Atul Depak

'Al-Haqqu min Rabbik' (Truth comes from God alone)

BANKING LAW & NEGOTIABLE INSTRUMENTS

Photo Credit: Ethan McArthur, Unsplash

Mid-Term Syllabus-Whole NIA 

Relevant Books for NIA- 

  • Khirgamwala 
  • Bhasham 
  • Avtar Singh 

Relevant Books for Banking Law

  • Paget on Bankings 
  • Alinger on Modern Banking Law

Wrt Bank Investment 

  • Goode on Legal problems, credit and security(first 3 chapters)

INTRODUCTION-

Banking law like Admin law is an applied topic. There is no specific statute. 80% understanding of Banking relate to understanding of property. (Read Transfer of Property Act on mortgages and equity) 90% litigations relate to property matter. 

Principles of Equity, Trust and Property matters here too.

Money

  • Storehouse of Value-To do away with the barter system
  • Unit of Account-For people to maintain how much they owe to each other
  • Medium of Exchange-Money came to used as a medium of exchange for buying and selling of commodities. 

With time units of bullion developed as money. In essence, money is a property. It can be inherited, transferred. Because it is a medium of exchange, many civilisations like Islam prohibited usury. The rationale was that you cannot earn money on money. Because it is a medium of exchange, much of it has to look same for others to believe its genuineness and do transactions immediately. Certain properties of properties do not apply to money. The rule ‘No one can give to another person better title than what he himself possess’ (nemo dat quod non habet) does not apply to money because it is a medium of exchange and the person taking it is not expected to verify the ownership of the giver. 

Legal Tender issued by State 

State used to earn seignorage on money. Bullion (metal coins) was inconvenient for the purpose of exchange. So Alternatives were sought.  A means of promise to pay was evolved so that instead of paying through coins people could acknowledge the debt and promise to pay as and when required. Such promissory notes were first issued in China. Payment through coins would involve transportation over long distances and hence was inefficient in many cases. 

Muhammad bin Tughlaq also tried to introduce token currency but it failed due to forgery. But in China it went for a quite a long time. 

In Europe, the rulers did not intervene but nobility used to keep the coins with goldsmith and in return for that goldsmith would issue-‘I owe you’ or IOU (Eg-IOU 10K Pounds)to whosoever deposited the coins with them. At the initial stage, the goldsmiths charged fees on these IOUs, but soon they realised that what was deposited was rarely called upon to be paid because IOU itself would circulate as money. But with time, this mere acknowledgement of debt and promise to pay developed as money itself. UK Parliament declared it to be money and doctrine of nemo debt was applicable on it. These Promissory notes are a kind of Negotiable instruments

Important-NI means that instrument concerned can be transferred to someone else by mere delivery. 

If I sign a debt bond which gets lost, that would not affect the original debt. The debt merges in that debt bond. If that debt bond is transferred to some else, I would still have to pay him. It means that debts are assignable.

The debt bond is not evidence of debt but debt itself. What if someone else finds that paper and goes and pays for his coffee with it? The coffee shop owner would have full right over it. The piece of paper gives rise to the possibility that someone else has a better title to it than the person owning it, this gives rise to negotiable instruments. 

Initially the goldsmith would charge a fee for that IOU. Over a period of time, he realises that people rarely made claim for the gold and paid with IOUs only. That IOU would start circulating as money. So goldsmiths started making money by lending the golds deposited to them. 

BILLS OF EXCHANGE (BoE)

Rich people and merchants deposited their money with trustworthy goldsmiths and bankers in their town or locality.  These merchants moved extensively to other nations for trade and mercantile purposes and sometimes they would require money in those locations.  In such cases it used to be difficult for the goldsmith of their hometown to pay personally, so the goldsmiths concerned developed credit systems, networking, linkages and patronages in other nations. So when their clients required money in other states, they would simply write to their patrons, debtors or fellow goldsmiths in other nations to pay to their respective clients. This type of instrument came to be called “Bills of exchange” The whole system was based on ‘Trust’ and ‘Honour’

BOE became very popular in Europe.  Fares were organised where goods were exchanged and people would make payment in terms of Bills of Exchange drawn in favour of some other person. When the fare would come to end, people would collect the net amount payable from the person concerned on whose behalf the payment was made. 

This is how banks evolved. BOEs were also treated as money.

PROMISSORY NOTES (PN)

Originally Promissory notes were issued by goldsmiths who later converted them into banks. These notes were payable on demand and payable to the bearers. By issuance of bank notes, banks earned profits. The value of bank notes depended on the trust and reputation of the banker. Trust would be inversely proportional to the distance. It was easier to make profit, if the banker had a monopoly in that area. To create a monopoly, rival issuers would buy up the notes of a banker and then suddenly would make a demand of payment. If the banker was unable to pay, it would become bankrupt. So bank failures became common sight. In this manner, economic would take a hit. Some measures of collaboration were found out. It was thought that note-issuing monopoly be given to an entity. 

HISTORICAL DEVELOPMENTS

United Kingdom

In UK, after the glorious revolution, banknote issuing monopoly was given to Bank of England (BOE) around the city of London. In lieu of it, the Bank gave the King loans to bankroll his war efforts. Since London was an important mercantile centre, the notes issued by BOE slowly over-powered other banks all over England. Because it was lending to the King, there was more confidence in it. Later on denominations of notes were decreased and its locality increased. London experiment was copied by other Nations including the United States. The US was the last to copy this because states did not want to give this power to the federal government. 

United States

In the 1880s, the US established the Federal Reserve Board. Economy normally follows a cycle. Over the few cycles, there is a financial cycle. When People become confident about future, they take loans and invest. Over a period of time, something occurs, and they shrink their spending. It becomes difficult to pay the loan. When lender is unable to recover the money, he is unable to pay-back to the entity from which it borrowed. 

There is an element of opacity to lender’s business-Whether the borrower would be able to repay or not? If one lender is unable to pay, it generates a fear in everyone else. People will then not give money to those lenders. When borrower does not pay, banks become afraid and they stop lending.  So at this time, someone who has got deep-pockets is needed. 

In 1907, a crisis occurred in New York wrt many Bank Trusts who were failing due to financial crisis. JP Morgan raised money to rescue the crisis. He then mooted the idea that there should be a central bank to issue money.

So just before the 1st world war, Federal Reserve was established in the US to act as a central bank. 

In 1929 the great depression occurred, and one of the recommendations was that all countries should have entity which has monopoly over issuing notes. Till this depression, the amount of notes issued were equivalent to gold reserved. As economy progressed, the demand of money increases but gold reserved does not increase at same level.

If the money is limited, there will be deflation. Prices of commodities start to reduce. So someone is needed who can issue notes in proportion to the gold reserved and which would honour each notes it issues. 

RBI was created in India after the great depression. 

The best asset that can back a note is either gold reserved or the currency of another state or the debt of the government/government securities

Post World War II

Post WW2 there were only 2 countries where currency notes were backed by gold or bullion-US and Switzerland. After banks lost their note issuing capability, they had to find out some methods to stay in business. So they started issuing ‘Promissory Notes’ and ‘Bills of Exchange’ BoE.

Illustration-‘I will pay the bearer 100 rupees on demand.’

Bills of exchange (BOE) was essentially done by traders. That’s how cheque evolved. 

A Check is a Bill of Exchange with 3 differences-

  1. It can be drawn only from a bank and not from any other person. 
  2. It’s payable only on demand.
  3. There is a time limit.

Banks gave its customers the facility to issue checks upon it. Business evolved. Cheques cannot be indefinitely in circulation. If your AC balance is 10K and you have issued cheque of 20K? 

Two systems developed wrt Cheques-

  • To pay the cheque drawn upon it.
  • To collect the cheque of its customers deposited for collection. 

Bank is the debtor of its customer. Customer is the lender. But it differs from a traditional creditor-lender relationship. In any debtor-lender relationship, the debtor goes to lender for payment. But in banking, it is the lender that approaches the bank for payment during working hours. 

There cannot be any specific performance of a contract to take debt or lend. The customer can lend to the bank as much as he want to lend and duty upon the bank to collect the money which the customer deposits or gives to it. 

The Cheque issuance facility-This denotes the liability of the bank to pay upon it.

Actionable claim-Cannot be split if the cause of action is one. Similarly cheque cannot be split.  We did what a bank does.

3 Essential Components of a Bank

  1. Banks in order to be called bank has to accept deposit to be payable on demand
  2. It has to provide chequing facilities
  3. It has to collect cheques on behalf of its customers.

Statutes do not convey all the components 

Post offices are not banks because there is a limit on the amount which can be deposited in post office bank. Banking regulation also defines bank. To be called a bank an entity has to provide cheque facility. Many entities like Payment Banks use the word ‘Bank’ in their name but do not include all its feature.There is a limit on deposit amount. No Cheque collection facility. Initially, Cheque writing and cheque collection was rogue. Bank took customers only if they were confident that he will payback. But as time progressed, common people also became the customers of Bank. Because Banks were collecting cheques more frequently, people had fewer interactions so certain duties and privileges had to be accorded to the bank.

BANKER CUSTOMER RELATIONSHIP

  • If bank collects cheque and the customer is at fault, the bank is to be given a certain degree of protection. 
  • Cheque is not money, its a movable property. 
  • So if a thief has collected payment on a stolen cheque, he is guilty of tort of conversion. Bank is guilty as an agent of thief. 
  • The only remedy is the bank itself. 
  • They are governed by the terms of the contract between bank and customers
  • Banks act as customers agent when doing transactions. 
  • Confidentiality Agreements
  • Bank concerned is the single debtor of the customer. 
  • Right to combine the credit and debt account
  • Right of lien over the property that comes across in the course banking business. 
  • Lien is that the thing will not be returned, neither will it be sold. 
  • The rights that the bank has, is with regard to the customer. 
  • For banking law purpose, the person is a customer only if he/she has an account with it. Earlier it was the rule that, a person has to habitually deal with the bank. Now, a person is a customer when it is certain that will open the account, provided he opens the account. 
  • In banking business a person is entitled to withdraw the money on demand. 
  • All the debt which the bank owes are short termed. It has to cover its cost of operation and also generate profit. So they have lend loan for fix duration loan. It liabilities are short in duration, assets are long in duration. 
  • Banking business is most convenient but inherently unstable. 

Banks lend loans for a fixed duration. Banks are unstable because if there is sudden surge in demand then Banks will not be able to repay the loan. It is a means by which people transact. Rules for its insolvency are much stricter than institutions

If a person is unable to pay loan, court will not order insolvency of that person. 

A Bank is immediately admitted for insolvency proceedings the moment it is unable to pay on demand. So it becomes very imp to regulate bank more than any other sector of the economy.

In addition there are always difficulties wrt financial sector itself. In any particular business other than bank, most of the assets can be observed ie most of them are tangible. 

Its a bundle of rights and liabilities. In banking business, if other person goes off, your assets will also go off. 

In the normal course if I lend money, I will take something as a security. There is an opacity wrt to bank. You have to essentially rely on trust. 

The fractional banking system not only deal in money but also create money. Switzerland had a referendum whether Banks should create money. 

Eg-Promissory notes issued on gold coins. I issue a 1K Promissory notes and you acknowledge liability of 1K. So 2K is created. So money is not gold coin but a fiction which people believe that they will be paid. 

You deposit 1K rupees. The deposited 1K is called reserved money. Bank will credit that to your account. The Bank will lend the 900 Rupee if chance of your withdrawal is 10%. Other person deposits 900 as part of loan payment. Bank by fiction creates 9000 out of 1000 Rupees. System will work as long as people are confident that the bank will survive. The moment confidence erodes, the system will collapse. 90% of the money does not exist in realty

Every bank is dependent on other banks. If one fails, people are afraid to lend to others. You deposited the cheque in PNB. It is collected by SBI. Will PNB give 10K to SBI? No, It will just credit 10K to SBI.

REGULATION OF BANKS

How banks are regulated?

We discussed that note issuing entity is given the power to disperse loans as a last resort. That’s why  known as lender of last resort. When it gives loan, it will take some security. Because it lends money for the purpose of being paid back. It has to have the confidence it will be paid back. That confident will be there only if it can tell the loan taker to abide by the terms and condition and how he will do his business. RBI does the same. BOR and Federal Reserve example. 

All banks meet for the clearances of cheque. The clearing house will always have regulatory role. 

Re-Financing agencies also have a regulatory role. Cooperative banks have got regulatory role. 

NABARD is the re-financing agency for all rural banks.

WHAT ARE THE IMPORTANT ASPECTS OF REGULATIONS?

The ownership

Who has controlling stake in the bank. Ownership of a bank gives you access to liquidity which he may use for other business. That business becomes more important than servicing the customers of the bank. Therefore banks should not do other business other than banking directly or indirectly. Bank of Bengal failed because of these reasons. 

Management

Control over management becomes very important. Most of bank frauds occurred due to the same person has been on the desk for ages. Banking regulation therefore provides for oversight and regular change in the board. 

Capital

One needs to have initial capital for the purpose of doing banking. There is a ratio of capital which bank will give as loan. Management is not answerable to customers but to shareholders. Management’s instinct will be to maximise returns. The risk taken should be proportional to the capital. 

1973New York Crisis 

The Heritage Fiasco-A German bank failed. Because of this many other banks also failed. So countries came up with BASEL Accord. Now we have BASEL3. It was essentially for developed countries who were members of Bank of Intl Settlement. Amount of capital will determine the risk you can take. Risk also depend on type of activities for which loan is given. RBI had prohibited many PSBs from lending to any private individual but only to government because of less risk. In India, Banks should have 9 rupees of their own for every 100 rupee they lend. Internationally it is 8%. 

Purpose

  • To control shareholder’s instinct of pushing management to take more risk
  • Standby for loss

Banking business is inherently unstable. Its liabilities are liquid but its assets are illiquid.

