Il YEAR Il SEM CONTRACT LAW-II DR. RUCHI TIWARI TOPICS INCLUDED: Cheque, Bank Payment of due core; Payment of Interest, Parties to Negotiable Instrurnent Hokler - Helder it due course; Bishanour and Discharge of Negotiable Instruments, Dishonor, Diacharge, Creeging and Bouncing of ChequesN.D. KAPOOR'S Elements of © . USINESS LA Dt rp din oeN.D. KAPOOR'S Elements of BUSINESS LAW (Textbook for B.Com, LL.B, CA, CS, CMA, M.Com, MBA and other Commerce Courses of all Indian Universities) N.D. KAPOOR Formerly, Head of the Department of Commerce Hans Raj College, University of Delhi, Delhi Revised by Dr. RAJNI ABBI English (Hons.), LL.B, LL.M, Ph.D (Delhi University) Associate Professor, Faculty of Law, University of Delhi BHARAT BHUSHAN M.Com, M.Phil (Delhi School of Economics) Senior Faculty Member, Hans Raj College, University of Delhi Associate Member, Institute of Company Secretaries of India RAJIV KAPOOR B.Com (Shri Ram College of Commerce) LL.B (Faculty of Law, University of Delhi) Practising Advocate at the Delhi High Court Consulting Editor VIJAY KAPUR Formerly, Director of Studies Institute of Chartered Accountants of India Lecturer, Shri Ram College of Commerce, University of Delhi BES, sultan chand Educational PublishersSULTAN CHAND & SONS (P) LTD Educational Publishers assed, Darya Ganj, New Delhi 110 002 Phones: 4854 6000 (100 Linen), 2324 8080 Wax 5 (O11) A354 6004, 2826 4205, Bemail : sce@sultanchandebooks.com Buy books online ats www.sullan-chand,com N.D. Kapoor's other Popular Books lements of Mercantile Law ements of Company Law Flements of Industrial Law ISBN: 978-93-87907-73-7 Thoroughly Revised and Enriched Edition 2019 © All rights reserved. No part of this book may be reproduced or copied in any form or by any means (graphic, electroncor mechanical, including photocopying, recording, taping, or information retrieval system) or reproduced — on any disc, tape, perforated media or any other information storage device, etc, without the prit written permission of the publishers. Breach of this condition is liable for legal action. Persons fount dealing in pirated version of this product will be dealt with strictly. To avoid purchase of sub-standal pirated version, insist on taking a cash memo. Anyone who brings information regarding any such reproduction will be handsomely rewarded Publication of Key to this book is strictly prohibited, Every effort has been made to avoid errors or omissions in this publication. In spite ofthis, some ene tight have crept in. Any mistake, error or discrepancy noted may be brought to our notice andi shill taken care of in the next edition. Itis notified that neither the publishers nor the authors or seller will® responsible for any damage or loss of any kind, in any manner, therefrom. For faulty binding, misprints or for missing pages, etc, the publishers’ liability is limited to replace™ within one month of the purchase by a si imilar edition. All expenses in this connection are to bE by the purchaser. All disputes are subject to Delhi jurisdiction only. Printed at: Goyal Offset Printers, Delhi396 || Special Contracts or by non-payment, due notice of made liable to pay. his includes. ote no such notice is ‘bill either by non-aeceptance ersons who are to be case of dishonour of am TL. In case of dishonour of dishonour must be given to all the p the drawer and the prior indorsers. But in the required to be given to the maker (See, 93). cur when such protest is required by the law of in the case ofa note, Foreign bills must be protested for dishont 1 the place where they are drawn (See. 104), No such protest is required it CHEQUE |A cheque is a bill of exchange drawn upon a specified banker and payable on demand and it Jneque in the electronic form. image of a truncated cheque and a ¢ means “cheque which contains written and signed in a secure system et mmetric crypto system.” fhe course of a clearing cycle, iving payment, immediately on fhe further physical movement includes the electronic ‘A cheque in the electroni¢ form proper cheque, and is generated, safety standards with the use of digital signature and asyn ‘A truncated cheque means a cheque which is truncated during cither by the clearing house or by the bank whether paying or recei generation of an electronic image for transmission, substituting t of the cheque in writing. “Clearing house’ means the clearing house managed by the Re house recognised as such by the Reserve Bank of India [Sec. 6 as substituted by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002]. ‘A cheque isa species of bill of exchange; but it has the following two additional qualifications, viz, 1. It is always drawn on a spec 2, Ibis always payable on demand. hange, but all bills of excl f a bill of exchange. It fied banker to pay a certain sum of money to the exact mirror image of a suring the minimum serve Bank of India or a clearing ified banker, and yhange are not cheques. A cheque must it must be signed by the drawer. It must All cheques are bills of exc! or to the have all the essential requisites o contain an unconditional order on a speci crder of a specified person or the bearer of the cheque. But i is intended for immediate payment. The usual form of bank cheque is as follows: it does not require acceptance as itNotes, Bills and Cheques 11 397 pistinction between a Bill of Exchan 1, Abill ofexchange may be drawn on an drawn on a banker, Thus all bills are n , Abill must be accepted before the ¢, A cheque requires no acceptance as i ill which is not expresse j i Ai sive ist adie ee mae bevel a demand is entitled to three days of grace. , Abill may be payable on demand or after the ex ‘A cheque is always payable on demand. . Abill must be duly presented for payment tot be discharged from liability. The drawer of a liability by delay of the holder in Presenting extent of the damage, if any, suffered by him, Acheque may be crossed but not a bill, Acheque does not require any stamp whereas abill except in certain cases, must be stamped. The payment of a cheque may be countermanded (revoked or cancelled) by the drawer but the payment of a bill cannot be countermanded. A cheque is not required to be noted or protested for dishonour. A bill may be noted or protested for dishonour. ge and a Cheque Y person, a including a banker, but a cheque is always 'S Whereas all cheques are necessarily bills. wee can be called upon to make payment upon it. is intended for immediate payment. ity of a certain period after date or sight. the acceptor or else the drawer of the bill will cheque is not necessarily discharged from his it for payment. He is discharged only to the larking of Cheques que does not require acceptance in ordinary course of business as it is intended for Mediate payment. The custom among bankers to mark cheques as ‘good for payment’ does. iate payment. The bank rk cheques as ‘good for payment’ famount to an acceptance. Marking is the writing on a cheque by the drawee banker that it ld be honoured when it is duly presented for payment. The effect of marking a cheque as id by the drawee banker is that it cannot be countermanded by the