruments (e.g hundis) drawn according to their prevalent usages and bars the application of this act to such instruments (unless the instrument by explicit declaration suggests otherwise)

Definition:
A promissory note is an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker, to pay certain sum of money only to a certain person, or to the order of a certain person or to the bearer of the instrument.

Parties in a promissory note:
  1. Maker of the promissory note I.e the person who promises to pay.
  2. Payee- in favour whom the note is drawn. I.e the person who is to receive the payment.
     

Essentials of a Promissory Note:

  1. The promissory note must be in writing.
     
  2. The promissory note must contain an express promise to pay: A mere acknowledgement of debt without any promise to pay does not constitute a promissory note. In this case the usage of the words “promise to pay” is not important. However the document must indicate an intention of payment. Intention is the most important factor in such a determination. (case: Mohammad Akbar Khan v. Attar Singh)

    According to Illus (b) to s. 4: A promissory note wherein a debt is acknowledged and specified to be payable on demand constitutes a valid promissory note.

    In Mohammad Akbar Khan v. Attar Singh, Lord Atkin observed that the said illustration had been taken from an early English Case (casborne v. Dutton) wherein the words “to be paid” amounted to a promise to pay. And hence the usage of words “to be paid” or “payable on demand” is valid.
     
  3. The promise to pay must be un-conditional. A promissory note should not be conditional or should only contain a condition that is bound to happen (e.g death). An instrument payable on death is valid since the happening of death is certain although the time is uncertain.
     
  4. The Promissory Note must be Signed by the Maker.
     
  5. The Maker and the Payee must be certain. S.5 (para 4) states that The payee within the meaning of s.4 and s.5 must be a certain person, although may be misnamed or designated by despcription only.

    Case: Lala jelhaji v. bhagu: it was held that where a payee is misnamed but it is possible to identify him, the instrument would be valid promissory note. But where the payee cannot be identified, the instrument would be invalid.
     
  6. The sum payable must be in terms on money only and must be certain. Section 5 lays down that the sum payable in s.4 and 5 must be certain. However charging of future interest at an indicated rate is allowed.
     
  7. Other Essentials:
    1. Date and place on which the pronote was drawn is generally mentioned although not essential in law.
       
    2. Stamping of promissory note is necessary as per the provisions of the Indian Stamp Act in order to be admissible in Evidence.


S.5 Bill of exchange (BoE):
Definition: S.5 defines bill of Exchange as 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 certain other person or the bearer of the instrument.

Parties to a bill of Exchange:

  1. Drawer: The person who is the maker of the bill.
  2. Drawee: On whom the bill is drawn I.e the person who is directed to make a payment.
  3. Payee: The person to whom the payment is to be made.

Essentials of Bill of Exchange:
  1. Must be in writing.
  2. Must contain an order to pay. The order is in an imperative sense suggesting a command or direction unlike a promissory note which is only a promise.
    Case: Ruff v. Webb: The order must be an imperative and not a mere request although it may be politely worded.
  3. The order must be unconditional.
    Case: Dankes v. Deloraine: It was held that a promissory note payable out of a particular fund is conditional and invalid, since it is not certain that the fund will be in existence or sufficient when the Bill of Exchange becomes payable.
  4. The Bill must be signed by the drawer.
  5. The parties (Drawer, Drawee, Payee) must be certain. One person can assume the role of two parties ( Drawer/Drawee can be a same person, Drawer/Payee can be the same person)
  6. The Sum payable must be certain and in terms of Money Only.

Difference between Promissory Note and Bill of Exchange:
  1. Number of Parties: A promissory note involves only two parties. Maker (debtor) and Payee (creditor)
    While a bill of Exchange involves three parties: Drawer, Drawee and Payee.
  2. A promissory note involves a promise.
    While a BoE involves an order/direction.
  3. Acceptance: Acceptance is not required in a promissory note while a Bill of Exchange needs to be accepted by the drawer.
  4. Position of the Maker: The maker of a promissory note stands in an immediate relation with the payee, whereas the drawer of a bill of exchange stands in an immediate relation with the drawee and not the payee.
  5. Payable to bearer: A promissory note cannot be made payable to the bearer while a BoE can be issued to a bearer (provided that it is not payable on demand: S.31 RBI Act)
  6. Notice of Dishonour is required in a BoE but not in a promissory Note.