Two measures of insolvency-

  1. Assets are less than liability
  2. When liabilities arise, you are not able to pay. 

Therefore for some of Bank’s assets should be liquid which can be sold off when need be. In India we have Cash Reserve Ratio-Cash with the RBI. 

Statutory Liquidity Ratio-Money invested in govt. securities. You will always get a buyer of gold. 

They are a kind firewall.

Prudential practices in lending-

  1. RBI Directives/Guidelines
  2. Market Practices
  3. Bank’s Own norms

Banks do not lend all their money for the purpose of buying land and buying shares. There has to be a diversity in lending. You cannot lend only in one sector. 

You cannot have exposure to one person or entity more than 15% of the capital. 

What is the margin (difference b/w the value of the security and loan) and security while lending? 

Banks also make money by quasi-lending. It means lending the name and not the money. It has been provided in the BALI ACCORD

Issuance of letter of credit or Bank Guarantees-The bank will take a certain commission. Because there is more certainty of payment due the robust practices and the law, the Bank will take certain cuts on it. 

Banks also make money through Negotiable Instruments by being an accommodating party. It charges a certain commission. Bill discounting is very common means by Bank to invest their short term surplus. Banks buys bills of exchange. BOEs have payment period of 45 days. For eg-GOI owes you 1 lac payable in 60 days. You sell the instrument to Bank and collect payment now. Bank will charge 5% will give you 95K and will collect the payment from GOI after 60 days. 

When a person borrows, he is the first security (including his reputation and track record). He can’t be a guarantor to his own loan. Anything extra given as a security is known as collateral security

Property which he gives as security-This is a very imp area. 

We use the term ‘security’ very loosely. 

Eg-You deposit certain amount to landlord as security. But in reality it is not security. 

Any security given to company has to be registered. 

What is security interest? When it is created? When it attaches? Perfection of a security interests

In banking law, perfection relates to the additional steps required to be taken in relation to a security interest in order to make it effective against third parties or to retain its effectiveness in the event of default by the grantor of the security interest.

Methods of perfection

There are three principal modes by which a security interest may be perfected (which method of perfection is applicable depends upon the nature of the security interest and the laws of the relevant country).

  1. Possession of the collateral;
  2. Statutory registration or filing, and
  3. Notice to the debtor or a fund-holder.

NEGOTIABLE INSTRUMENTS ACT

Lays down laws regarding 3 Instruments-

  1. Promissory Notes
  2. Bills of Exchange
  3. Cheque

Instrument in oriental language-‘Hundis’ are not covered by it. But General Principles of NI Act are applicable to Hundis as well. 

Eg-Law of Mortgages-Whether the mortgage will be valid if it is not registered? This a specific rule. 

NIA is not an outdated Act. It lays down the mercantile law generally applicable in most jurisdiction. Its Lex Mercatoria and they are utilised for International trade and finance. Most bonds are in the form of promissory notes. Now we use cards but earlier people used to carry cheques. 

In UK, BOEs are commonly used. Banks take it as a collateral security. It can be easily sold off to anyone else. 

They are regarded as equal to money and denoted right to money. There had to be certain attributes in them to be regarded as negotiable. 

CERTAINTIES 

There has to be certain certainties regarding NI-

  • Negotiable Instruments are transferrable
  • Every right and duty wrt the instrument have to be evident on the instrument itself.

Certainties regarding-

  • Who has to pay?
    • It can be paid by person promising to pay unconditionally. Then it is Promissory notes. Or it can order someone else to pay ie cheque. 
    • When you order someone else to pay, it is Bills of Exchange. BOE payable on demand is Cheque
    • Person who orders is called Drawer on Instrument.
    • The person who has been ordered to pay is Drawee of the Instrument. (ie in a cheque Bank is the Drawee) Drawee is not liable. Its his option whether or not to pay. But once he accepts his liability, he becomes an acceptor. 
    • In Cheque, there is not concept of acceptance as it is paid across the counter even if the drawee bank concerned has written something on the cheque. It can only verify the genuineness of the signature. 
    • There is also a concept of acceptor for honour. He is the one who is not mentioned as drawee but accepts it for the honour of that person (generally drawer). 
    • The person who has been ordered to pay, if he has been named, he is payee. Payee when further endorses the BoE, he is called the endorsee. Endorsee might again endorse it. Sometimes the endorsement can become blank. When the endorsement is endorsement in blank, then it becomes payable to bearer. He will just enter his name on the blank space and collect the payment. 
    • Unconditional acknowledgement that he will pay. 
    • See S.4 and 5 of NI Act. 
  • Payment to whom?
    • Payment might be to the bearer or it might to be to whosoever.
  • How much has to be paid?
    • It has to be only in terms of money or anything which public regards as money. 
  • When it has to be paid. 
    • Payable on demand or payable after certain time which is certain to happen.

MEANING OF NEGOTIABLE

Negotiable means the receiver will get it free from defects of the title.

S.13 of the RBI Act provides that no one other than central govt. can issue any PN, BOE or Hundis which is payable on demand to the bearer. Only RBI can issue bank notes. The raison d’être is that they are nearer to currency. Currency issuing power is only with RBI in India. Exceptions are made wrt cheque or drafts upon one’s own bank or Shroff. 

Long time ago they used to issue Indira Vikas Patra

PN is something which is nearer to currency

If you bypass the restriction ‘Payable on Demand’ and put the date of issuance and payment as same.  

Nowdays ‘PN payable to the bearer’ is used to bypass money laundering. 

BOE (order to pay) if it is drawn on myself or in favour of a fictitious person who does not exists or agent upon the principle or one branch upon other branch. They on the face of it looks like BOI but in reality it is a PN. Where there an ambiguity wrt to nature of the instrument, the person concerned has an option of how he treat it as. 

In case of PN, the maker is primarily liable and everyone who endorses it unconditionally is a guarantor upon that instrument. The more signatures (indorsers) there are on a PN, the more the value of the PN. The value also depends upon who the guarantor is. If the guarantor is a bank, then its value increases. The rule of Sale of Goods apply. 

When one issues a cheque, following things are implied-

  • The bank exists
  • The account exists 
  • The balance exists
  • The liability exists 

Accommodation Instrument

Where someone puts his name on the instrument so as to help someone else in selling that particular instrument or making it more credible. Eg-I have deposited in bank 10K for the purpose of BOE and order the bank to pay. If I don’t have any balance now, the bank takes a risk on me that I will put the money in my account on  or before the given date when the BOE has to be paid the bearer. Even the money is not deposited, the Bank will still honour the BOI to the bearer but not the person who issued it. 

PN/BOECheque comes into existence only after it has been given the 3rd person. If I have drawn PN but have not given it to 3rd person, it will not come into existence. Even if the 3rd party has got that, the issuer can refuse to pay provided he can prove that he didn’t give it. In the case of PN, it is looked whether you has intention to pay or not. Merely because I promised to pay does not mean that I had intention to make a PN. Intention depends upon facts and circumstances

INTENTION

One of the requirement of PN is that maker should have intention to write PN. Intention to create any legal relationship is not required. Many a time intention is also contested by the holder of PN.

PN and BOE as per Indian Stamp Act in order to be admissible as evidence must be stamped. Similarly Mortgages need to be registered. This limitation might not be there wrt to foreign courts.

It has to stamped during the inception itself. If it is not adequately stamped at the inception, it cannot be stamped later. 

The stamp Act distinguishes b/w stamping of PN and a Bond. Consequences are different. An inadequately stamped bond will be inadmissible as evidence but court may allow it to be produced as an evidence if a a penalty is paid upon it. But in the case of PN and BOE no such concession is provided for. If it is admissible as evidence once, it will remain inadmissible. 

Rationale-Policy Concerns ie people will not stamp it. 

In case of inadequately stamped PN, writer or holder will generally say that it was never issued in the first place. Holder will say, that maker didn’t intend to pay, he just acknowledged his debt through this inadequately stamped PN and therefore it should admissible as evidence of debt and maker should be made to pay. 

All factors will be taken into account to ascertain the intention.

Eg-In Nawab Mohammad Akbar Khan case, PC held that debtor acknowledged the debt in his account book and said that he was willing to pay the debt with interest and it was also stamped. PN is written in 1-2 pages and is transferable. So if it is written in account book, it shows there was no intention to transfer even if it was stamped. This case was a property dispute in family. The person who got bigger share wrote the PN that he will compensate the one who got lesser share. 

In PN you as writer of PN lose your right of set-off. 

Totality of facts & circumstances will determine the intention. 

If PN is inadmissible in evidence due to inadequate stamping, then other party try to claim it upon the dept. PN is generally evidence of debt. 

Muang Chit v Roshan Kareem Omer (Rangoon HC)

The Rangoon HC laid down in detail law regarding this. When you make the payment in terms of NI, generally the NI is supposed to be a conditional payment. You still retain your right wrt debt. If he is dissatisfied. If someone issues a 15K to you to settle a loan which he took from you. This is a conditional payment ie if the cheque is honoured by the bank then debt is settled but if it cannot be encashed, then the debt remains. The holder of cheque may come back due to some concerns ie it is difficult for him to encash the cheque. Similarly PN is a conditional payment towards the debt generally. If PN is held to inadmissible, one can ask for the payment on the original debt. But in certain circumstances, one loses it-When the debt and NI merges. It can be by the intention of the parties or their conduct subsequently which can show that debt has merged in the NI and there cannot exist a debt which is separate from the NI. Eg-Where the parties to the debt negotiated and all terms are reflected in the PN. If the PN is contemporaneous with the debt and every detail is listed in the PN, then it is indication that parties intended that debt and PN should merge. 

By the Act of the parties-The parties have done something which shows that debt has merged with PN. Eg-Bank has given you loan and you have given a PN as a collateral security after negotiations. Later Bank gives it to other Bank. This shows that both have merge and PN was not intended to be just a collateral security. 

There is no requirement of stamp in the case of cheque. 

CHAPTER II-OF NOTES, BILLS & CHEQUES 

S.4 Promissory note-A Promissory note 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 order of, a certain person, or to the bearer of the instrument

Illustrations 

A Signs instruments in the following terms:

  1. I promise to pay B or order Rs. 500”
  2. I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received”
  3. “Mr. B, I O U Rs. 1,000.”
  4. “I promise to Pay ‘B’ Rs. 500 and all other sums which shall be due to him.”
  5. “I promise to Pay ‘B’ Rs. 500, first deducting thereout any money which he may owe me.”
  6. “I promise to Pay ‘B’ Rs. 500 seven days after my marriage with C.”
  7. “I promise to Pay ‘B’ Rs. 500 on D’s death, provided D leaves me enough to pay that sum.” 
  8. “I promise to Pay ‘B’ Rs. 500 and to deliver to him my black horse on 1 January next.”
    The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), 
  9. (d), (e), (f), (g) and (h) are not promissory notes

S.5 “Bill of exchange”-A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. 

A promise or order to pay is not “conditional” within the meaning of this section and section 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain. 

The sum payable may be certain within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due. 

The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person” within the meaning of this section and section 4, although he is mis-named or designated by description only

S.6 Cheque-A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form

Explanation IFor the purposes of this section, the expressions-

  1. A cheque in the electronic form means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be;
  2. A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing
  3. Explanation IIFor the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.
  4. Explanation III-For the purposes of this section, the expressions “asymmetric crypto system”, “computer resource”, “digital signature”, “electronic form” and “electronic signature” shall have the same meanings respectively assigned to them in the Information Technology Act, 2000 (21 of 2000).

S.7 Drawer and Drawee-The maker of a bill of exchange or cheque is called the “drawer”; the person thereby directed to pay is called the “drawee”

  1. Drawee in case of need”-When in the Bill or in any indorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a drawee in case of need.
  2. Acceptor”-After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the acceptor(If the drawee accepts the bill, he is known as acceptor)
  3. Acceptor for honour”-When a bill of exchange has been noted or protested for non-acceptance or for better security, and any person accepts it supra protest for honour of the drawer or of any one of the indorsers, such person is called an acceptor for honour
  4. Payee”-The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the payee

HOLDER (S.8)

S.8 Holder-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 is meant to be the owner. Ownership here is legal ownership and not equitable ownership. He is the person who is entitled to the possession in his own course and to receive the amount due thereon.

A person may not be a holder but can derive the title.

A person to whom the instrument comes through an offense is not entitled to it. He may the payment on the it but he is not entitled to it. The person should be entitled to receive payment on it. If he is not entitled then he is not the holder of the instrument.

Who will be holder of the instrument?

  • The bearer of the instrument
  • The Payee or the endorsee

The one who come across the instrument in succession is holder and owner of the instrument. I endorse the instrument for the purpose of collection to my servant. The servant is the holder of the instrument for a limited time-for collection of payment. If he is unable to collect the payment, he is not entitled to its possession. 

If the instrument is assigned, it is separate from the instrument.

If negotiation happens upon the instrument, you negotiate upon it

Difference between Negotiation and Assignment

The difference between negotiation and assignment is that when you endorse the instrument you become party to that instrument and you also become a guarantor. When you assign the instrument you implicitly say whatever right I have in this instrument, I give it to you. But when you endorse it, you give a guarantee as well. If a person gets the instrument as an assignee, he become the holder of the instrument. 

Beneficial/Equitable Owner

This person cannot be regarded as the holder of the instrument. He may have the right of possession of the instrument but is not entitled to that possession. It is the legal owner who is entitled to its possession. He may take the money on behalf of beneficial owner. The person who holds it for someone else’s benefit is the real owner and not the beneficiary. 

Eg-Your father creates a trust in your name. But your uncle is trustee. Some property of the trust is sold. The cheque will come in uncle’s name. Uncle is the owner/holder of the cheque not you though you might be the beneficiary. If there is some problem in the cheque, you file a suit against the issuer of cheque and if uncle doesn’t cooperate then make him co-defendant in the suit. 