drawer subsequently and payce is certain of getting the money. In India, no such practice of marking of cheques has N established either by judicial decisions or by Statutes [Bank of Baroda v. Punjab National k, (1944) A.C.176]. s may be marked as good by the drawee banker at the instance of — drawer, or the holder, or the collecting banker. (ea a = Mi ’s instance. When a cheque is marked good at the instance of the a d eb seer earmarks sufficient funds in the account tomeet the cheque when Benue’ Pam snt, The drawer cannot afterwards countermand payment of ace Dresented for payment ve dishonour other cheques if ther eacastment would cheque. The banker is en 1 the cheque marked good. ave the banker with insufficient funds to mee ; king at holder’s instance, When a cheque is marked good at the holder’s instance, an ina the holder that at the time of marking, the banker has sufficient an ie oe ker may refuse to honour the cheque when it is ds of d in his hands, The ban F rc Ea proaned for payment if in due course the drawer has withdrawn funds or PPed payment of the cheque.398 || Special Contracts 3. Marking at collecting banker’s instance. Where a cheque is received by a collecting banker too late for inclusion in the clearing, he may, to safeguard the interest of the customer, present such cheque for marking by the drawee banker. When a cheque is marked atthe collecting banker's instance, the marking is treated as ‘constructive payment” Because the thanking custom is that such cheque shall be honoured when its presented through the next clearing. Crossing of Cheques There are two types of cheques, open cheques and crossed cheques. Acheque which is payable in cach across the counter of a bank is called an open cheque. When such a cheque is in circulation, a great risk attends it Ifits holder loses i, its finder may go to the bank and get payment unless, dy been stopped. It was to prevent the losses incurred by open cheques its payment has alreat ing was introduced. getting into the hands of wrong persons that the custom of crossi 'A crossed cheque is one on which two parallel transverse lines with or without the words *& Co." are drawn. The payment of such a cheque can be obtained only through a banker. Thus crossing is a direction to the drawee banker to pay the amount of money on a crossed cheque ‘generally to a banker or a particular banker so that the party who obtains the payment of the cheque can be easily traced. The crossing compels the holder to present the cheque through a “quarter of known respectability and credit” and affords security and protection to the owner of the cheque, as the cheque is payable only through a banker. ‘Types of crossing. There are two types of crossing, viz., 1. general crossing, and 2. special crossing. Another type of crossing known as ‘restrictive crossing’ has developed out of business usage. 1. General erossing. A cheque is said to be crossed generally where it bears across its face an addition of — (a) the words ‘and company’ or any abbreviation thereof, between two parallel transverse lines, either with or without the words ‘not negotiable’; or (6) two parallel transverse lines simply, either with or without the words ‘not negotiable’ (See. 123). Specimens of general crossing: wo NN & Co. QB) &Co 4) Not Negotiable (S) Not Negotiable & Co 6)ae Notes, Bills and ‘Cheques |! 399 ere a cheque is crossed general /, th « a banker (Sec. 126, Para 1). ¥ the drawee banker shall not pay it unless it is presented Special crossing. Where a che either with or without the we @ Bank of India 2 Canara Bank & Co, GB) ‘Bank of ladia @ Bank of India for Ale of Payee Zz Where a cheque is crossed specially the banker on whom it is drawn shall pay it only to the banker on whom it is crossed, or his agent for collection (Sec. 126, Para 2). Restrictive crossing. In addition to the two statutory types of crossing discussed above, there is another type which has been adopted by commercial and banking usage. In this type of crossing the words “A/c Payee’ are added to the general or special crossing. Specimens of restrictive crossing: g 2 a § 2] |e2| [eal ole] slFsl alse Sle} Sle 8) Sls 8 2] 32] |Be 3 a 3 : + on a cheque are a direction to the collecting banker that the amount co Sa eae is to te credited to the account of the payee. If he credits the eds to a different account, he is prima facie guilty of negligence and will be liable to true owner for the amount of the cheque. It should however be noted that ‘A/c Payee” ques are negotiable [British Bank of Middle East v. Almal Bros., 66 CWN 285).400 |! Special Contracts Not negotiable crossing (Sec. 130). The effect of the words ‘not negotiable’ on a g cheque is that the title of the transferee of such a cheque cannot be better than that o i transferor. The addition of the words ‘not negotiable’ does not restrict the further transferabjyi of the cheque. It only takes away the main feature of negotiability, which is, that a holder wg € defective title can give a good title to a subsequent holder in due course. Anyone who takes 3 cheque marked ‘not negotiable’ takes it at his own risk. The object of crossing a cheque ‘not negotiable’ is to afford protection to the drawer or ‘older of the cheque against miscarriage or dishonesty in the course of transit by making it difficuly 10 get the cheque so crossed cashed, until it reaches its destination. Example, W drew a cheque crossed ‘not negotiable’ in blank and handed it to his clerk to fq) in the amount and the name of the payee. The clerk inserted a sum in excess of her authority ang delivered the cheque to P in payment of a debt of her own. Held, the clerk had no title ty the cheque and as such P had no better title, and therefore WV was not liable [Wilson & Meeson y, Pikering, (1946) K.B, 422). Who may cross a cheque (Sec. 126). A cheque may be crossed by— ~ The drawer. He may cross the cheque generally or specially. 2. The holder. Where the cheque is uncrossed, the holder may cross it generally or specially. Where it is crossed generally, he may cross it specially. Where it is crossed generally of specially, he may add the words ‘Not Negotiable’ 3. The banker. Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker (his agent) for collection, TOsseq CLASSIFICATION OF NEGOTIABLE INSTRUMENTS ‘The negotiable instruments may be classified as: Bearer and Order Instruments Bearer instruments, A negotiable instrument is payable to bearer — 1. when it is expressed to be so payable, or 2. when the only or last indorsement on the instrument is an indorsement in blank. [Explanation (ii) to Sec, 13]. Any person who is in lawful possession of an instrument payable to bearer, asa holder, is entitled to enforce payment due on it. He may, when he receives money, be required to acknowledge receipt of money on the instrument by signing on it, A promissory note and a bill of exchange cannot be made payable to bearer on demand A Promissory note cannot be payable to bearer due to restrictions imposed by the Reserve Bank of India Act, 1934, Order instruments. A negotiable instrument is payable to order— 1. when it is expressed to be payable to order, e.g., ‘Pay to A or order’ or “Pay to the order of 4’. In both these cases, the bill is payable to. or his order at his option. 