S.6 Cheque:

Acc to S. 6: A cheque is a bill of exchange drawn on a specified Banker and not expressed to be payable otherwise than on demand. It includes electronic image of a truncated cheque and a cheque in electronic form.

A cheque being a qualified bill of exchange has to to fulfill all the essentials of s.5 along with two more qualifications:

  1. A cheque is always drawn on a bank. I.e the drawee of a cheque is always a bank.
  2. A cheque is always payable on Demand.
A cheque remains valid even if its post dated or ante-dated.

Ante dated Cheque: When the cheque is drawn after the date Mentioned on the cheque. (I.e the cheque becomes payable in the past)

Post Dated Cheque: When the cheque is drawn before the date mentioned on the cheque. (the cheque becomes payable in the future.

Case: Anil Kumar Sawhney v. Gulshan Rai: It was held that a post dated cheque remains a bill of exchange till the date shown on its face, it is only from that date it becomes payable on demand and hence a cheque.

The Negotiable Instrument Amendment act 2015, substituted Explanation 1 to S.6 and included an electronic cheque and a truncated cheque within the meaning of S.6 to bring it in conformity with IT Act 2000.

Difference between A Cheque and a Bill of Exchange:
  1. A cheque is always payable on demand but a Bill of Exchange Payable on demand is Prohibited by the RBI Act.
  2. A cheque is always drawn on a Banker but a Bill of exchange can be drawn on any person/bank.
  3. A cheque does not require acceptance while a bill of exchange does.
  4. A cheque is not required to be stamped while a Bill of Exchange is necessary to be stamped.
  5. A cheque can be crossed to curtail its negotiability while a Bill cannot be crossed.


Liabilities of Parties in a Negotiable Instrument:

  1. Sec 30 Liability of Drawer of Bill
    According to this section, In case of Dishonour of the Bill by the drawee or the acceptor, the drawer is bound to compensate the holder/payee the due amount. However, this liability arises only when a notice of dishonour is received by the drawer.

    S.98 lays down cases in which notice of dishonour to the drawer/maker is not necessary:
    1. When the requirement of notice is expressly waived by the drawer.
    2. When the drawer has countermanded (prohibited) payment on the Bill.
    3. Notice is not necessary when the drawer could suffer no damage for the want of notice.
    4. When the drawer cannot be found or located.
    5. Notice is not necessary when the acceptor(drawee) and the drawer are the same person.
    6. Notice is not required in a promissory note which is non-negotiable.
    7. Notice is not required if the drawee/maker has promised to pay unconditionally the amount due.
       
  2. Liability of Drawee of a Cheque: s.31
    In cases of Cheques, the drawee is always a bank and the section states that, a drawee bank who has sufficient funds of the drawer in its custody, and the funds are proper for a payment against a cheque, such drawee bank is is bound to pay the cheque when required to do so. A failure/default of this obligation would entitle the drawer to compensation for any loss suffered consequentially.

    The relationship between a bank and its customer is that of a creditor and debtor with an obligation on the bank to honour the customer’s cheques as long within the account balance or overdraft limits. Therefore in cases of wilful dishonour by the drawee bank, the drawer-customer is entitled to substantial damages without proving actual damage. The holder of the cheque has no remedy against the drawee-banker, as there is no privity of contract between the payee and the drawee-banker.- Case: Prebn v. Royal Bank of Liverpool.
     
  3.  Liability of Acceptor of Bill and Maker of Note: S. 32
    The maker of a promissory note and the acceptor of a Bill Before Maturity is bound to pay the amount at the maturity according to the tenor of the note or acceptance thereof.