HOLDER IN DUE COURSE (S.9) (4-5 marks)

S.9 Holder in due course-“Holder 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

Holder is meant to be the owner. Holder in Due Course (HDC) is the person who will get the title to the instrument free of defect of the title of previous party. Certain conditions have to be fulfilled. 

The person must have acquired the instrument for due consideration. Consideration has to be valuable. Consideration once given is not a consideration for second time.

A person claiming to be a ‘holder in due course’ must show: (Khirgamwala)

  • That, for consideration he became the possessor of a negotiable instrument when it is payable to bearer or the payee or indorsee thereof when it is payable to order. 
  • That he became the holder of the instrument before the amount mentioned in it became payable 
  • That he became the holder of the instrument, without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

PRIVILEGES OF A HOLDER IN DUE COURSE 

The title of the holder in due course of a negotiable instrument as defined in S.9 is free from equities and other defects which could be urged against prior parties. This special privilege is secured to him by means of certain rules and estoppels contained in the Act. These may be briefly summarised as follows. 

  • According to S.20, a person who has signed and delivered to another, a stamped but otherwise inchoate instrument, is precluded from asserting, as against a holder in due course, that the instrument has not been filed in accordance with the authority given by him, the stamp being sufficient to cover the amount. 
  • According to S.42, where a bill of exchange is accepted payable to the order of the drawer in a fictitious name, and is indorsed in the same hand as the drawer’s signature, the acceptor is not permitted to allege, as against a holder in due course, that such name is fictitious. 
  • According to S.46 and 47, if a bill or note is negotiated to a holder in due course, the other parties to the bill or note cannot avoid liability on the ground that the delivery of the instrument was conditional or for a special purpose only
  • According to S.58, the defences on the part of the person liable on a negotiable instrument that the instrument had been lost or obtained from him by means of an offences or fraud or for an unlawful consideration, cannot be set up against a holder in due course
  • According to S.120, no maker of a promissory note and no drawer of a bill of exchange or cheque and no acceptor of a bill of exchange for the honour of the drawer shall, in a suit thereon by a holder in due course, be permitted to deny the validity of the instrument as originally made or drawn. 
  • According to S.121, no maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s capacity at the date of the note or bill to indorse the same. 

1st element-Consideration

Wrt consideration, inadequacy of consideration does not matter but it affects good faith. Also, all rules mentioned in Contract Act are applicable.

  1. That the consideration should be lawful, ie, 
  2. That it should not be forbidden by law, 
  3. That it should not be fraudulent, 
  4. That it should not be immoral or 
  5. That it should not be opposed to public policy and 
  6. That it should not cause any injury to the person or property of another. 

2nd element-Before the amount mentioned in it became payable

It should have been acquired before the amount in it became payable. If the amount is payable on 30 August, then no one can become its holder in due course on 30th August in India. 

UK Act uses the term ‘Overdue’ ie its date of payment has still not come or it has not expired. So one can still become its holder on 30th Aug. In the case the instrument is payable on a certain date, as per convention (S.22) it provides for 3 working day grace. If the instrument was payable on 1 September, it will become due on 4th Sept. Till 4th sept has expired, it is not overdue. Overdue system has been suggested for India as well. 

Instrument payable on demand-this becomes overdue the moment it is brought into existence/issued.

Shaha v Bengal National Bank Ltd 

  1. A promissory note is supposed to circulate for sometime.
  2. PN cannot be said to be overdue till it is presented for the purpose of payment.
  3. Same is applicable on instruments payable on demand ie NIs and Cheques. 

Limitation Act applies from the moment NI is made out. Maximum life of NI can be 3 years unless something is written to extend the period

It has to be presented and endorsed within a reasonable time. Guarantor cannot be for time immemorial. 

3rd element-Without having sufficient cause to believe that a defect exists in a title of a person from whom the instrument is received 

The Indian law differs from UK law on this aspect-

Under English law, the only question to be considered is whether the holder took the instrument in good faith and, once it is proved that he did so, he is entitled to all the rights of a holder in due course notwithstanding that he was careless, that he made no enquiry, and that he was informed of facts which would have led a reasonable man to make further inquiry, provided, however, that he had no notice of any defect in the transferor’s title. 

As regards the Indian law, the words used u/s 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. 

The Indian law is stricter and requires a higher degree of diligence from the person who claims to be a holder in due course than in England where it is sufficient for such a person to show that he took the instrument in good faith. 

Raphael v Bank of England

Bank notes were stolen from bank vaults and thief left the shores of UK. BOE circulated the serial nos. of stolen notes to all currency exchangers. The Paris money exchanger exchanged it for the local currency and made a claim to BOE. BOE refused to pay on the ground that you had knowledge wrt to stolen notes. The court rebutted it on the ground that Raphael had acted in good faith. He might have been negligent but acted in good faith. If the person acted honestly on a NI though he takes it negligently, he has title to it. 

Debts were not transferable in those times. One could transfer it without the defects of the transferor. 

Gill v Cubitt-BoEs were supposed to be dealt amongst people who knew each other. You have to make inquire regarding strangers otherwise it will not be good-faith. Due care and caution were made the tests of bona fides.

Note:-NI Act was enacted when Gill v Cubitt was the precedent.

Goodwin v Roberts-Ignored the g Gill v Cubitt ratio. 

Fagan v Bank of Bengal (IMP)-PC once again upheld the Gill v Cubitt findings. That a person can be holder in due course if he acted honestly though negligently

In India law, there is nothing to suggest defect in-title.

4th Element-Notice of Defects

If, at the time when the holder acquires his title as such, he has sufficient notice that a defect exists in the title of his transferor, he is not a holder in due course. Notice means knowledge of the facts or a suspicion that something is wrong combined with a wilful disregard of the means of knowledge. Notice of defects may be either actual or constructive. 

Where the indorsee of fourteen post-dated cheques aggregating a very large sum had known that they were issued without the possibility of any business transaction between the parties concerned, the court held that the circumstances should have put him on inquiry about the transferor’s title 

DIFFERENCE BW DEFECT IN TITLE AND NO TITLE

Defect in title-Voidable Contracts due to Duress, Fraud, undue influence, lack of consideration, illegal consideration. 

Something which has been stolen or found. Only person who can say that he has a better title is the real owner of that object. Ownership is comparative under all legal system. There is nothing like an absolute owner. It is a relative term-that between x and y, x has a better title than y. 

What are the cases where there is no title?

Where the instrument never came into existence in the eyes of the law Eg-I have written a cheque and put it in the drawer. It will not come into existence till it is given to someone else. 

S.10 Payment 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 do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned

S.11 Inland instrument-A promissory note, bill of exchange or cheque drawn or made in India, and made payable in, or drawn upon any person resident, in India shall be deemed to be an inland instrument. 

S.12 Foreign instrument-Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument. 

S.13 Negotiable Instrument-

(1) A Negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

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

Explanation (ii)-A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last indorsement is an indorsement in blank. 

Explanation (iii)-Where a promissory note, bill of exchange or cheque, either originally or by indorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.] 

(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees.

S.14-Negotiation-When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated. 

S.15-Indorsement-When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the “indorser”

S.16 Indorsement “in Blank” and “in full”

  1. If the indorser signs his name only, the indorsement is said to be “in blank,” and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be “in full”; and the person so specified 
    1. Indorsee-is called the “indorsee” of the instrument.
  2. The provisions of this Act relating to a payee shall apply with the necessary modifications to an indorsee.

S.17 Ambiguous instruments-Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be thenceforward treated accordingly

S.18 Where amount is stated differently in figures and words-If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid

S.19 Instruments payable on demand-A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand

INCHOATE INSTRUMENTS 

S.20 Inchoate stamped instruments-Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount: provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder

S.21-At Sight 

On presentment-In a promissory note or bill of exchange the expressions “at sight” and “on presentment” mean on demand

The expression “After sight” after sight means, in a promissory note, after presentment for sight, and, in a bill of exchange, after acceptance, or nothing for non-acceptance, or protest for non-acceptance

MATURITY (S.22-25)

S.22-Maturity-The maturity of a promissory note or bill of exchange is the date at which it falls due

Days of grace-Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable

S.23-Calculating maturity of bill or note payable so many months after date or sight-In calculating the date at which a promissory note or bill of exchange, made payable a stated number of months after date or after sight, or after a certain event, is at maturity, the period stated shall be held to terminate on the day of the month which corresponds with the day on which the instrument is dated, or presented for acceptance or sight, or noted for non-acceptance, or protested for non-acceptance, or the event happens, or, where the instrument is a bill of exchange made payable a stated number of months after sight and has been accepted for honour, with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month

Illustrations

  1. A negotiable instrument, dated 29th January, 1878, is made payable at one month after date. The instrument is at maturity on the third day after the 28th February, 1878
  2. A negotiable instrument, dated 30th August, 1878, is made payable three months after date. The instrument is at maturity on the 3rd December, 1878
  3. A promissory note or bill of exchange, dated 31st August, 1878, is made payable three months after date. The instrument is at maturity on the 3rd December, 1878

S.24-Calculating maturity of bill or note payable so many days after date or sight-In calculating the date at which a promissory note or bill of exchange made payable a certain number of days after date or after sight or after a certain event is at maturity, the day of the date, or of presentment for acceptance or sight, or of protest for non-acceptance, or on which the event happens, shall be excluded

S.25-When day of maturity is a holiday-When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day. 

Explanation-The expression “public holiday” includes Sundays: and any other day declared by the Central Government by notification in the Official Gazette, to be a public holiday

HOLDER IN DUE COURSE (S.9) (4-5 marks)

S.9 Holder in due course-“Holder 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

The person must have acquired the instrument for due consideration. Consideration has to be valuable. Consideration once given is not a consideration for second time.

All rules wrt consideration mentioned in Contract Act are applicable-

  1. That it should be valid
  2. Not against law
  3. Conscionable 

Inadequacy of consideration does not matter but it affects good faith.

It should have been acquired before the amount in it became payable. If the amount is payable on 30 August, then no one can become its holder in due course on 30th August in India. 

UK Act uses the term ‘Overdue’ ie its date of payment has still not come or it has not expired. So one can still become its holder on 30th Aug. In the case the instrument is payable on a certain date, as per convention (S.22) it provides for 3 working day grace. If the instrument was payable on 1 September, it will become due on 4th Sept. Till 4th sept has expired, it is not overdue. Overdue system has been suggested for India as well. 

Instrument payable on demand-this becomes overdue the moment it is brought into existence/issued.

Shaha v Bengal National Bank Ltd 

  1. A promissory note is supposed to circulate for sometime.
  2. PN cannot be said to be overdue till it is presented for the purpose of payment.
  3. Same is applicable on instruments payable on demand ie NIs and Cheques. 

Limitation Act applies from the moment NI is made out. Maximum life of NI can be 3 years unless something is written to extend the period

It has to be presented and endorsed within a reasonable time. Guarantor cannot be for time immemorial. 

3rd element-Without having sufficient cause to believe that a defect exists in a title of a person from whom the instrument is received, the Indian law differs from UK law.

Raphael v Bank of England

Bank notes were stolen from bank vaults and thief left the shores of UK. BOE circulated the serial nos. of stolen notes to all currency exchangers. The Paris money exchanger exchanged it for the local currency and made a claim to BOE. BOE refused to pay on the ground that you had knowledge wrt to stolen notes. The court rebutted it on the ground that Raphael had acted in good faith. He might have been negligent but acted in good faith. If the person acted honestly on a NI though he takes it negligently, he has title to it. 

Debts were not transferable in those times. One could transfer it without the defects of the transferor. 

Gill v Cubitt 

BoEs were supposed to be dealt amongst people who knew each other. You have to make inquire regarding strangers otherwise it will not be good-faith. 

NI Act was enacted when Gill v Cubitt was the precedent.

Goodwin v Roberts

Ignored the gill ratio

Fagan v Bank of Bengal (IMP)

PC upheld the Gill v Cubitt

A person can be holder in due course if he acted honestly though negligently. In India law, there is nothing to suggest defect in-title.

Difference bw defect in title and no title. 

Defect in title-Voidable Contracts due to Duress, Fraud, undue influence, lack of consideration, illegal consideration. 

Something which has been stolen or found. Only person who can say that he has a better title is the real owner of that object. Ownership is comparative under all legal system. There is nothing like an absolute owner. It is a relative term-that between x and y, x has a better title than y. 

What are the cases where there is no title?

Where the instrument never came into existence in the eyes of the law Eg-I have written a cheque and put it in the drawer. It will not come into existence till it is given to someone else. 

FORGERY FREEZES THE TITLE

Forgery-The moment there is a forgery in the instrument, the title freezes. Same cannot be revived ie the signature cannot be adapted later. But Principle of equity and estoppel applies here.

Foster v McKinon 

The person concerned presented a BOE to his father as law and presented it as a railway receipt. Father relying upon that person’s word signed on it. In such case the BOE never comes into existence because he signed it believing it to be a railway receipt. The person was incapable of knowing due to poor sight and had relied upon someone. But if his eyes were working perfectly fine, then he would be liable. But if the person knows that he is signing a NI, he will be liable notwithstanding the amount.

The person should have sufficient cause to believe that there was defect in title. 

A person who is not in trade will not want to have a BOE. He might prefer cheque. Because its only traders who take and exchange BOE. The person should make a reasonable inquiry. He cannot be a holder in due course if he did not make those inquiry if there are suspicions. Reasonable man test. 

FRIDAY

Aaa

CHAPTER III-PARTIES TO NOTES, BILLS AND CHEQUES (S.26-45A)

Summary of S.26-28

Who are the Primary parties to the instrument?