2. when it is expressed to be payable to a particular person, and does not contain words Prohibiting or restricting its transfer, e.g, ‘Pay A One hundred rupees” [Explanation (i) © Sec. 13]PAYMENT IN DUE COURSE “Payment in due course” means payment in accordance with the apparent tenor of in good faith and without negligence to any person in possession thereof. Apparen' the period of time, as expressed inthe instrument, after which itis payable. Further, the PAY to the person in possession of the instrument must be under circumstances which do not affo ' a reasonable ground for believing that he is not entitled to receive payment of the amoun mentioned in the instrument (Sec. 10). the instrumett t tenor mean/ Notes, Bills and Cheques \) 497 ent in de COMES, WHCH TOSUTE in isch Pa ing conditions ange of a neg ns ree Of a negotiable instrument, m satisfy the ah . phe payment must be in aeeorda apparent tenor of the tastromeat rao {OMOF” MEANS Payment aoe of the instrument. “ApH penton ofthe fie A ing 10 what appears onthe face ofthe instrament go berth intention ofthe parties. payment hetane yee dpe apparent tenor of the instrument ‘Murity is not a payment according to mee with the The payment must be made by or on behalf nade in money. Money here includes cheques mrament cannot be forved to Of the drawee or acceptor. It must also be Nt and currency notes. The holder of a negotiable “cept payment in any other mode except with his consent. The person Co whom payment is made should be in possession of the instrument and should also be entitled to receive payment on it. He should be in possession of the instrument in such manner that he is entitled to give a valid discharge. The payment should be made in good faith, without negligence and under bona fide circumstances, This means the circumstances should not afford a reasonable eround for believing that the person to whom the payment is made is not entitled to receive the amount, If, under suspicious circumstances, the person making the payment does not make sary inquiry, the payment is not a payment in due course. Where a bill payable to bearer is stolen and is presented for payment to the acceptor at maturity by the thief, the payment is a payment in due course if the acceptor pays in good faith without having any son to believe that the bill is a stolen bill. But, ifa cheque bears forged signature of the drawer, the payment will not be a payment in due course if the banker fails to exercise the ry care [Allahabad Bank Lid. v. Kul Bhushan, ALR. (1961) Punj. $71). There should not exist any ground for believing that the possessor is not entitled to receive payment. it the ne INTEREST ON BILLS AND NOTES When the rate of interest is specified in a promissory note or bill of exchange, it will be lculated at such rate on the principal money due thereon from the date of the instument to the date of realisation or tender of such amount. If a suit is filed on the instrument, interest is payable up to such date as the Court directs (Sec. 79), a When no rate of interest is specified in the instrument, interest is calculated (in spite of any collateral agreement which is not embodied in the instrument) at the rate of 18% per annum (See, 80). indorser of an instrument dishonoured by non-payment, he is When the changed is the : i i When the party charged is the eives notice of dishonour (Explanation Hable to pay interest only from the time that he rec 1 See, 80), ‘ ified i instrament may not be allowed by the following cases, the rate of interest specified in the ae 7 fi ally unfai : » Where the rate specified is excessive and the transaction is substantially unfair (Unsurious ‘ans Act, 1918), Where the instrument has been obtai Tistepresentation (Sec. 19-A of the Indian ned by coercion, undue influence, fied or Contract Act, 1872).D HOLDER IN DUE COURSE HOLDER Holder (Sec. 8) The *holder’ of a promissory note, bill of exchange or cheque means any person entitled in his own name (a) to the po ion thereof, and (4) 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. In order to be entitled (0 the instrument in his own name, the holder must be named therein as the payee or the indorsee in case the instrument is payable to order, or he must be the bearet thereof in case the instrument is payable to bearer, Where a person obtains possession of am instrument by theft or under a forged indorsement, he is not a holder, as he cannot obtain of recover the payment of the instrument, But where a person (e.g,, the heir to a deceased holder) it the absence of'a holder can give a acquires the status of a holder and can sue on the instrument to recover the amount due thereo” Holder in Due Course (Sec, 9) Any person is a ‘holder in due course’ if he fulfils the following conditions: (@) That, for consideration, he became (i) the possessor of the negotiable instrument if payable to bearer, or the payee or indorsee thereof, if payable to order, id discharge to the maker or acceptor of the instrument, he7 , Patties to a Negotiable Instrument 1 415 That he became the holder of the j afer it is dve, the pers viking te Tument before its maturity. I the instrument is taken immediate transteror, * AS against the other parties, only the rights of his ‘That he became the holder of the instrument in 0 believe that any ii ity i : be w» infirmity in the instrument or defect existed in the title of the person Sree wore tone atest ‘Ahi is deemed tobe done in good faith when iis, in a stly, whether it is done neeli Chand Panda, AAR. 1957), Thus if ne negligently or not [Braja Kishore Dixit v. Purna ° holder acquires an instrument knowin; vitiing wrone Willttt’ ete : g that there is fier ros ewe eet ein fom in 1a he is not taking it in good faith [Goodman v. Harvey, (1836) good faith, i.e., without sufficient cause A holder of a negotiable instrument will not be a holder in due course if— (@) he has obtained the instrument by gift or for an unlawful consideration or by some illegal method; or (b) he ha obtained the instrument after its maturity; or (©) he has not obtained the instrument bona fide, vileges of a holder in due course. A holder in due course gets title to a negotiable rument free from equities, Certain defences which can be set up against a person claiming negotiable instrument cannot be set up against a holder in due course, ecial privileges of a holder in due course are as follows: Inchoate stamped instrument; A person, who has signed and delivered to another a tamped but otherwise inchoate instrument, is precluded from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given him, the stamp being sufficient to cover the amount (Sec. 20). jability of prior parties: Every prior party to a negotiable instrument is liable thereon to holder in due course until the instrument is duly satisfied (Sec. 36). Fictitious payee: Where a bill is drawn payable to the drawer’s order in a fictitious name ie., where the drawer is a fictitious person) and is