    Also, in case of a bill presented to the drawee for acceptance after maturity, the drawee is bound to pay the amount on demand.

    In case of default, the drawee or maker is liable to pay compensation to the holder. Thus the liability of the maker/drawee is primary in nature. But the section lays down that the liability can be avoided by making a contract against liability.
     
  4. Liability of Indorser. S35 provides that:
    An indorser of a negotiable instrument who has indorsed and delivered the same before maturity is bound to compensate the subsequent holder in case of dishonor by the drawee, acceptor or maker(in cases of pronotes). In case the instrument has been negotiated multiple times, the indorser is laible to every subsequent holder.

    However, this liability of Indorser is subject to the following conditions:
    1. There must be no contract curtailing the liability of the indorser.
    2. The indorsement should not in itself contain words excluding or limiting the indorsers liability.
    3. A notice of dishonour is required to be received by the indorser.
       


5. Liability of Intervening Parties:
S.36 provides that every until satisfaction of the negotiable instrument, every prior party is liable to the holder in due course. All parties include the maker/drawer/drawee-acceptor and all the indorsers.

S.37. provides:
The maker of a note and the drawer of a cheque are liable to the holder as principal debtors and all other parties are liable as sureties.

In case of a bill of exchange:

  • Before acceptance, the drawer is liable as the principal debtor and all other parties are liable as sureties.
  • After acceptance, the drawee-acceptor is liable as the principal debtor and other parties are liable as sureties.


Dishonour of Negotiable Instrument:
A negotiable instrument can be dishonoured two ways:

  1. By non-acceptance in case of a Bill: s. 91
  2. By non-payment in cases of all three instruments: s.92


  1. Dishonour by Non acceptance: s. 91
    A bill is said to be dishonoured by non-acceptance:
    1. When a bill is properly presented for acceptance, and the drawee does not accept it.
    2. When presentment for acceptance is excused and the bill is not accepted.
    3. When the drawee is incompetent to contract, the bill may be treated as dishonoured.
    4. When the drawee gives qualified/conditional accpetance, the bill may be treated as dishonoured.
       
  2. Dishonour by Non Payment : s.92
    When a promissory note, bill of exchange or a cheque is duly presented for payment, and the payment is subsequently denied by the maker or the drawee, the Instrument is said to be dishooured by non-payment.

Effect of Dishonour:
The dishonour of a negotiable instrument entitles the holder/payee to bring a suit for the recovery of money.

Requirements to initiate a suit:
  1. Notice of Dishonour: S.93
    According to the section, when a negotiable instrument is dishonoured, the holder must notify the party/parties to which the holder seeks to make liable.

    However, the same section states that a notice is not requires to be given to the maker of promissory note and the drawee/acceptor of a bill. This is because, these are Principal Debtors with primary liability and they are presumed to have the knowledge of such dishonour.
     
  2. Mode of Notice:
    Acc to s. 94 the notice may be in oral/written form, may be sent by post or any other form provided that it conveys the fact of dishonour explicitly or by reasonable implication.

     
  3. When Notice of Dishonour is Not- Required: S. 98
    Notice Of Dishonour Is Not Required In The Following Cases:
    1. Waiver: When the requirement of notice is waived by the party entitled
    2. When the drawer has countermanded payment, a notice is not required to make the drawer liable.
    3. When the party entitled to notice could not suffer damage for want of notice.
    4. When the entitled party cannot be found.
    5. When the drawer and acceptor are the same.
    6. In case of a non-negotiable promissory note.
    7. When the party liable, knowing the facts, agrees to pay the due amount.

     

DISHONOUR OF CHEQUES DUE TO INSUFFICENCY OF FUNDS
The law on the Dishonour of Cheques is contained in s.138 to s.147.

S.138 to 142 were inserted by the Banking, Financial Institutions and Negotiable Instruments Amendment Act of 1988. Ans s. 143 to 147 were added by the amendment act of 2002.