  1. The maker of the PN
    1. The person who is primarily liable on the instrument subject to a contract to the contrary (eg-Accommodation Bill)
  2. The drawer of a BoE or Cheque 
    1. He is primarily liable on the BOE till someone accepts it. Who can accept it?
      1. Either the drawee 
      2. The drawee in case of need. 
      3. Can be accepted for honour after it has been dishonoured by non-acceptance
      4. The person who accept it is primarily liable subject to a contract to the contrary. 
        1. Acceptance has to be unconditional
        2. A conditional acceptance unless allowed by others will regarded as dishonour.
      5. There is no concept of acceptance of Cheque. The Bank is under duty to pay if there is money in the account of the issuer. There is no duty of the bank to the holder of the cheque. 
  3. The Payee 
    1. The payee concerned can transfer the PN by endorsement. 
    2. Every prior party is a principal to every subsequent party
    3. The instrument must be unconditional but endorsement can be conditional
    4. A person may limit or exclude his liability in endorsement. 

The purpose whose name does not appear on PN, he cannot be a guarantor 

Who can make NI?

A minor can draw and endorse but cannot make NI. 

Making of a NI and acceptance of BOE-A minor cannot do so. 

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

There should be an order by the drawer to the drawee to pay. 

Forged Cheques-

In a forged cheque, there is no order by the drawer to the drawee. No payment made on a forged cheque can be deducted from the account of the drawer. There should be no ambiguity wrt the payment instruction. A payment instruction can be countermanded. The drawer concerned can tell the bank not to pay upon it. The instruction should be during the banking hours and prior to payment of the cheque. Instruction should also be clear. The cheque number should be specified. 

Implied withdrawal of payment instruction-

In cases of lunacy and bankruptcy, intervening death, garnishee order, etc. In case of bankruptcy, no one creditor should be preferred over another creditor. 

Garnishee Order-

Garnishee order is like an execution order. Property of the defendant is attached and will be sold for the purpose of decretal debt. Possession does not matter. Garnishee order provides that debt money be paid to the court which will use it to satisfy the decretal debt. In these cases, the authority of the customer to make payment order comes to an end. 

There should be sufficient money available for the payment. Where the person concerned definitely has the money. If the account concerned is a trust account and the bank is aware of the fact that it is a trust account. 

There is no concept of Part payment in cheque. It has to be paid fully.

Amount of damages is inversely proportional to amount of cheque. 

Issue 1

Where money is in the account but initially was not supposed to be there. No remedy because he is supposed to know the state of the account bw him and the bank.

Rare Exception-Where the person can say that because of the bank’s mistake he has changed his position. For instance-old widow case. Otherwise If the bank has credited the money by mistake, it can anytime withdraw that. 

Issue 2

Where someone else by mistake has credited money into an account without intention. Can the bank at the instance of the person change it? 

Once the money has been credited, it is the money of that person even if given by mistake. The bank on its own cannot rectify the mistake. The remedy is that he should approach that person and ask his money. 

J&K Bank v Attarunnisha 

J&K govt was crediting money into the account of defendant but later realised that that it had paid extra and hence wanted reversal of those entries. It cannot be done by the bank but by the defendant. 

DISCHARGE OF INDORSER’S LIABILITY (S.39 & 40) 

If the guarantor’s rights are affected, should he still be a guarantor? And when can we say his rights are affected?

S.39 and 40 deal with it. 

S.40-Discharge of indorser’s liability-Where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser’s remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity

Illustration 

‘A’ is the holder of a BoE made payable to the order of B, which contains the following indorsements in blank:— 

First indorsement, ‘B’; Second indorsement, ‘Peter Williams’; Third indorsement, ‘Wright & Co; Fourth indorsement ‘John Rozario’

This bill A puts in suit against John Rozario and strikes out, without John Rozario’s consent, the indorsements by Peter Williams and Wright & Co. ‘A’ is not entitled to recover anything from John Rozario

Rationale-The reason for the rule is that an indorser of a negotiable instrument, being in the position of a surety, is entitled to the benefit of those securities to which the holder can have no claim except for the instrument itself. ‘The contracts of the several indorsers are so many links of a pendant chain; if the holder dissolves the first, every link falls with it. If the dissolves an intermediate link, all after it are likewise dissolved. But the last link supports nothing, and its dissolution injures no one’. 

S.39-Suretyship-When the holder of an accepted bill of exchange enters into any contract with the acceptor which, under section 134 or 135 of the Indian Contract Act, 1872 (9 of 1872), would discharge the other parties, the holder may expressly reserve his right to charge the other parties, and in such case they are not discharged

Section 134 of the Indian Contract Act 1872 provides that the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released, or by any act or omission of the creditor

Under s 135, a contract between a creditor and a principal debtor by which the creditor makes composition with, or promises to give time to, or not to sue, the principal debtor discharges the surety unless the surety assents to such contract. 

Illustrations (Khirgamwala)

  1. The holder of a bill for Rs 5,000 takes from the acceptor Rs 3,000 in full satisfaction of his claim against him. All the other parties are discharged. 
  2. The holder of a bill enters into a contract with the acceptor to give him time for payment. The drawer and the indorsers are discharged. 
  3. The holder of a bill agrees with the acceptor, not to sue him upon the bill or not to sue him for certain time. The drawer and the indorsers are discharged. 
  4. The holder of a bill takes a new bill from the acceptor payable on a future day. The drawer and indorsers are discharged.However, where a new bill is taken by way of collateral security, the indorsers are not discharged.

S.135 differs from common law. Under common law, a person may agree with principle debtor not to sue him but can reserve his right against the surety. 

Difference b/w S.39 and S.40

S.39 applies only to bills of exchange whereas S.40 applies to all negotiable instruments. Secondly, u/s 39, express reservation by the holder of his rights against an indorser does not discharge him; whereas u/s 40, if the holder of an instrument destroys or impairs the indorser’s remedy against a prior party, the indorser is discharged from his liability to the holder, despite an express reservation of the holder’s rights against the indorser

Does S.39 lays out a rule which is limited in its application to only BoE or it has laid down a principle of law?

Some cases have said that S.39 applies only to BoE. Law Commission said that it is an exception to common law rule and therefore it should be narrow and limited within its scope.

Murugappa Mudaliar v Muniswami 

HC Madras applied S.39 also on PN. On dishonour of PN, the holder of PN started proceedings against the maker of PN and all its endorsers. Then he withdrew against the maker. HC said that S.39 intents to lay down common law principle. S.39 when it says BoE, it is only an illustration.

This was reiterated in-Bank of Hindustan v Govindarajulu 

The PC in Mahant Singh v Ubayi applied the Common Law principle. 

FORGED INSTRUMENTS (S.41 & 42)

S.41 and S.42-deal with issues of Forgery 

S.41-Acceptor bound, although, indorsement forged An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such indorsement is forged, if he knew or had reason to believe the indorsement to be forged when he accepted the bill

S.42-Acceptance of bill drawn in fictitious name. An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an indorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.

Acceptor/Drawee-The person (generally bank) who accepts the instrument to pay the money therein to the holder. 

Payee-The one who collects the payment or encashes the instrument.

Drawer has drawn the instrument in the name of a fictitious person and then got it endorsed by a reputed person and that is accepted by the fictitious person and then forwarded to someone else. The acceptor can refuse to honour it. If the holder of the instrument can show that the hand that endorsed it is the same hand that drew it, then acceptor is liable. Fictitious does not mean that the name is uncommon but that it was drawn in the name of person who was not intended to be the payee.

ABSENT OR PARTIAL CONSIDERATION (S.43-45)

S.43, 44 and 45 deals with situations where consideration is absent or partial-

S.43-Negotiable instrument made, etc., without consideration-A negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction

But if any such party has transferred the instrument with or without indorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto

Exception I-No party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed can, if he have paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation

Exception II-No party to the instrument who has induced any other party to make, draw, accept, indorse or transfer the same to him for a consideration which he has failed to pay or perform in full shall recover thereon an amount exceeding the value of the consideration (if any) which he has actually paid or performed

Note-Endorser and Endorsee are the immediate party. Maker of the instrument and Payee are the immediate parties. Drawer of BoE is immediate party to Payee and the acceptor of the BoE. If the drawer gives the instrument to the payee for 1K but the payee does not pay that 1K then drawer is not liable upon it. No liability in case of full failure of consideration but proportionally liability in case of partial consideration. It will require collateral inquiry. 

S.44 Partial absence or failure of money-consideration-When the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced

Explanation-The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the indorser with his indorsee. Other signers may by agreement stand in immediate relation with a holder

Illustration 

A draws a bill on B for Rs. 500 payable to the order of A. B accepts the bill, but subsequently dishonours it by non-payment. ‘A’ sues B on the bill, B proves that it was accepted for value as to Rs. 400, and as an accommodation to the plaintiff as to the residue. ‘A’ can only recover Rs. 400

S.45-Partial failure of consideration not consisting of money-Where a part of the consideration for which a person signed a promissory note, bill of exchange or cheque, though not consisting of money, is ascertainable in money without collateral enquiry, and there has been a failure of that part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced

The holder of the bill, in case it was lost, he could ask for the payment, provided he is able to prove it.

S.45A provides that one can also get a duplicate bill. It does not extend to PN. The person concerned has only got a right against the drawer. Those who have previously written on it (acceptor or indorser), their liability gets wiped off. No right exists against prior indorsers. But you have to indemnify the drawer. 

CHAPTER IV-OF NEGOTIATION (S.46-60)

S.60 Instrument negotiable till payment or satisfactionA negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity) until payment or satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction

The bill can be negotiated till it has been payed. Even if it has been payed but has not been canceled and comes to a person (holder in due course) who is unaware that it has been payed, he has to be payed. 

Generally PN is payable in one go. But there can be PN which are payable in instalments. A PN can specify that 10K will be payable after one month, another 10K after another one month. Whosoever pays upon that instalment has to specify in the PN that that instalment has been paid. Otherwise the holder in due course can get full amount. 

Exception

S.46 Delivery-The making, acceptance or indorsement of a promissory note, bill of exchange or cheque is completed by delivery, actual or constructive. 

As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or indorsing the instrument, or by a person authorised by him in that behalf. 

As between such parties and any holder of the instrument other than a holder in due course, it may be shown that the instrument was delivered conditionally or for a special purpose only, and not for the purpose of transferring absolutely the property therein. 

A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof. 

A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by indorsement and delivery thereof

The instrument concerned is delivered. It comes into existence only by delivery. If it has been delivered for a specific purpose. Then the person to whom it has been delivered cannot claim it unless that purpose comes into being. But holder in due course can claim it. 

Eg-I gave a post-dated cheque which can be encashed only when I default on a loan and not prior to that. Delivery can be by myself.

Delivery can be by me or the party on my behalf (agent)

When do I deliver a NI to someone? If someone sends it by post, then the postal service is his agent. Till it is delivered, it is still your cheque. 

S.52 Indorser who excludes his own liability or makes it conditional-The indorser of a negotiable instrument may, by express words in the indorsement, exclude his own liability thereon, or make such liability or the right of the indorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen. 

Where an indorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate indorsers are liable to him

Illustrations

  1. The indorser of a negotiable instrument sign; his name adding the words— “Without recourse.” Upon this indorsement he incurs no liability. 
  2. A’ is the payee and holder of a negotiable instrument. Excluding personal liability by an indorsement “without recourse” he transfers the instrument to B, and B indorses it to C, who indorses it to A. A is not only reinstated in his former rights, but has the rights of an indorsee against B and C

Explanation-If one has indorsed it but not delivered it, and if that person dies, his legal representative has to endorse it again and then deliver it. 

He can make the endorsee a holder for limited purpose only. He can exclude the right of the endorse to negotiate. He can provide that endorsee can collect money only after the satisfaction of a condition which is uncertain. Indorsement of instrument can be for uncertain event but condition at the time of making it has to be certain. An indorsement can be conditional as well. There cannot be indorsement for partial amount. 

S.53 Holder deriving title from holder in due course-A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course

S.54 Instrument indorsed in blank-Subject to the provisions hereinafter contained as to crossed cheques, a negotiable instrument indorsed in blank is payable to the bearer thereof even although originally payable to order

S.55 Conversion of indorsement in blank into indorsement in full-If a negotiable instrument, after indorsed in blank, is indorsed in full, the amount of it cannot be claimed from the indorser in full, except by the person to whom it has been indorsed in full, or by one who derives title through such person

S.56Indorsement for part of sum due-No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount has been partly paid, a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance

S.57 Legal representative cannot by delivery only negotiate instrument indorsed by deceased-

The legal representative of a deceased person cannot negotiate by delivery only a promissory note, bill of exchange or cheque payable to order and indorsed by the deceased but not delivered.

INSTRUMENT OBTAINED BY UNLAWFUL MEANS (S.58)

S.58 Instrument obtained by unlawful means or for unlawful consideration-When a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or indorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course

Explanation-An instrument which has been lost, obtained by fraud/offense or for unlawful consideration, the holder of such instrument has no rights but holder in due course can claim upon it. The section does not mention forgery. Court has held that the English law wrt forgery is applicable to India as well. 

FORGED INSTRUMENTS-

If the instrument has been forged, no one other than holder can claim under such an instrument. One it is forged, the title is frozen and a genuine signature subsequent signature makes no difference. Only in one situation the person can claim it-The person who gave you the forged instrument, you can claim from him. 

If the signature of the drawer or acceptor of a bill has been forged, no title passes and in either case, the bill is entirely valueless. For example: 

  1. On a note for Rs 1,000, A forges B’s signature so as to make him the maker. C, a holder, who takes it bona fide and for value, acquires no title to the note. 
  2. On a bill for Rs 1,000, A’s acceptance to the bill is forged. The bill comes into the hands of B, a bona fide holder for value. B acquires no title to the bill

Forgery cannot be ratified, for a forger does not act, and does not purport to act, on behalf of the person whose signature he forges. However, a person whose signature has been forged may, by his conduct, be estopped from denying its genuineness to an innocent holder. 