indorsed in the same hand as the awer’s signature, the acceptor is not relieved from liability to any holder in due course, n the plea that the drawer is fictitious (Sec. 42). This, in simple words, means that the ceptor of a bill cannot say, as against the holder in due course, thatthe other parties to 2¢ bill were fictitious. set e inst ithout consideration: When a negotiable instrument is made, “kanes without consideration, it creates no obligation of payment een the parties to the transaction. An agreement made without consideration is void Sec, 25 of the Indian Contract Act, 1872). But if the negotiable instrument gets into the lands of a holder in due course, he can recover the amount on it from any of the pron ies thereto. This plea of absence of consideration cannot Lies against a jolder in course or against any subsequent holder deriving title from i ec. 43). it very: Ifa bill or note is negotiated to a holder in due course, the other ee et 4d liability on the ground that the delivery of the to the instrument cannot avoit i ‘ nent was conditional or for a specific purpose only (Sec. 46, Para 3).416 | Special Contracts 6. > * 2 Ss ii passes through .ce a negotiable instrument p: hth hag 9 idee a id ofa holder in due course, it gets cleansed of its defects provided the holder was himselt ny illegality whi instrument in some stage of it party to the fraud or illegality which affected the i rue in sone gs ais cum Thus any defect in the title of the transferor will not al ler in course oven if he had knowledge of the prior defect provided he himself is not a pany the fraud (Sec. 53). Examples: (a) Abill, originally obtained b: in due course. A indorses the bill to B by way of gi stands on 4’s title. (b) A, by fraud, induces B to make a promissory note in his favour. He indorses the no, to C, who takes it as a holder in due course. C subsequently indorses the note to 4, for value. A cannot sue B on the note as he himself is a party to the fraud. Instrument obtained by unlawful means or for unlawful consideration: The person iable to pay on a negotiable instrument cannot, as against a holder in due course, contend thet he had lost it, or that it was obtained from him by means of an offence or fraud or for an unlawful consideration (Sec. 58). Every holder is a holder in due course: The law presumes that every holder is a holderin due course, although the presumption is rebuttable (Sec. 118). Estoppel against denying original validity of instrument: The maker of a promissory note, the drawer of a bill of exchange or cheque and the acceptor of a bill of exchange for the honour of the drawer cannot, in a suit thereon by a holder in due course, deny the validity of the instrument as originally made or drawn (Sec. 120). Instrument cleansed of all defects: On & yy fraud from the drawer, gets into the hands of 4, a oy ft. B can sue the acceptor for hy |. Estoppel against denying capacity of payee to indorse: The maker of a promissory note and acceptor of a bill of exchange payable to order cannot, in a suit thereon by a holder in due course, deny the payee’s capacity at the date of the note or bill, to indorse the same (See. 121). . Indorser not permitted to deny the capacity of prior parties: The indorser of a negotiable instrument cannot, in a suit thereon by a subsequent holder, deny the signature or capacity to contract of any prior party to the instrument (Sec. 122). LIABILITY OF PARTIES Secs. 30 to 32 and 35 to 42 of the Negotiable Instruments Act deal with the question. of liability of the parties to negotiable instruments, These Sections are discussed below: L. v Liability of drawer. The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided du notice of dishonour has been given to, or received by, the drawer (Sec. 30), Liability of drawee of cheque. The drawee ofa cheque (who is always a banker) bai safcient finds of a drawer in his hands, properly applicable to the payment of ‘jue, must pay the cheque when duly required to do so, In default of such payment drawee, i.e., the banker i ae must compensate the drawer for any loss or damage causedyr Parties to a Ne (a Negotiable Instrument |) 417 ty of maker of note and ace 1 sniy of maker ‘ceptor of bill, The maker of 5 HE tor of «bill of exchange are th tierra irae hoker on demand, In the ‘to 4 promissory note and the coer fe maker of a p ry note and the pe kon who are primarily liable to pay the amount pay the amount on the instrument at maturity scorn oliperec neu ’ f according to ils appare Saker ore 18 t0 ils apparent tenor. In defa pone nk acceptor is bound to compensate any rad toth isos any loss or damage susta ined by him and caused by such default (See, 'n2,Pama a ja y of indorser, i st Pa nt baors rau 4, Liability of indorser, The indorser ofa negotiable instrument before maturity is liabl all subsequent holders in case of dishonour of the instrument provided ea («) there is no contract to the contrary; (b) the indorser had not limited or qualified his lability by using appropriate words; and (c) due notice of dishonour has been given to, or received by, such indorser (See. 35, Para 1). , iad Every indorser after the dishonour of instruments liable as upon an instru is \s iment payable demand (Sec. 35, Para 2). m pee 5, Liability of prior parties to a holder in due course. Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied (Sec. 36). 5, General rules regarding liability—the principle of suretyship (a) Maker, drawer and acceptor principals: In the absence of a contract to the contrary, the maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance, and the acceptor are respectively the parties primarily liable. They ar, in dither words, liable as principal debtors. The other parties tothe instrument are liable thereon as sureties for maker, drawer or acceptor, as the case may be. Their liability arises only on a default by the party primarily liable (See. 37). (b) Price ty a principal debtor in respect of each subsequent party: As between (6) Prior party a principa each prior party is, in the absence of a contract to the the parties liable as sureties, erary ‘a principal debtor in respect of each subsequent party (Sec. 38). “IL payable to his own order, on B who accepts. He afterwards Example: A bei i pase ‘Dio E.As between £ and B, B is the principal debtor indorses the bill 1o © «1 relies. As between E and 4, A is the principal debtor and oe A Be ant ar ins between £ and C, Cis the principal debtor and D is his an al ms surety. ir + ofan accepted bill of exchange enters into any contract Suretyship: When oe pees Sec. 134 or 135 of the Indian Contract Act, 1872, with the acceptor WHIT ies, the holder may expressly reserve his right to charge would discharge the © they are not discharged (Sec. 39). and in such a case the other pe dorser’s fiability: Where the holder of a negotiable instrument, (a) Discharge of indore indorser, destroys or impairs the indorser’s remedy against without the consent of °° charged from liability to the holder othe same extent a prior Pay oe nas been paid at maturity (Sec, 40). as ifthe instrumem polder of a bill of