Sec 138 provides that:
-when a cheque is drawn by a person for any amount of money on an account maintained by him with a banker-
For the payment of such amount to any person for the discharge of any debt or liability;

And if such cheque is returned by the bank unpaid due to:
Insufficiency of Funds

Or Exceeding the overdraft limit.

In such a case, the drawer shall be deemed to have committed an offence.

And the Punishment for such offence shall be an imprisonment of upto two years or with a fine (2x of the cheque) or both.

Case: Modi cements v Kuchil Kumar: Countermanding payment by the drawer shall also amount to dishonour by non-payment under s.138.

However, the Proviso to s.138 lays down certain qualifications in order to make the drawer liable under the offence. These are:
  1. The cheque must be presented by the holder to the drawee bank within 6 months or within the validity of the cheque.
    Case: Anil Kumar Sawhney v. Gulshan Rai: It was held that a post dated cheque is just a bill of exchange untill its maturity and therefore it dosent attract the provisions of 138 untill its maturity.
     
  2. Notice of Dishonour/Demand Notice: The payee or holder of the cheque must make a demand for payment to the drawer thorough a written notice. This notice should be given within 30 days of the receipt of information of dishonor.

    Case: Alavi Haji v. Palapetty Muhammed: when the payee dispatches the notice by registered post with correct address, the service is deemed to be complete according to s.27 of the General Clauses Act. Thus the requirement of notice under 138 shall stand fulfilled.
     
  3. The drawer of the cheque fails to make payment of the said amount of money to the payee/holder within 15 days of the receipt of the notice.

    S.139- presumption in favour of the holder:
    When a cheque is dishonoured, it shall be presumed by a rebuttable presumption that the cheque was recieved in discharge of a debt or laibility.

    S.140-Mens Rea not required.
    S.140 provides that it shall not be a defence available to the the drawer that he had no reason to believe that the cheque issued by him would be dishonoured. This section disposes off with the requirement of mens rea for prosecution under 138.

Sec 142: Procedure for Initiating Prosecution under S. 138
S.142 (clause 1) lays down the procedural requirements for prosecution. They are:

  1. A written complaint needs to be filed by the payee/holder.
  2. The complaint must be made within 30 days from the arising of cause of action (under 138 proviso c- after the non-payment upon notice).
  3. The complaint must be made to the Court of a Metropolitan Magistrate or JM Class 1. Courts lower than this do not have the power to take cognizance of offences under 138.
     
Territorial Jurisdiction In Cheque Bounce Cases:
The first case on territorial jurisdiction aspect of cheque bounce cases was K. Bhaskaran v. Sankaran Vaidhyan Balan. The Court held that the complainant can file case in any of court having jurisdiction over any of those local areas within the territorial limits of which any one of the following five acts was done:
  1. Drawing Of Cheque;
  2. Presentation Of Cheque To The Bank;
  3. Dishonour By The Drawee Bank;
  4. Giving Notice To Drawer By Demanding Payment; And
  5. Failure Of Drawer To Make Payment Within 15 Days Of Receipt Of Notice.

However, a superior bench in Dasharath Rathore v. State of Maharashtra overruled this and held that only the court in whose local jurisdiction the cheque is dishonoured by the drawee bank/branch has jurisdiction.

This decision created a lot of problems with jurisdiction and Vide 2015 amendment to Negotiable Instruments Act, the above judicial dictum was nullified and clause 2 to s.142 was inserted.

According to s 142(2); the offence under section 138 shall be inquired into and tried only by a court within whose local jurisdiction:

  1. In case where the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, maintains the account, is situated; or
  2. Where the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

Sec 143: Summary Provisions:
This section provides that the criminal proceedings under this act shall be conducted summarily as per the Summary Provisions of The CRPC (s262 to 265)

S.147: Compounding
According to s 147 every offence under NI Act is compoundable upon the compromise and consent of the parties.

Case: Meters and Instruments P.LTD v . Kanchan Mehta:
Generally compounding requires the consent of both parties, but where it appears to the court that the complainant has been duly compensated, it in the interests of justice can close the proceedings and discharge the accused.

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