Estoppel also applies-If the person whose signature has been forged, he cannot accept that signature but wrt the person to whom he has claimed that it is his signature, he cannot later claim that it was forged signature.

Forgery freezes the title of only that instrument. If on the basis of that instrument, a new instrument comes into being, that is valid.

Marcanas v Mercantile Bank of India

A trust has given to a person, an instrument for the collection of payment. The person forged his signature and gave it as a security to the Bank. 

FORGED INDORSEMENTS-

The case is, however, different where an indorsement is forged. The answer depends entirely upon the question whether the instrument is indorsed in full or in blank. If an instrument is indorsed in full, the signature of the person to whom or to whose order the instrument is negotiated must be a genuine one, for a title to the instrument can only be established through his indorsement. Therefore, if a bill or note is negotiated by means of a forged indorsement, a person claiming under that indorsement, though he is a purchaser for value and in good faith, cannot acquire the rights of a holder in due course. He acquires no title to the bill or note.

For example: 

  1. A bill is indorsed, ‘Pay John Brown or order’. John Brown must indorse the bill, and if his signature is forged, the bill is worthless
  2. A bill is payable to: ‘A’ or order. It is stolen from ‘A’ and the thief forges A’s indorsement and indorses it to B who takes it in good faith and for value. B acquires no title to the bill, nor can be recover upon it or give a valid discharge for it

Section 58, which protects a holder in due course where a negotiable instrument has been obtained by means of an offence, does not apply to a case of forgery. Where a party, primarily liable on a negotiable instrument pays the amount thereof, to a wrong person, who holds it under a forged indorsement, he remains liable to the true owner. This is subject to an exception in the case of cheques and bank drafts. No holder can acquire a good title to an instrument through a forged indorsement. 

However, different considerations arise where an indorsement is forged on an instrument that is already indorsed in blank. In such a case, when the instrument gets into the hands of any person, a transfer can be made by simply delivery, and it is immaterial as far as the holder is concerned that the transferor indorsed the bill in any name whatsoever. Where an instrument is indorsed in blank and it bears a further forged indorsement, the holder does not derive his title through the forged indorsement, and he can sue any of the parties to the bill without being affected by the forgery. 

For example-

A bill is indorsed; Pay John Brown or order. John Brown indorses the bill in blank. It comes into the hands of A. A passes it by simple delivery to B. B forges A’s indorsement and transfers it to C. As C, the holder, does not derive his title through the forged indorsement of A, but through the indorsement of John Brown which is genuine, he can sue any of the parties to the bill irrespective of A’s forged indorsement. A similar result would follow where the forged indorsement is made on an instrument originally drawn or made payable to bearer

CHAPTER V-PRESENTMENT (S.61-71)

S.61 Presentment for Acceptance-A bill of exchange payable after sight must, (if no time or place is specified therein for presentment), be presented to the drawee thereof for acceptance, (if he can, after reasonable search, be found), by a person entitled to demand acceptance, within a reasonable time after it is drawn, and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default. 

If the drawee cannot, after reasonable search, be found, the bill is dishonoured. 

If the bill is directed to the drawee at a particular place, it must be presented at that place; and if at the due date for presentment he cannot, after reasonable search be found there, the bill is dishonoured. 

Where authorized by agreement or usage, a presentment through the post office by means of a registered letter is sufficient

S.62 Presentment of promissory note for sight-A promissory note, payable at a certain period after sight, must be presented to the maker thereof for sight (if he can after reasonable search be found) by a person entitled to demand payment, within a reasonable time after it is made and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default.

S.63 Drawee’s time for deliberation-The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow the drawee forty-eight hours (exclusive of public holidays) to consider whether he will accept it

S.64 Presentment for payment- 

  1. Promissory notes, bills of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter provided. In default of such presentment, the other parties there to are not liable thereon to such holder. Where authorized by agreement or usage, a presentment through the post office by means of a registered letter is sufficient.
    1. Exception-Where a promissory note is payable on demand and is not payable at a specified place, no presentment is necessary in order to charge the maker thereof
  2. Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification: 

Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly.

S.65 Hours for presentment-Presentment for payment must be made during the usual hours of business, and, if at a banker’s within banking hours

S.66 Presentment for payment of instrument payable after date or sight-A promissory note or bill of exchange, made payable at a specified period after date or sight thereof, must be presented for payment at maturity

S.67 Presentment for payment of promissory note payable by instalments-A promissory note payable by instalments must be presented for payment on the third day after the date fixed for payment of each instalment; and non-payment on such presentment has the same effect as non-payment of a note at maturity

S.68 Presentment for payment of instrument payable at specified place and not elsewhere-A promissory note, bill of exchange or cheque made, drawn or accepted payable at a specified place and not elsewhere must, in order to charge any party thereto, be presented for payment at that place

S.69 Instrument payable at specified place-A promissory note or bill of exchange made, drawn or accepted payable at a specified place must, in order to charge the maker or drawer thereof, be presented for payment at that place

S.70 Presentment where no exclusive place specified-A promissory note or bill of exchange, not made payable as mentioned in sections 68 and 69, must be presented for payment at the place of business (if any), or at the usual residence, of the maker, drawee or acceptor thereof, as the case may be

S.71 Presentment when maker, etc., has no known place of business or residence-If the maker, drawee or acceptor of a negotiable instrument has no known place of business or fixed residence, and no place is specified in the instrument for presentment for acceptance or payment, such presentment may be made to him in person wherever he can be found

S.72 Presentment of cheque to charge drawer-Subject to the provisions of section 84, a cheque must, in order to charge the drawer be presented at the bank upon which it is drawn before the relation between the drawer and his banker has been altered to the prejudice of the drawer

S.73 Presentment of cheque to charge any other person-A cheque must, in order to charge any person except the drawer, be presented within a reasonable time after delivery thereof by such person.

S.74 Presentment of instrument payable on demand-Subject to the provisions of section 31, a negotiable instrument payable on demand must be presented for payment within a reasonable time after it is received by the holder.

S.75 Presentment by or to agent, representative of deceased, or assignee of insolventPresentment for acceptance or payment may be made to the duly authorized agent of the drawee, maker or acceptor, as the case may be, or, where the drawee, maker or acceptor has died, to his legal representative, or, where he has been declared an insolvent, to his assignee

WHEN PRESENTMENT UNNECESSARY (S.76)

S.76 When presentment unnecessary-No presentment for payment is necessary, and the instrument is dishonoured at the due date for presentment, in any of the following cases:— 

  1. if the maker, drawee or acceptor intentionally prevents the presentment of the instrument, or,  if the instrument being payable at his place of business, he closes such place on a business day during the usual business hours, or,  if the instrument being payable at some other specified place, neither he nor any person authorized to pay it attends at such place during the usual business hours, or,  if the instrument not being payable at any specified place, he cannot after due search be found; 
  2. as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-presentment
  3. as against any party if, after maturity, with knowledge that the instrument has not been presented— he makes a part payment on account of the amount due on the instrument, or promises to pay the amount due thereon in whole or in part, or otherwise waives his right to take advantage of any default in presentment for payment; 
  4. as against the drawer, if the drawer could not suffer damage from the want of such presentment

Presentment is giving or showing the instrument to concerned person for payment.

Why presentment is necessary?

The necessity arises because the person has to be paid upon the instrument. 

When it is to be presented?

3 circumstances-

  1. For the purpose of payment
  2. For the purpose of acceptance 
  3. Where the instrument is to paid after sight. 

For the purpose of acceptance one need to give the drawee 48 hours exclusive of holiday.

When the amount is payable, it has to be presented it at instalment time or maturity. Default in doing so (except under S.75) will excuse everyone (those who stood as guarantor) to its holder.

Presentment after Sight

S.61 A person cannot be expected to be a guarantor in perpetuity. He will be a guarantor only for a reasonable period of time. So A BOE on sight (on which no date is mentioned) must be presented to the drawee for acceptance within a reasonable time. 

Reasonable time is short. Limitation does not define reasonable period wrt indorsers. Limitation period come into picture for those who stood as guarantor for the instruments. The holder if keeps it for unreasonable time later indorses to 3rd person who does not indorse it for unreasonable time. He will be liable to the latter. Reasonable period depends on circumstances. He one has already kept it for 2 years and then indorses it to B. Reasonable period for B might be 2 months. 

If the drawee vanishes/cannot be found after reasonable search, BoE becomes dishonoured. 

Wrt to Cheque-In order to make the drawer liable, the cheque should be presented before the relationship bw drawer and the bank changes to prejudice of the drawer of the cheque. Ie the bank in the interim goes insolvent. In that case, the drawer of the cheque is excused to the extent to which he is prejudiced (S.84)

Eg-I have in my account 50K and give you a check of 20K. You keep the cheque for 3 months. If in the between the bank goes bankrupt, my 50K gone. But you cannot claim 20K from me but from the bank.

If I had only 5K but I had overdraft facility with the bank. In this case, the payee would recover 5K from drawee (bank) and 15K from me. 

Wrt to the liability of indorsers-The same rule is applicable which was applicable to PN. The holder should present it within a reasonable period otherwise prior indorsers are discharged to that holder. 

Place of Presentment-

If the place is specified, it has to be presented there. If not, then usual place of business

Excuse in presentment

If not attributable to delay, misconduct, negligence, he cannot make the presentment. But the moment the causes stops, he has to make the presentment

When the presentment is unnecessary? (S.76)

  1. When the party to whom it has to be presented, is guilty of misconduct ie prevents the presentment. 
  2. S.61-When he cannot be found after reasonable search.
  3. When he agrees to pay without presentment. Indorsers can specify that presentment is not necessary. By doing so he will expand his liability.
  4. Where the party concerned waves the default in presentment. Waiver can be-
    1. Making Part payments-
      1. If he has paid the part, can he be made liable for the whole? Its a contested issue, though language seems to indicate that he is liable for the whole
    2. Agrees to pay notwithstanding non-presentment
    3. By any conduct on his part, express his willingness to pay. 
  5. Where the drawer will not suffer any loss due to non-presentment. 
    1. If there was no credit in account of the drawer. 
    2. Cross drawing of BoE means liability owed to each other mutually

S.77 Liability of banker for negligently dealing with bill presented for payment-When a bill of exchange, accepted payable at a specified bank, has been duly presented there for payment and dishonoured, if the banker so negligently or improperly keeps, deals with or delivers back such bill as to cause loss to the holder, he must compensate the holder for such loss

Explanation-People draw BoE which are payable at the Bank. Bank accepts and pays. Only thing is that they are not payable on demand but at specified time. Many a time people accept BoE and mention that it is payable at the bank where they have account. Normally as a matter of practice, banks pay upon such bills. But there is no necessity of the bank to pay. The bank can deduct from the account of customer only if by paying upon it, the customer is validly discharged of his liability upon the bill. The bank has to check whether the person who is demanding the payment is the person authorised for payment and whether there has been forgery upon the instrument. For this acceptor normally takes some time and it has been suggested that Bank should be given some time for this purpose. But in one case it was held that if the bank takes caution, then there would be nothing to be cautious about as it would be out of business or there will be no purpose left

CHAPTER VI-OF PAYMENT AND INTEREST (S.78-81)

S.80 Interest when no rate specified-When no rate of interest is specified in the instrument, interest on the amount due thereon shall, [notwithstanding any agreement relating to interest between any parties to the instrument], be calculated at the rate of [eighteen per centum] per annum, from the date at which the same ought to have been paid by the party charged, until tender or realization of the amount due thereon, or until such date after the institution of a suit to recover such amount as the Court directs. 

Explanation-When the party charged is the indorser of an instrument dishonoured by non-payment he is liable to pay interest only from the time that he receives notice of the dishonour

Explanation-Where the interest rate on the instrument is not specified or it has been dishonoured subsequent to it, interest is payable at the rate of 18 percent per annum.  Where it is 10K 

If the space for interest is left blank, it is an inchoate but the authority to put up interest is up to 18% and not more than that otherwise it would be regarded as material alteration excusing all the parties to it. 

S.10-Payment in due course “Payment 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 do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned

ExplanationPDC can happen provided-

  1. First it should be according to apparent tenor of the instrument
  2. Should be only in money terms 
  3. Paid at or after maturity
  4. Payment before the maturity is not PDC
  5. It has to be in good faith without negligence to the person in possession of the instrument without having sufficient cause to believe that he is not entitled to receive the payment.
    1. Indian law is more rigorous than UK law. 
    2. The person not only has to make the payment to the holder of the instrument, he also has to make sure that he is entitled to payment. 

A drawer of BoE can later become HDC of that instrument. Same is true with PN. But its not PDC.

If its a payment to order, the drawee has to check whether the holder is the designated payee or indorsee. 

Where the indorsements are in order, ie it has been indorsed by the people who are entitled to indorse it, (cases of forgery freezes the title) 

If the payee has become bankrupt, the drawee can refuse to pay to him, as the amount by law has to go to the official liquidator. 

For a payment to be made, it can be made only by a person who is a party to that instrument (indorsers, payee, acceptor, etc). 

CHAPTER VII-OF DISCHARGE FROM LIABILITY (S.82-90)

DISCHARGE ON AN INSTRUMENT

First method of discharge is ‘payment upon the instrument’

Payment is payment in due course. Discharge does not mean that the instrument comes to an end. 

Everyone is completely discharged only when the person who is primarily liable on it pays upon it. If the interim parties pay upon it then only he and those whose stood as guarantee are discharged. 