exchange made payable to the order of Example: Ral” sins ie following inorsements in blak: i Balram, W! (©418 II Special Contracts First indorsement, “Balram” Second indorsement, “Shyam” | Third indorsement, “Krishan” | Fourth indorsement, “Govind”. Ram puts this bill in suit against Govind and strike indorsement by Shyam and Krishan. Ram is not entitled to recover? nO 7. Acceptor’s liability on a forged indorsement, An acceptor of @ bill of excl ange a lready ‘indorsed is not relieved from liability by reason that such indorsement is forged, if he knew ata reason to believe the indorsement to be forged when he accepted the bill (Sec. 41), 8. Acceptor’s liability for a bill in a fictitious name. An acceptor of a bill of exchange draws ina fictitious name and payable to the drawer's order is not, by reason that such ame 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 (Sec. 42). ikes out, without Govind’s consent, the er anything from Govind, Other Rules 1. Where an instrument is negotiated to a holder in due course, other parties to the instrument cannot escape liability on the ground that the delivery of the instrument was conditional or for a special purpose only (Sec. 46, Para 3). 2, Even though as between the immediate parties to an instrument, it was caused by fraud, once the instrument passes through the hands of a holder in due course, it is cleansed of all defects. Any person who derives his title from a holder in due course takes it free from all defects unless he was himself a party to the fraud (Sec. 53). 3. The defences on the part of a person liable on a negotiable instrument that it has been lost or obtained from him by means of an offence or fraud or unlawful consideration, cannot be set up against a holder in due course (Sec. 58). 4, No maker of a promissory note, and no drawer of a bill of exchange or cheque, and n0 acceptor of a bill of exchange for the honour of the drawer, is, in a suit thereon by a holder _ vs permitted to deny the validity of the instrument as originally made or drawn ec. 5. No maker of a promissory note and no acceptor of a bill of exchange payable to order is, in a suit thereon by a holder in due course, permitted to deny the payee’s capacity at the date of the note or bill, to indorse the same (Sec. 121). ] UM Rus CAPACITY OF PARTIES | The capacity of a person to incur liability as a i eel of epee ta ity Party to a bill of exchange, promissory note or cheque i$ | Minor. A minor may draw, indorse, deliver and ne, iable i i , indorse, Botiate a negotiable instrument so as to bind all parties eae aes on a : may operat sa chanel to convey te and lst but not to eciioae erson of unsound mind. Bills and notes drawn or made b ‘mind are voi i ; yy a person of unsound id as against him (though the other parties continue to be liable) if at the time of the execution apa ennonte is not capable of forming a rational judgment. ‘ gies aeyy ™ Dishonour of a Negotiable Instrument CHAPTER CONTEN # Rules as to Compensation © Meaning © Dishonour by Non-acceptance « Penaltis in Case of Dishonour of Certain Cheques © Dishonour by Non-payment for Insufficiency of Funds i © Questions—Test, Practical '* Notice of Dishonour ‘© ‘Noting and Protesting ® Noting © Protest MEANING A bill may be dishonoured by non-acceptance (since only bills require acceptance) or by non payment. A promissory note and a cheque are dishonoured by non-payment only. When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to all the prior parties inorder to make them liable on the instrument. Ifhe fails to do so, except in cases when votice of dishonour may be excused, he forfeits his right of action against the prior partis entitled to the notice of dishonour (Sec. 93). Dishonour by Non-acceptance (Sec. 91) Abill of exchange is dishonoured by non-acceptance in any one of the following ways: 1, Ifthe drawee does not accept the bill within 48 hours from the time of ‘presentment thou it is duly presented for acceptance. . If there are several drawees (who are not partners) and all of them do not accept . When presentment for acceptance is excused, and the bill is not accepted. . When the drawee is incompetent to contract. . When the drawee gives a qualified acceptance. . When the drawee is a fictitious person or after reasonable search cannot be found- Awewn> Dishonour of a Negotiable Instrument | 445 1g in Case of need is mentioned in a bill, the bill is not deemed to be dishonoured unless .d by such drawee in case of need also (Sec, 115), yaseneeine on ure wsdl pishonour by Non-payment (Sec. 92) enissny noe bll exchange or cheque ssid tobe dishonoured by non-payment when apiger ofthe note acceptor of the bill or drawee of the cheque makes default in payment wena duly tequited to pay the same (Sec. 92), An instrument is also dishonoured by non- ent wen presentment for payment is excused andthe instrument when overdue semains Braid See. 76) NOTICE OF DISHONOUR \\hen a negotiable instrument is dishonoured either by non-acceplance or by non-payment, tte holder of the instrument or some party to it who is liable thereon, must give 2 notice of gshonour to all the prior parties whom he wants to make liable on the instrument. [fhe does not sve this notice, except in cases when notice of dishonour may be excused, all the prior parties juble thereon are discharged of their liability (Sec. 93). Object of notice of dishonour. The object of notice of dishonour is to inform the party liable cathe instrument about the liability which accrues as a result of the dishonour of the instrument. The notice is necessary whatever the nature of the instrument, i¢., whether itis payable at sight oron demand or whether it is an accommodation bill. If the holder neglects to give such notice within a reasonable time from the date of dishonour, all the prior parties liable on the instrument and entitled to notice are discharged. Notice by Whom Notice by holder or any prior party. Notice of dishonour may be given by the bolder o any of the parties liable on the instrument (Sec. 93). Chain method of giving notice of dishonour. A party receiving notice of dishonowr must, in order to render any prior party liable to himself, give notice of dishonour to such party within a reasonable time, unless such party otherwise receives due notice (Sec. 95). It is not necessary that the notice should always emanate from the holder for he és entitled uo avail himself of a notice given by any party liable on the instrument. But if a notice is giver by a stranger it would be a mere nullity. Notice by principal or agent. If an instrument deposited with an apent for presemteaet is ishonoured, the notice of dishonour may be given either by the agent or by the principal himself, The agent may give notice to his principal within 2 reasonsible time, and the principal may give notice within a reasonable time to the parties sought to be eld Hable (Sec. 96). Notice to Whom 1. Notice to all parties whom the holder seeks to make Itable. Notice of dishomenr samt be given to all the parties whom the holder seeks to make liable. booed Notice of dishonour need not be given tothe