Eg-If 3rd indorses pays, then subsequent indorsers are discharged but not prior indorsers who will still be liable to 3rd indorsers.

Cancellation and Release-

S.82 Discharge from liability-The maker, acceptor or indorser respectively of a negotiable instrument is discharged from liability thereon— 

  1. by cancellation-to a holder thereof who cancels such acceptor’s or indorser’s name with intent to discharge him, and to all parties claiming under such holder; 
  2. by release-to a holder thereof who otherwise discharges such maker, acceptor or indorser, and to all parties deriving title under such holder after notice of such discharge; 
  3. by payment-to all parties thereto, if the instrument is payable to bearer, or has been indorsed in blank, and such maker, acceptor or indorser makes payment in due course of the amount due thereon

Explanation-They both have the same effect but method is different

Cancellation is where the name is cut off. (eg holder cuts the name of 3rd person, that 3rd person is discharged of his liability to him only)

Release is where by a contract outside the instrument, a person is released of his liability on the instrument.

S.39-Common law Principe that if I have agreed that I will not sue the acceptor , I might reserve my right to sue other parties.

But I might reserve my rights against other parties. In cancellation and release if I reserve my right against other parties, then I can proceed against them.

Cancellation is a unilateral act so S.39 will not apply. If it is by a a contract then S.39 will apply

S.83 and S.86

S.83-Discharge by allowing drawee more than forty-eight hours to accept.—If the holder of a bill of exchange allows the drawee more than [forty-eight] hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharge from liability to such holder. 

S.86Parties not consenting discharged by qualified or limited acceptance.—If the holder of a bill of exchange acquiesces in a qualified acceptance, or one limited to part of the sum mentioned in the bill, or which substitutes a different place or time for payment, or which, where the drawees are not partners, is not signed by all the drawees, all previous parties whose consent is not obtained to such acceptance are discharged as against the holder and those claiming under him, unless on notice given by the holder they assent to such acceptance. 

Explanation-An acceptance is qualified—

  1. where it is conditional, declaring the payment to be dependent on the happening of an event therein stated;
  2. where it undertakes the payment of part only of the sum ordered to be paid; 
  3. where, no place of payment being specified on the order, it undertakes the payment at a specified place, and not otherwise or elsewhere; or where, a place of payment being specified in the order, it undertakes the payment at some other place and not otherwise or elsewhere; 
  4. where it undertakes the payment at a time other than that at which under the order it would be legally due
  5. Note:-Any type of conditional acceptance will mean that those who do not agree to that will be discharged

S.85-Cheque payable to order-

  1. Where a cheque 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 a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing, thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.

S.85A Drafts drawn by one branch of a bank on another payable to order- where any draft, that is, an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.

S.85 Explanation

  1. Payable to holder 
    1. There can be a possibility that indorsement is forged. If it is forged, the title freezes.
    2. Initially, the person who dealt with BoE were not general public but limited set of people.  The acceptor concerned was supposed to be aware of the signature concerned. As the usage of banking increased, it became means of paying one’s liability. 
    3. 85(1) was added as a protection to the bank. 
    4. The indorsement if forged, the bank is excused if paid in due course. Bank is not supposed to know the signature of the payee concerned
  2. Bearer Instrument
    1. In UK law, once a bearer always a bearer
    2. If it has been indorsed or indorsed restrictively, bank is required to cross-check but not if it acted reasonably. 
    3. Bank will try to see if holder is the indorsee of the cheque. 
    4. It is excused by saying that it paid the bearer of the cheque. 
    5. At the end of the cheque it is written-it is paid to x or bearer

S.87 Effect of Material Alteration-Any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties

Alteration by indorsee- And any such alteration, if made by an indorsee, discharges his indorser from all liability to him in respect of the consideration thereof

The provisions of this section are subject to those of sections 20, 49, 86 and 125

Law regarding Material Alteration applies to all instruments and deeds. 

As per the Stamp Act, if the instrument is altered (with or without consent) then its a new instrument and this has to be stamped afresh.

Material alternation discharges all prior parties who did not consent to the alteration. MA does not render the instrument completely useless. Those who become party to it subsequent alteration, they will be liable on it. 

Eg-A altered the instrument and thereafter indorses it and gives it to B. A is liable to B. B indorses to C. B is liable to C. 

MA excuses the parties not only on instrument but also on original consideration. 

What is a Material Alteration (MA)?

Merely because its alteration does not mean parties are excused. It has to be material. In UK, it has also to be apparent. MA is something which alters the rights and liabilities of parties to the instrument which are settled or varies the legal affect of a provision as originally expressed or reduces to certainty a provision originally uncertain or prejudices the party bound by deed.

Anirudham v Thomco Bank

MA defined

Instances of MA

Changing the amount which is payable on the instrument. 

Change of indorser or his/her liability

Where the interest is left bank or not specified, interest rate is assumed to be 18%. Putting interest more than 18% is MA.

If the date is not specified, then you put the original date on which it was made. But putting a different date (earlier or later) is MA

Because it affects (extends or reduces) the validity period. 

Putting a different place than otherwise mentioned is MA

Laws differ with places. In British India, each princely state had different laws. If it makes no difference then its not a Material Alteration 

Postponing the payment date is also MA

Changing order of indorsers is MA

Stamping an unstamped instrument is MA

Stamping an instrument which was not stamped will be MA as Stamped instrument are admissible in evidence.

MA will discharge the parties. It does not matter whether the person himself has altered it or has been altered by a someone else, provided it should be in its custody.

Accidental Alteration-Mixed views by courts

Suffel v Bank of England (IMP)

Queens bench gave the decision that if the number of the note is accidentally wiped off then it is MA. And the person concerned cannot claim on that bank note. Honk Kong and Shanghai Bank issued bank notes.

HSBC v Lo Lee Shi 

Lo Li Shi had mistakenly given the clothes for laundry and after ironing the notes were discovered but their numbers were erased. PC said that number on the note was not material part. It also said (controversially) that something which is done accidentally will not be regarded as MA. 

Instances where alteration has been held not to be MA

Attestation by witnesses

f

Changed before its completion 

Change in an inchoate instrument. But the common intention of original parties matters. 

Where the nick name is changed to real name

F

Whether it was the bearer, it is made payable to order 

When an alteration is made in BoE or Cheque and the alteration is not visible and the drawee concerned makes payment on the basis of alteration, how much can he deduct from the account of the drawer. 

Eg-A 10K cheque is altered to 1Lac. How much can the drawer deduct from the account? 

Young v Grote 

The court allowed the drawee to deduct the full amount if the change was not apparent. This decision was criticised a lot. 

Many common law courts did not follow this decision.

London Joint Stock Bank v Macmillan and Arthur 1920

The partner of the solicitor’s firm while going out was presented with a cheque by a clerk for payment of petty cash for office expenses. No amount was written in words and in figures it was mentioned 2. The clerk subsequently changed to 120 Pounds. When the bank paid the money, the firm contested it. In the event one draws the cheque, one has to take due care in filling up the amount so that there is no scope for tampering with it or its reduced. If not then the person concerned is liable to the bank for contributory negligence. This is the UK law. But if you are not negligible in filling, then you are liable only to the extent you originally intended while filling.

In India, S.89 mentions that irrespective of whether the drawer was negligent or not, in the event of alteration which is not apparent, and on that basis if drawee makes payment in due course, he can deduct the entire amount. The payee has to return the extra amount regardless whether he knew of the alteration or not. 

S.89-If a person is in possession of a written doc, and he tampers it, he may first try to prove it original and if he is unable to do so,. So you have to put a disclaimer that if possessor tempers with it, then he will not get anything on it as disincentive. 

S.90-Extinguishment of rights of action on bill in acceptor’s hands.—If a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished. 

If the BoE comes into the hand of the acceptor after its maturity, you can say that all parties are discharged. He can’t claim the bill upon himself. The same principle will apply to PN. 

Where the bankruptcy code discharges the person who is primarily liable.

Lapse of time-When the limitation period start operating then discharge happens when there is a merger ie on the instrument you have got a court directive then debt on that instrument merges with the court order. 

When there is a delay in giving notice of dishonour, the party concerned is discharged. 

CHAPTER VIII-NOTICE OF DISHONOUR (S.91-98)

When the bill or promissory note is dishonoured, notice has to go to prior parties who are liable upon it. 

Rationale-If a person has gone insolvent or not paid, then the parties concerned should be immediately notified so that they can adjust their account wrt the payment/drawee concerned. 

S.91-Dishonour by non-acceptance-A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. 

Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonoured.

S.92-Dishonour by non-payment-A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same

S.93 By and to whom notice should be given When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment, the holder thereof, or some party thereto, who remains liable thereon, must give notice that the instrument has been so dishonoured to all other parties whom the holder seeks to make severally liable thereon, and to someone of several parties whom he seeks to make jointly liable thereon

Nothing in this section renders it necessary to give notice to the maker of the dishonoured promissory note or the drawee or acceptor of the dishonoured bill of exchange or cheque

Dishonour can happen-

  1. Non-Payment (S.92)-
  2. Non-Acceptance (S.92)- 
    1. BoE is dishonoured by non-acceptance ie refusal to accept, incompetence of the drawee, giving a qualified/conditional acceptance. 

Notice of dishonour has to come from the party who is liable upon the instrument. It has to state the fact of the dishonour, how it has been dishonoured, why he is treating it as dishonour and the fact that he intends to make him liable. 

S.93 By and to whom notice should be given-When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment, the holder thereof, or some party thereto, who remains liable thereon, must give notice that the instrument has been so dishonoured to all other parties whom the holder seeks to make severally liable thereon, and to someone of several parties whom he seeks to make jointly liable there on

Nothing in this section renders it necessary to give notice to the maker of the dishonoured promissory note or the drawee or acceptor of the dishonoured bill of exchange or cheque

Notice can be oral or written-If written, it has to be sent so that it is received at most a day after it was sent. 

S.98 When notice of dishonour is unnecessary-No notice of dishonour is necessary-

  1. when it is dispensed with by the party entitled thereto- 
    1. The party has agreed that he will be liable for dishonour even without notice
  2. in order to charge the drawer when he has countermanded payment;
  3. when the party charged could not suffer damage for want of notice
    1. An accommodated party is supposed not to have suffered any damage by want of notice
  4. when the party entitled to notice cannot after due search be found; or the party bound to give notice is, for any other reason, unable without any fault of his own to give it; 
  5. to charge the drawers, when the acceptor is also a drawer; 
    1. Where drawer is an acceptor, he need not be given the notice of dishonour
  6. in the case of a promissory note which is not negotiable
    1. Such PN is not negotiated under PN but assigned. Rules of assignment ie actionable claims are applicable. 
    2. In the case of non-negotiable BoE, each particular indorser is as if he is drawing a fresh BoE.  Notice only need to be given to the prior indorser. 
      1. It is basically assignment. Non negotiable instrument are assignable. All debts are assignable.
  7. When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument

CHAPTER IX-OF NOTING AND PROTEST (99-104A)

Noting and Protest-

Noting is where upon the instrument the public notary records the fact of dishonour. And it will specify how and why it was dishonoured.

Protest is where he certifies the dishonour

S.99 Noting-When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each

Such note must be made within a reasonable time after dishonour, and must specify the date of dishonour, the reason, if any, assigned for such dishonour, or, if the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonoured, and the notary’s charges

S.100 Protest-When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-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 of exchange 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 acceptor, and on its 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

When it is protested, there is presumption of dishonour. In some foreign jurisdictions, it is mandatory.

Protest for better security-When the credit of the liable party is impeached, then the holder of the instrument can ask for security. 

In India, it does not give any advantage other than that, someone may become acceptor for honour. In certain continental jurisdiction, it gives certain rights to the holder ie to regard it as dishonour. 

After it has been noted or protested for non-acceptance, any person can go to the public notary and accept for the honour of the prior parties. If does not specify the party, then it will be assumed that he is accepting it for the drawer. 

Acceptance for honour-by allowing someone to become acceptor for honour, there is postponement of the day of reckoning. When a person accepts it for the honour of someone, the holder still has to go to the drawee and if he refuses then he will go to the acceptor for honour. Whosoever honour he (acceptor for honour) accepts it, that person is liable to him and parties prior to him are liable to him. (X accepts it for the honour of D (4th indorser), then D and prior parties are liable to X. 

The notary public notes it that it has been accepted for honour and details therein. 

Acceptance for honour can also come into being, after it has been protested for better security. 

Acceptance for honour is only for BoE. If the person not mentioned, then it is the drawer. 

Payment for honour can be for BoE as well as PN. 

CHAPTER X-OF REASONABLE TIME (S.105-107)

S.105 Reasonable time-In determining what is a reasonable time for presentment for acceptance or payment, for giving notice of dishonour and for noting, regard shall be had to the nature of the instrument and the usual course of dealing with respect to similar instruments; and, in calculating such time, public holidays shall be excluded

S.106 Reasonable time of giving notice of dishonour-If the holder and the party to whom notice of dishonour is given carry on business or live (as the case may be) in different places, such notice is given within a reasonable time if it is dispatched by the next post or on the day next after the day of dishonour. 

If the said parties carry on business or live in the same place, such notice is given within a reasonable time if it is dispatched in time to reach its destination on the day next after the day of dishonour

S.107 Reasonable time for transmitting such notice-A party receiving notice of dishonour, who seeks to enforce his right against a prior party, transmits the notice within a reasonable time if he transmits it within the same time after its receipt as he would have had to give notice if he had been the holder

CHAPTER XI-ACCEPTANCE AND PAYMENT FOR HONOUR (S.108-116)

S.108 Acceptance for honour-When a BoE has been noted or protested for non-acceptance or for better security, any person not being a party already liable thereon may, with the consent of the holder, by writing on the bill, accept the same for the honour of any party thereto.