acceptor of bill of exchange or the euker of promissory note or the drawee ofa chegue (Sec. 93), because they are the parties pri .446 I! Special Contracts . Notice to party or his agent, or to legal representative or ey who dishonour the instrument by non-acceptance gy I merely be notice of a fact already known to them, assignee. Notice of dishonguy + be given to the party liable or his duly authorised agent, or, where he has digg oe ‘egal represenatve ot, where he has been declared insolvent, ® bis assignee (Gec. 94). When the party to whom notice of dishonour is despatched is dead, but the party despatching the notice is ignorant of his death, the notice is sufficient (Sec. 97). liable upon the instrument. It is th non-payment, and notice to them wil Form of Notice __ The notice of dishonour may be oral or written. If itis written, it may be sent by post [Fit is duly directed and sent by post, it would be a good notice even though it is miscarried. . Itmay be in any form but it must clearly indicate that the instrument has been dishonoured and in what way, and that the party to whom it is being given will be liable on the instrument, It must be given within a reasonable time at the place of business or (in case such party has no place of business) atthe residence of the party for whom it is intended (Sec. 94). Delay caused by circumstances beyond the control of the party desiring to serve notice is exeused provided it is not imputable to his default, misconduct or negligence [Beveridge v. Burgis, (1812) 3 Camp. 262]. What is a reasonable time? In determining what is a reasonable time for giving notice of dishonour, regard must be had to the nature of the instrument and the usual course of dealing with respect to similar instruments. In calculating such time, public holidays shall be excluded (Sec. 105). Rules for Giving Notice of Dishonour (Sec. 106) 1 If the holder and the party entitled to notice of dishonour carry on business or live (as the case may be) in different cities, the notice must be despatched by the next post of on the day next after the day of honour. . If these parties carry on business or live in the same place, the notice must be despatched in time to reach its destination on the day next after the day of dishonour. When the Notice of Dishonour is not Necessary (Sec. 98) No notice of dishonour is necessary— (a) when it is dispensed with by the party entitled thereto; (8) to charge the drawee, when he has countermanded payment; (©) when the party charged could not suffer damage for want of notice; (@) 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; (€) to charge the drawer when the acceptor is also the drawer; (A) in the case of a promissory note which is not negotiable; and (g) when the party entitled to notice, knowing the facts, i , Promises unconditionally to pay the amount due on the instrument.Dishonour of a Negoti: gotiable Instrument {i 447 ny ties OF the Holder upon Dishonour sotice of dishonour. Wh i Notice of dis cn a promissoy i or-aeceplance OF Nonpayment, hy a pate, bil of exchange or cheque is dishonoured | parties {0 the instrument whom he seeks to make Hable theron (§ m ail a _ Noting and protesting. When a promissory note or bill ee non-acceptance Or non-payment, the holder may calle Notary ae upon the instrument (Sec, 99). The ‘olde time of the dishonour of the note or bill, get i (Sec. 100). ‘get instrument 3, Suit fer mosey Aft the formality of noting and protesting is gone through , the holder may bring a suit against the parties liable on the instrument for the recovery of the amount due. Instrument acquired after notice of dishonour. The holder of a negotiable instrument, who has acquired it after dishonour, whether by non-acceptance or non-payment, with _ notice thereof, has only, as against the other parties, the rights of his immediate transferor (Sec. 59). Same is the case when the instrument is acquired after maturity. of exchange is dishonoured by such dishonour to be noted by @ t may also, within a reasonable protested by the Notary Public NOTING AND PROTESTING ing, ben a promissory note or bill of exchange is dishonoured, the holder can, after giving due ice of dishonour, sue any or all prior parties liable thereon. But before he does that, he may sihe fact of dishonour authenticated by ‘noting’ by a Notary Public. In such a case the Notary 3 a formal demand upon the maker or drawee or acceptor, for acceptance or payment, as case may be. On refusal by the maker or drawee or acceptor, he records the noting on the ‘ding of the fact of dishonour by a Notary Public upon the strument. ‘Noting’ means the recor b ‘ trument, or upon a paper attached thereto or partly upon each, within a reasonable time after Bhonour (Sec. 99, Para 1). ing’ must contain the following particulars: a) the fact of dishonour; (6) the date of dishonour; assigned for such dishonour; expressly dishonoured, the reason why the holder treats it (c) the reasons, if any, if the instrument has not been as dishonoured; and ®) the Notary’s charges (Sec. 99, Pa ing is not compulsory in the cas¢ ofan it does not in any way affect the rights ra 2). nland bill or note. The omission to get the instrument of the holder thereof. dishonoured by non-acceptance or exchange has been oe ar, ce ene the holder may, win ate nadie apres See 100, Para 1-The 0 eat Public. Such erg the dishonour of bill or note. It is based upon noting, mal notarial certificate at 4 promissory note or bill o!448 II Special Contracts Si ing particulars; Contents of protest. A protest must contain all the following pi it ipt of the instrument. . The instrument or a literal transcript of the instru . The name of the person for whom and against whom the instrument has been Protesteg, . The fact of, and reason for, dishonour. . The place and time of dishonour. . The signature of the Notary Public. Incase ofan acceptance for honour or payment for honour, the name of the Person accepting or paying and the name of the person for whose honour it is accepted or paid (See. 19)) Protest for better security. When the acceptor of a bill exchange has become insolvent, o¢ his credit has been publicly impeached before the maturity of the bill, the holder may, with, a reasonable time, through a Notary Public, demand a better security from the acceptor. If the acceptor refuses to give a better security, the fact may also be noted and certified by the Notary Public. Such certificate is called a ‘protest for better security’ (Sec. 100, Para 2). The acceptor is not bound to give such security. On a refusal by the acceptor to give a better security, the holder has no immediate right of action against the drawer and the indorsers, He shall have to wait till the maturity of the bill. Advantages of protest Aukwnn 1. Itaffords an authentic evidence of dishonour to the drawer and indorsers, 2. Ina suit upon an instrument which h: Subject to the same conditi ns, The i Protest (Sec. 102), ‘ons. The notice may be given by the Notary Public who makes the Protest for non-pa: " yment after di dav payable ishonour by non RULES AS TA ranePENALTIES IN CASE OF DISHONOUR OF CERTAIN CHEQUES FOR INSUFFICIENCY OF FUNDS (Sees. 138 to 142) Banking, Public Financial and Negotiable Instruments Lar Amendment) Act, 1988 has anew Chapter XVI1 in the Negotiable Instruments Ac 1881, The Chapter comprises ges. 138 to 142, The important provisions of these Sections are as follows: of Cheque for Insufficiency, ete. of Funds in the Account (Sec. 138) txwer of a dishonoured cheque shall be deemed to have committed an offence. For this ence, he shail be punished with imprisonment for a term which may extend to two years or fine which may extend to twice the amount of the cheque or with both provided— the cheque has been dishonoured due to insufficiency of funds in the account maintained by him with a banker for payment of any amount of money to another person from out of thet account; @® the payment for which the cheque was issued, should have been in discharge of a legally enforceable debt or liability in whole or part of it; ‘the cheque should have been presented by the payee or the holder in due course within 2 period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier: ae - 2 in due course of the cheque should have given notice demanding é minty ea from the drawer on receipt of information of dishonour of ‘heque from the bank; : the drawer is liable only if he fails to make payment within 15 days of such notice Period: and the payee or holder in due ‘complaint within one month of cause of 3 course of the cheque dishonoured should have made a ction arising under See. 138,450 || Special Contracts Comments / / (a) Complaint under See. 138 must contain the following ingredients, v () there is a legally enforceable debt; - (i) _ that the cheque was drawn from the account of bank for discharge in whole or in Part of any debt which pre-supposes a legally enforceable debt; (iti) cheque so issued had been returned due to insufficiency of funds [Krishna Janardhay Bhatt v. Dattatraya G, Hegde, (2008) 4 SCC 54]. (5) There is no restriction as to the number of times a cheque can be presented. Every: ‘subsequent dishonourment gives rise to fresh cause of action for filing complaint [Mallappa Sangappq Desai y. Laxmanappa Basappa whoti (1994) 3 crimes 707 (karn.)]. (©) The criminal liability cannot be fastened on the heirs and legal representatives of a person who is said to have been guilty of the offence under sec. 138 [Bhupinder Lima v. State of Andhra Pradesh, (2000) 99 comp. Cas 424]. Presumption in Favour of Holder (Sec. 139) It shall be presumed unless contrary is proved that the holder of a cheque received the cheque of the nature referred to in Sec. 138 for discharge, in whole or in part, of any debt or other liability. Defence which may not be Allowed in any Prosecution under Sec. 138 (Sec. 140) It shall not be a defence in a Prosecution for an offence under Sec. 138 that the drawer had no reason to believe that when he issued the cheque that the cheque may be dishonowed for reasons mentioned in Sec, 138,Nua Discharge of a Negotiable Instrument CHAPTER CONTENTS © Discharge of an Instrument © Material Alteration * Discharge of a Party or Parties © Questions—Test, Practical The term ‘discharge’ in relation to a negotiable instrument is used in two senses, viz., 1. discharge of the instrument, and 2. discharge of one or more of the parties from liability thereon. An instrument is said to be discharged when all rights of action under it are completely extinguished and when it ceases to be negotiable . This would happen when the party who is ultimately liable on the instrument is discharged from liability. In such a case, even a holder in due course does not acquire any rights under the instrument. If, on the other hand, one or more of the parties is/are discharged from liability, the instrument continues to be negotiable and the other parties continue to be liable on it. The discharge of one or more of the parties to a bill or note does not discharge the instrument. DISCHARGE OF AN INSTRUMENT. ‘The different modes of discharge of an instrument are as follows: 1. By payment in due course, This is the most obvious and the usual mode of discharge of an instrument and of the parties to it, The instrument is discharged by payment made it due course by the party who is primarily linble to pay (i.e, the maker or the acceptor)» °° by a person who is accommodated in case the instrument was made or accepted for bis accommodation. The payment of the amount due on the instrument must be made at oraftet the maturity to the holder of the instrument if the maker or acceptor is to be dischat (See. 78).A payment by a party who is secondarily liable does not discharge the instrume®™ Again, any person liable to pay is entitled to have the instrument shown to him befo™ Payment. On payment he is entitled to have the instrument delivered up to him (See: 8) ee See1 of int ate Discharge of a Negotiable Instrument || 455 ment of interest. If a rate of j : branes, interest shall be Oe Interest is specified in the promissory note or bill of ihe date of the instrument until rn on the principal amount at the specified rate from of interest is specified, the law i T OF realisation of the amount (Sec. 80). If no rate | rate increased from 6% to 189 ; rr Negotiable tnsirusents on by the Banking, Public Financial Institutions shih s mt incorporated inte insument st mse any collateral agrement By a ee becoming holder. If the maker of a note or the acceptor of a Bs does not hold it conditi after its maturity in his own right (Le., he has an absolute title on , itionally or as an agent), the instrument is discharged (Sec. 90). Pe oly end noo bite: the holder of a negotiable instrument at or after its maturity absol : ye cane itionally renounces in writing or gives up his rights against all the _ parties to the instrument, the instrument is discharged. The renunciation must be in writing unless the instrument is delivered up to the party primarily liable. ‘4, By cancellation. Where an instrument is intentionally cancelled by the holder or his agent and the cancellation is apparent thereon, the instrument is discharged. Cancellation may take place by crossing out signature on the instrument, or by physical destruction of the "instrument with the intention of putting an end tothe lability ofthe parties to the instrument. . By discharge as a simple contract. A negotiable instrument may be discharged in the same way as any other contract for the payment of money. This includes, for example, " discharge of an instrument by novation or rescission or by expiry of period of limitation. DISCHARGE OF A PARTY OR PARTIES party or parties toa negotiable instrument is/are discharged in any one ofthe following ways: “1, By payment, When payment on an instrument is made in due course, both the instrument ~ and the parties to it are discharged (Sec. 82 (0)]. . By cancellation. When the holder of a negotiable instrument or his agent cancels the name - of a party on the instrument with intent to discharge him, such party and all subsequent _ Parties, who have @ right of recourse against the party whose name is cancelled, are discharged from liability to