S.109 How acceptance for honour must be made-A person desiring to accept for honour must, by writing on the bill under his hand, declare that he accepts under protest the protested bill for the honourofthedrawerorofaparticularindorserwhomhenames,orgenerallyforhonour.

S.110-Acceptance not specifying for whose honour it is made-Where the acceptance does not express for whose honour it is made, it shall be deemed to be made for the honour of the drawer

S.111-Liability of acceptor for honour-An acceptor for honour binds himself to all parties subsequent to the party for whose honour he accepts to pay the amount of the bill if the drawee do not; and such party and all prior parties are liable in their respective capacities to compensate the acceptor for honour for all loss or damage sustained by him in consequence of such acceptance. 

But an acceptor for honour is not liable to the holder of the bill unless it is presented, or (in case the address given by such acceptor on the bill is a place other than the place where the bill is made payable) forwarded for presentment, not later than the day next after the day of its maturity

S.112-When acceptor for honour may be charged-An acceptor for honour cannot be charged unless the bill has at its maturity been presented to the drawee for payment, and has been dishonoured by him, and noted or protested for such dishonour

S.113-Payment for honour-When a bill of exchange has been noted or protested for non-payment, any person may pay the same for the honour of any party liable to pay the same, provided that the person so paying or his agent in that behalf has previously declared before a notary public the party for whose honour he pays, and that such declaration has been recorded by such notary public

S.114-Right of payer for honour-Any person so paying is entitled to all the rights in respect of the bill, of the holder at the time of such payment, and may recover from the party for whose honour he pays all sums so paid, with interest thereon and with all expenses properly incurred in making such payment

S.115-Drawee in case of need-Where a drawee in case of need is named in a bill of exchange, or in any indorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee

S.116-Acceptance and payment without protest-A drawee in case of need may accept and pay the bill of exchange without previous protest

CHAPTER XII-OF COMPENSATION (S.117)

S.117 Rules as to compensation-The compensation payable in case of dishonour of a promissory note, bill of exchange or cheque, by any party liable to the holder or any indorsee, shall be determined by the following rules:— 

  1. the holder is entitled to the amount due upon the instrument, together with the expenses properly incurred in presenting, noting and protesting it; 
  2. when the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places; 
  3. an indorser who, being liable, has paid the amount due on the same is entitled to the amount so paid with interest at 1[eighteen per centum] per annum from the date of payment until tender or realization thereof, together with all expenses caused by the dishonour and payment; 
  4. when the person charged and such indorser reside at different places, the indorser is entitled to receive such sum at the current rate of exchange between the two places; 
  5. the party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill.

CHAPTER XIII-SPECIAL RULES OF EVIDENCE (S.118-122)

Evidence Act and other general principles are applicable

Two things-

  1. Presumptions (rebuttable)
  2. Estoppel

S.118 lays down presumptions as to NI. All these presumptions are rebuttable presumptions

S.118-Presumptions as to negotiable instruments-Until the contrary is proved, the following presumptions shall be made:— 

  1. of consideration:—that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration
  2. as to date:—that every negotiable instrument bearing a date was made or drawn on such date;
  3. as to time of acceptance:—that every accepted bill of exchange was accepted within a  reasonable time after its date and before its maturity
  4. as to time of transfer:—that every transfer of a negotiable instrument was made before its maturity
  5. as to order of indorsements:—that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon
  6. as to stamp:— that a lost promissory note, bill of exchange or cheque was duly stamped
  7. that holder is a holder in due course:— that the holder of a negotiable instrument is a holder in due course : provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burthen of proving that the holder is a holder in due course lies upon holder
    1. Every one assumed to be holder in due course. 
    2. It is also assumed that he brought it for consideration and before maturity. 
    3. Whether there was awareness in the defect of the title of the person? 
    4. There is presumption that holder acted in good faith and without negligence and nothing to show that there was defect in title of the person from whom he got the instrument.  
    5. But if its gets transferred by means of offence, then every subsequent holder will have to prove that he holder in due course. 

S.119-Presumption on proof of protest-In a suit upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved

On proof of protest, the instrument shall be presumed to have been dishonoured. This presumption is difficult to rebut as this is certified by the notary. 

S.114 of Evidence Act-provides that the court concerned shall take into account the normal course of events during assessing evidence. If the person concerned has evidence of an event which he does not present in court, then court can presume that that particular event did not occur.

If you have paid consideration, you would made record of that in normal course. If you do not present that record, court can presume that you did not pay not consideration. 

A businessman concerned in the normal situation, is supposed to maintain record in his books of account that he paid such and such consideration. 

Even in circumstances where the preservation of records becomes difficult, still you need to have some evidence.

Kundal Lal v Custodian of Evacuee Property

KL claimed that consideration for PN was paid by him, the court asked him the book of records.

Two other presumptions-

Presumption that every instrument is an inland instrument governed by the Indian law.

Presumption that every instrument when delivered, it was delivered unconditionally.

ESTOPPEL

There is an estoppel against denying the original validity of the instrument. Maker, drawer and acceptor for honour of drawer, they cannot deny the original validity of the instrument in a suit thereon by a holder in due course. If I made the instrument and given it out, I cannot subsequently say that I did not make it. I can deny the signature which means that it never came into being. If you do not deny the forgery of the signature, then you do not deny the original validity of the instrument. If he was forced/coerced, it is voidable wrt to immediate party.

Also an indorser cannot deny the signature of prior party. 

S.117 Evidence Act-That the acceptor/drawee of the BoE cannot deny the capacity of drawer to draw upon him. But the acceptor of BoE can deny the signature of the drawer. Here Indian law differs from UK law. In UK, the acceptor of BoE cannot even deny the signature of the drawer. 

S.120-Estoppel against denying original validity of instrument-No maker of a promissory note, and no drawer of a bill of exchange or cheque, and no acceptor of a bill of exchange for the honour of the drawer shall, in a suit thereon by a holder in due course, be permitted to deny the validity of the instrument as originally made or drawn

S.121-Estoppel against denying capacity of payee to indorse-No maker of a promissory note and no acceptor of a bill of exchange [payable to order] shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s capacity, at the date of the note or bill, to indorse the same

When I make and give a BoE to someone, I cannot deny his capacity to indorse it unless there is a contract otherwise. Even if he indorsed it against terms, I can only claim damages against him and not from holder in due course.

S.122-Estoppel against denying signature or capacity of prior party-No indorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity to contract of any prior party to the instrument

CHAPTER XVI-RULES OF INTERNATIONAL LAW WRT NI (S.135-137)

This is also known as Conflict of Law or Private Intl Law.

Foreign Instrument-Defined negatively.What is not an inland instrument is a Foreign Instrument

Inland Instrument-made or drawn in India and payable in or drawn upon resident in India. 

It includes-

  1. If drawn upon a resident of India if paying outside India 
    1. BoE is drawn upon Tata Steel. If paid outside India, its still inland instrument
    2. Mercedes Benz if paying a BoE in India will be inland instrument
  2. Resident of a foreign nation if paying in India

In the case of an Indian bank, if BoE which is drawn upon a branch outside India, it is not an Inland Instrument. 

FEMA-Foreign Exchange Management Act has to be looked at to determine the inland or foreign instrument. 

Kidston and sons v Seth Brothers

Calcutta HC provided that if an instrument is made an Indian in favour of an Indian, it still is an inland instrument if it was payable in India though the place at which it was drawn might have been outside India. 

Madras HC Judgement

Cheque was drawn outside India to be payable at a bank branch in India. Was held to be an Inland Instrument. 

S.11 says that an inland instrument has to be drawn or made in India. 

3 Factors/Principles-

  1. The intention of the legislature will have to be taken into account. If the statute intends to regulate NI, then that particular statutory provision will prevail whether it has relation with that country or not. 
  2. Generally, one sovereign does not intend to govern issues that are primarily the domain of other sovereign. An Indian govt should not be concerned about the happenings outside India. What? It would be discourteous to intervene.
  3. Normally, the parties intent to be governed by the laws of a country. But most of the mercantile laws have rules-‘subject to a contract to the contrary’ and unless and until rules of public policy are violated, parties have a discretion to say what law they intend to be governed by. They can say so expressly or impliedly. In 90% cases, they do not state the law they intend to be governed by. Then courts will have to decipher-
    1. The laws parties intended to be governed by
    2. What law has got the most real connection with that particular contract? For that purpose it will look at-
      1. The language of the contract
      2. The place of the contract
      3. Parties to the contract
      4. Currency to be paid upon
      5. Format and style of the contract
    3. Wrt foreign NI, some rules are specified in the act itself and some are not specified but will be looked at by the conflict of laws.

Validity, Capacity, etc

The law of the place of the contract (Lex Loci Contractus)

If the NI was made in Nepal and if the law of majority there is 16, then it has to be honoured

Mode of acceptance

Whether general or qualified, the law where it is accepted.

Stamp Laws-

One goes by the place where it was made. Whether NI void or inadmissible in evidence due to improper stamping, under that law, it restraints only courts of that country. But if comes to India, it has to be stamped. 

Where it is made-

It will be defined by where it has been delivered and not where it was written

S.134 and S.135 defines liability of the maker and acceptor/indorser.

Liability of the maker/drawer is governed by the place where it was made

Liability of the indorser/acceptor is governed by the place where it was made payable.

S.134-Law governing liability of maker, acceptor or indorser of foreign instrument-In the absence of a contract to the contrary, the liability of the maker or drawerof a foreign promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and indorser by the law of the place where the instrument is made payable

Illustration 

A bill of exchange was drawn by A in California, where the rate of interest is 25 percent and accepted by B, payable in Washington, where the rate of interest is 6 per cent. The bill is endorsed in India, and is dishonoured. An action on the bill is brought against B in India. He is liable to pay interest at the rate of 6 percent only; but if A is charged as drawer, A is liable to pay interest at the rate of 25 per cent. IMPORTANT

S.135-Law of place of payment governs dishonour-Where a promissory note, bill of exchange or cheque is made payable in a different place from that in which it is made or indorsed, the law of the place where it is made payable determines what constitutes dishonour and what notice of dishonour is sufficient. 

Illustration 

A bill of exchange drawn and indorsed in India, but accepted payable in France, is dishonoured. The indorsee causes it to be protested for such dishonour, and gives notice thereof in accordance with the law of France, though not in accordance with the rules herein contained in respect of bills which are not foreign. The notice is sufficient

S.136-Instrument made, etc., out of India, but in accordance with the law of India-If a negotiable instrument is made, drawn, accepted or indorsed outside India, but in accordance with the law of India, the circumstances that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or indorsement made thereon within India

S.137-Presumption as to foreign law-The law of any foreign country regarding promissory notes, bills of exchange and cheques shall be presumed to be the same as that of India, unless and until the contrary is proved

X draws a BoE upon B in Malaysia. As per Malaysian law, he could not have done so. But if the Bill comes in India and accepted, from that moment onward, the bill is valid in India. But the maker will not be liable and the indorser who indorser who indorsed in India will be liable. But it has to be stamped in India. 

CHAPTER XIV-CROSSING OF CHEQUES (S.123-131A)

Cross-A box in the cheque. It means that such cheques cannot be paid over the counter but to only a Bank. A Bank will collect it on the behalf of the customer. 

Banks collects it as an agent of its customer. When the cheque is crossed, then it can be paid only through a bank. If it is crossed then only a bank can collect payment upon it. One can also write-not negotiable. NN means that it cannot further negotiated but can be assigned. No one will collect payment on a non-negotiable cheque unless and until its a case of succession. Theoretically a NN cheque is assignable.  

General Crossing

Sometimes when it is crossed you add the name of the bank to it. Once the name of the bank is added it becomes a special crossing. In such a case, the collection can be made only by the bank mentioned. 

2 things-

  1. Once crossed, then obliteration of the crossing (general or special) is a material alteration. But if the cheque was not crossed, it can be crossed later and that would not amount to material alteration. Conversion of general crossing into special crossing is also no MA. 
  2. The bank can pay upon that cheque only to a bank for it to be a payment in due course. If specially crossed, then only to that bank whose name is mentioned. That bank however assign another bank to collect on its behalf by crossing it once again. 

Account Payee Cheques-This meant that cheque can be paid only into the account and not across the counter. Originally they did not make a difference. The person named’s bank will collect it and deposit it into his account.

Account payee now means that not just that you have to pay into the account but that it is non-negotiable and non-transferable. It can only be paid into the account of the person named into the cheque. 

Earlier maintaining an account was privilege. It was assumed that bank would not dishonour the cheques. Cheque facility was therefore granted to limited person who had some financial standing in society. 

Its value is deemed to be equal to the amount mentioned on it. Even a blank cheque leave is considered a good. The person who takes payment upon it, if he is not the real owner of the cheque, he has fraudulently deprived the real owner of its possession, he is guilty of tort of conversion howsoever small the period is. Whether he did not intentionally or not does not matter. 

The Principle is liable for the wrongs committed by the agent during the course of the employment. Bank is liable for its principle which is the customer. If the customer has committed the tort of conversion, the bank is also liable. 

S.131 of the NI was put in- 

S.82 of the BoE Act was put in-was later repealed and replaced by S.4 of the Cheques Act.

S.4 of the Cheques Act gives wider protection. 

Essence of S.131-Non-liability of banker receiving payment of cheque-A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. 

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

Explanation II-It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.

Conditions-

  1. The bank should collect the crossed only for its customer. If it collects of itself (discounted cheque) or someone else, then it will not have the protection of this section.
  2. It should collect in good faith without negligence. Then it is not liable to the original owner merely because there existed a defect in the title of the person for whom it collected the payment.

Issues-

  1. Who can be said to be a customer?
  2. When can we say that the bank has collected it in good faith without negligence?

Who can be said to be a customer?

Originally the test was-Customer was a person who habitually maintained an account with the bank (branch) for a certain period of time. The person was supposed to be a customer for certain period of time and had habitually dealt with the bank for the bank to be aware of him. 

Then in-

Taxation Commissioner v English, Scottish & Auz Bank Ltd, PC held

That duration was not of essence, a person is a customer from the moment an account is opened and he is allowed to withdraw. Here a cheque was in favour of a person. It was siphoned during post. The person opened the account with this cheque. The address given was of a posh locality in Sydney. The bank opened the account and the person later withdrew the account and vanished. Issue was whether he could be regarded as a customer. Court held that the person concerned was a customer the moment he could withdraw the amount. 

Ladbrok Co v Tord

The person was not allowed to withdraw the money till the cheque was cleared. The person had stolen a cheque payable to an Oxford Student. The thief presented the cheque for opening the bank account by presenting himself as the student. Account was opened but he was not allowed to withdraw. Court said that a person is a customer the moment he opened the account whether he is allowed to withdraw or not. He was held to be a customer.

Wood v Martin Brank

The person concerned discussed with the bank investment proposals for money which he was about to come into. BM advised him to invest in debentures of a company which had a/c in the bank. The company was not in good position. Acting on that advise, he invested the money. The company later went insolvent. Whether at the time of advice, he was a customer of the bank? Court held that he was a customer from the moment the negotiations had reached a stage, where a neutral businessman/observer will say that he would open an account provided he opens an account later on. People who have opened an account are regarded as customers. For the purpose of S.131 those who have habitually dealt with the bank would not be regarded as customers he they don’t have a bank account with the bank.

Great Western Railway Co v London And County Banking Co Ltd

The person who committed the malfeasance was a raid collector of a local municipality. Municipality had an account with the bank. He used to deposit collected money in that and take his commission across the counter. This is how he dealt with the bank. He later stole certain cheques from the GWRC and deposited it into the account. The bank claimed that it was dealing for a customer. The claim was negatived because the raid collector never had any account with the bank. 

Importer Co Ltd v Westminister Bank Ltd

The account payee cheque was from Turkey and was given to a Turkish bank. The Turkish bank contacted an English Bank for payment and got paid. TB habitually dealt with the English Bank but had no ac with the English Bank. Whether the UK bank was guilty? 

What if the bank is unaware of the account opener?

Eg-A opens the account in the name of B but this is his account. 

If someone deals with another person by misrepresenting that person, then the other person is not liable. 

Marfani & Co Ltd Midland Bank

A person ‘A’ working for a firm contacted some eminent gentleman who was the customer of the bank. And represented him that he was Eliazade (rich Persian). The gentleman after sometime confided in him and then ‘A’ him that he wants to open an account in the Bank. He gave reference of Eliazade. Account was opened and money was deposited. Cheque was drawn in the name of Eliazade. The person ‘A’ took the cheque money and fled. It was held that the real customer of the bank was ‘A’ who opened the account who the bank believed to be ‘Eliazade’ 

Issue-if the account is opened in name of someone else, the who is the customer?

If that person gave consent, then he is the customer thought the account is managed by 3rd person.

Rowlandson v National Bank

An eminent grandmother wanted to open an account in the name of her grandchildren. The account was to be operated for the benefit of the grandchildren by their parents who happened to be their guardian. Guardians did not approve off the opening of the account. But they withdrew money from the account for personal use. Customers were grandchildren.

When can we say that the bank has collected it in good faith without negligence?

S.131 Non-liability of banker receiving payment of cheque-A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. 

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

Explanation IIIt shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care

Protects bank from 2 charges-

  1. Money hadn’t received 
  2. Conversion

Wrt Conversion, it had to act in good faith and without negligence. The issue of good faith crops up because many a times, the person who has drawn the cheque, has overdraft with the bank. It is the bank which is pushing him to pay the overdraft and the person concerned pays into his account money which does not belong to him and the bank is many a times very fast in collecting such deposits. 

Wrt Negligence, the bank concerned is not in negligence, if it owes a duty of care, even if exercise of that care would not have brought out the truth. Duty of care is not wrt to the cheque. Many a time cheque is deposited wrongfully (misrepresenting identity, etc) So duty of care starts with opening of the account. What was sufficient 100 years ago may not be sufficient now. Reasonable prudent man doing business will be the criteria. When one opens an account, it has to usually take into account not just the industry practice but its own internal guidelines. Guidelines wrt KYC norms, etc 

Ladbrok Co v Tord

The person was not allowed to withdraw the money till the cheque was cleared. The person had stolen a cheque payable to an Oxford Student. The thief presented the cheque for opening the bank account by presenting himself as the student. Account was opened but he was not allowed to withdraw. Court said that a person is a customer the moment he opened the account whether he is allowed to withdraw or not. He was held to be a customer. It was also held to guilty of negligence

Loyd Bank v Sawory

There was a stock broker. Two clerks stole cheques and got in favour of themselves and their wives. The bank concerned asked the profession of account openers to ascertain how much money this person will be giving for the purpose of collection. This practice was not followed in the present case. 

Orbit Mining and Trading Company v Westminister Bank

The person concerned opened an account and later on changed his employment. 

Lumsden and Co v London Trusty Saving Bank

A person opened an account in someone else’s name and gave himself as a referee. He did not have bank account there. The bank was held guilty of negligence for not asking him the bank where he had account.

Most of the cases of conversion will arise, where a person misuses his fiduciary relationship to pay into account a cheque which does not belong to him. 

Eg-the guardian concerned puts the cheque into his personal account. 

Eg-the director of a company endorses a cheque payable to his company to his account. 

Bank has to make a reasonable inquiry

Morison v London County and Westminister Bank

The person paid into his account the cheque of the co. The bank grew suspicious and contacted the company. Employer concerned was forgiving by nature and told that everything was normal. The bank clerk was not satisfied and still persisted with inquiry. Later when similar incidents happened again and the company tried to recover them, it was held that by his statement, the Employer had regularised the practice. 

If in the inquiry, the customer concerned validates the cheque, then bank is not liable. 

Marfani Case-IMP

Note:-The court will look if the opening of account, deposit and withdrawl looks like one transaction, if it does then it has to be circumspect

SBI v PNB Delhi HC (Ask Rakesh Uncle)

One ‘Durlabh Singh’ opened an account on 10 Dec 1964. He was introduced by one ‘Lakshman Das’ whose antecedents were unknown. He (Durlabh Singh) opened an account with 200. Thereafter the account was not operated. On 26 Dec, he paid a cheque of 80K into his account. The cheque was drawn by the land acquisition collector of Delhi (SBI Cheques). The cheque was collected by SBI on 29 Dec and from 1st Jan 1965-11 Jan 1965, he withdrew on an average 10K a day so that he was left with 100 Rupees on 11. SBI got a notice from collector, that a chequebook with 20 cheque leaves were missing and those should not be honoured. SBI which had already paid to PNB (PNB had collected the cheques), sough its reimbursement u/s 72 of Contract Act which the PNB tried to avoid by saying that-

  1. It had collected it from its (SBI) customers  
  2. SBI was estopped from denying the signature of its customer. 

Estoppel principle has its origin in Roman Law. The court disagreed as due care/diligence was not observed. 

S.117 of the Evidence Act provides that theDrawee of a BoE in India can deny the signature of the Drawer. 

National Westminister Bank Ltd v Barkley Bank

One person named Ismail was given a cheque of 8K Pound. Ismail was based in Nigeria and was trying to bypass the civil laws of Nigeria. He paid Nigerian pounds for the cheque. NatWest honoured the cheque and paid Barkley Bank 8K Pound which was lying in his account. Subsequently a forgery was discovered and NatWest tried to recover the account. The plea of estoppel was taken and it cannot deny the signature. 

The court held that plea of estoppel will not apply against the bank. If it has paid by mistake, it is entitled to recover the money. Barkley bank was not going to suffer any loss as 8K pound was still lying in that account

Note:-In the case of a cheque, even if it is genuine, the drawer of the cheque at any time can countermand the payment on the cheque. Bank concerned in such a case is not bound to pay. In the case of BoE, the drawee once he has accepted, he is bound to pay. He cannot countermand on that. 

If the cheque is a forged cheque, S.131 is inapplicable as a forged cheque is not a cheque. 

Due care/diligence is important

An Altered cheque or where the signature is forged

Indian Bank v Catholic Syrian Bank

A bank draft of 20 Rs had been altered 29K Rupees. Parties are discharged upon it but it is still NI. Subsequent parties upon it will be liable if it gets further indorsed. IMPORTANT

Indian Overseas Bank v Industrial Chain Concerned

One Sethuraman was a manager of an Industry chain. He approached an IOB branch manager who used to be his class fellow for opening an account. Sethuraman also asked from him an ‘overdraft facility’ which he was refused. The account was opened on October 24, 1974, and over a period of time, cheques were deposited and withdrawn. Subsequently, they were informed by IOB, that cheques were missing. Whether the bank concerned had acted negligently?

The court found that bank followed the procedures in opening the account. If the bank manager knows someone, then there is no requirement of asking reference for that person. There was nothing abnormal in it. 

Wrt deposits and withdrawl, they were done over a period of 6 months.

Manager was negligent, he did not look into the address of the industrial chain concerned, then he would have found out the truth. 

Standard of Care=Reasonable Man’s test but that will change with time. It has to collect the cheque in reasonable time

These days banking transaction are quite common and same standard that was prevalent 100 years ago cannot be followed now. Hence, IOB was held not liable.

Second defence-Liggett Defence 

It is a defence in Equity. If the person concerned is misappropriating something owed to him/her, then there is no liabilities on the parties concerned. 

Defence of Contributory Negligence

That person concerned who was deprived was also negligence. 

Defence 4-Where the bank collect cheque for its own self. But if it is a holder in due course then it gets the benefit. 

CHAPTER XVII-PENALTIES FOR CHEQUE DISHONOUR (S.138-148)

S.138-Dishonour of cheque for insufficiency, etc., of funds in the account-

Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may be extended to two years’, or with fine which may extend to twice the amount of the cheque, or with both: 

Provided that nothing contained in this section shall apply unless-

  1. the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier
  2. 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 thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and 
  3. The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. 
    1. Explanation-For the purposes of this section, “Debt of other liability” means a legally enforceable debt or other liability

Explanation-

There is no liability on the drawee of the cheque except where it gives a banker’s guarantee or accommodate a BoE.

Liability is only upon the drawer of the cheque. 

Presumptions-

  1. That the drawer has banker customer relation with the Bank
  2. There is sufficient money to honour the cheque
  3. Bank concerned will honour the cheque provided it is presented in a reasonable time.

Principles of fraudulent preference (one creditor over other), etc are not applicable in a banker-customer relationship.

In case of insufficient funds, 2 remedies available to the payee-

  1. Civil Suit against the drawer
  2. Sue him u/s 420 IPC
    1. Problem-Proving Mens-Rea was difficult 

S.138 of the NI Act was drafted to punish culpable drawers. It does not penalise the dishonour of the cheque but that he does not seek to honour the liability which he had taken upon himself through the means of the cheque. 

Two reasons of dishonour-

  1. Insufficiency of funds
  2. It exceeds the arrangements made with the bank (over-draft facility)

Conditions-

  1. Bank will give a notice of dishonour of the cheque to the payee who in turn has to give a notice within 30 days after the receipt of notice of dishonour from the bank. 
    1. Notice has to reach the drawer within the period of 30 days. 
    2. Many a times, exorbitant claims are made in the notice.
    3. Notice has to be for the amount concerned. 
    4. Sometimes the drawer persuades the payee that he will present the cheque again. In such a case, the period of 30 days will run from the next dishonour. 
  2. Within 15 days of receipt of notice from the payee, the drawer has to make the payment. If he fails, then the liability starts. 

Collecting bank will tell the reasons for dishonour. 

Difference b/w collecting bank and paying bank-

Paying Bank-The banker who is required to pay the cheque drawn on him by a customer is called the paying banker or drawee bank.

Collecting bank-A collecting banker is one who undertakes to collect the amount of a cheques & bills for his customer from the paying banker. 

Pre-Emptive Steps to avoid the liability- 

  1. Countermanding the Cheque-Asking the bank not to pay upon the Cheque
  2. Closing of an account after drawing the cheque but it is still regarded as insufficiency of balance. 

Note:-S.138 has to be read in such a manner, that it is not rendered ineffective. 

Now banks also charge fine over dishonour of cheque.

Banks generally don’t use the term ‘insufficiency of balance’ The will mention various other excuse like-Contact the drawer. All this will be deemed as insufficiency of balance. 

The drawer concerned cannot say that he did not know of insufficiency of funds in his account. 

What if the payee had not paid consideration for the cheque?

In such a case, drawer can have a valid defence. But he will be liable to the holder in the due course. But the liability shall be civil liability. 

S.139 Presumption in favour of holder-It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, of any debt or other liability

The person concerned should have drawn the cheque in discharge of his liability. This presumption is a rebuttable presumption. It is an enforceable legal liability. 

Cheques drawn in discharge of time-barred debt is not covered here. 

Where only a part of the legal liability is enforceable, liability will be wrt to that value of the cheque. Legal liability should be equal or greater than the value of the cheque

S.140 Defence which may not be allowed in any prosecution under section 138-It shall not be a defence in a prosecution for an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section

Procedure of initiation of Complaint-

The person will initiate at the bank branch where he/she presented it for the payment.

In case it is across the counter, it will the branch of the drawer.

S.141 Offences by companies-

  1. If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: 
    1. Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence: 
    2. Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.] 
  2. Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. 
    1. Explanation-For the purposes of this section,—
      1. (a) “Company” means anybody corporate and includes a firm or other association of individuals; and 
      2. (b) “Director” in relation to a firm, means a partner in the firm.

To be continued…


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