the holder [Sec. 82 (a)]. The subsequent parties are in the “position of sureties to the prior party whose name is cancelled and discharge of the principal © debtor automatically discharges the sureties. Byrelease. Where the holder ofa negotiable instrument releases any party to the instrument by any method other than cancellation, [Sec. 82 (b)]. Sec. 63 of the Indian Contract nt hours. If the holder of a bill of exchange an forty-ci allows the ae era fours exclusive of public holidays, o consider ier he will accept the same, all previous parties not consenting to such allowance are by discharged from liability to such holder (Sec. 83). -presentment of cheque. Where achequs isnot presented by the holder for payment oectlgs issue and the drawer suffers actual damage through the lay Aecualtie failure ‘of the bank, he is discharged from liability to the extent of such amage. In determining what is a reasonable time, regard shall be had to the nature of the Seal ie ciepeot vit ihe facts ofthe particular case (Sec. 84). the party so released is discharged from liability t Act, 1872 also enunciates this rule, ‘of trade and of bankers,456 11 Special Contracts Examples: (@) Adrawsa cheque for %1,000, and when the cheque ought to be Presented, has fund the bank to meet the cheque, The bank fails before the cheque is presente and past 25 paise in the rupee. The drawer is d ed to the extent of 2750, vs Kin Kolkata, The bank fails before the Chg y (5) A draws a cheque at Delhi on a could be presented in ordinary cout damage through any delay in presenting the cheque. 6. Cheque payable to order, Where a cheque payable to order purports to be indorsed Payce, the banker is discharged by payment in due course, Where a cheque is Original ponressed to be payable to bearer, the drawee is discharged by payment in due courge ie bearer thereof. It makes no difference even if any indorsement whether in full or in b appears on the cheque and even if any such indorsement purports to restrict of €Xclude further negotiation (Sec. 85). 7. Draft drawn by one branch on another. 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 mon Payable to order on demand purports to be indorsed by or on behalf of the Payee, the bank is discharged by payment in due course (Sec. 85-A). 8. Parties not consenting discharged by qualified acceptance. If the holder of a bill of exchange acquiesces (assents) in a qualified acceptance, all the Previous parties whose Consent is not obtained to such acceptance are discharged from liability (See. 86). They Will, however, be liable if on a notice being given to them they give their assent to such acceptance. 9. By operation of law. This includes discharge— (@) By an order of Insolvency Court, discharging the insolvent. (6) By merger. Whena judgment is obtained against the acceptor, maker or indorser, the debt under the bill is merged into judgment debt, (©) By lapse of time, i.e., when the remedy becomes time-barred, 10. By material alteration. A material alteration of a negotiable instrument renders the same void against persons who were parties thereto before Such alteration unless they have consented to the alteration (Sec. 87), {Is not discharged for he has not sufferey aMERCANTILE LAW. 3) | | | J Eighth Edition | i>] 4 _ MC Kuchhal @ Vivek Kuchhal i4 _Prossing and Bouncing of Cheques een Banker and Customer A banker is one who does banking business. The Banking Regulation Act, 1949, defines a ‘banking company’ as a company which transacts the business of banking in India. The term ‘banking’ is defined as “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or, otherwise, and withdrawable by cheque, draft, order or otherwise” [Sec. 5(b), The Banking Regulation Act, 1949]. It may be emphasised that the primary function of a banking company consists of accepting of deposits for the purpose of lending or investing the sdme. If the purpose of accepting of deposits is not to lend or invest, e.g., where a trader accepts deposits of ‘money from the public merely for the purpose of financing his business, the business will not be called the banking business. Another special feature of banking business is that the deposited money should be repaid to the depositor on demand or according to the agreement. The demand should be made through an order, cheque, draft or otherwise and not merely by verbal order, The term ‘customer’ of a bank is not defined by law. Ordinarily, a person who has an account in a bank is considered to be a customer of the baik. But to Constitute a customer of the bank in the technical sense, besides opening of an account with the bank it is also essential that the dealings with the banker must relate to the business of banking, e.g., depositing and withdrawing money or taking loans, Merely availing of services rendered by the banker, i.e,, encashing a cheque, remitting money through a bank draft or depositing valuables in the safe deposit vaults in the bank, do not create the relationship of banker and customer. 4 dV aise OF CHEQUES Cheques may be of Wo types—(i) Open or uncrossed cheques and (ji) crossed cheques. An open cheque is payable at the counter of the drawee bank on the ~>, Crossing and Bouncing of Chequas presentation of the cheque. Such a cheque rns great risk in the course of circulation because once a wrong person takes away the payment of an open cheque it is difficult to trace him. 4 crossed cheque is payable only through a sallecting banker and not dircetly at the counter of the bank, Thus, crossing fords security and protection to the holder of the cheque because when payment ofa chegu has been craven through a banker it may easily be detected to whose use the money has been received. The collecting banker credits the proceeds to the account of the payee of the cheque. | cheque is said to be crossed when two parallel transverse lines, with or without any words, are drawn on the left hand top comer of the cheque. It is relevant to state that such lines are essential for ‘general crossing’ and may not be drawn in case of ‘special crossing.” Crossing of a cheque does not affect its negotiability. A crossed cheque can be negotiated in the same way as uncrossed one, i.e., it can be negotiated by mere delivery in case it is payable to bearer and by endorsement and deliv- ery if it is payable to order. ‘Where the holder of a crossed cheque has no account in any bank then either be may open an account with some banker and deposit the cheque in that account to enable the banker to collect its payment on his behalf and credit the same into his account, or he may obtain payment by endorsing the cheque in favour of some person who has got an account in any bank. Types of Crossing There are two types of crossing: (1) General or (2) Special. 1. General crossing. Where a cheque bears across its face (usually on the left hand top corner) two parallel transverse lines without any words or with words ‘and company’ or (& Co.) or/and ‘not negotiable’ written in between these two parallel lines, itis called general crossing (Sec. 123). Thus, general crossing may take any of the following forms: Se generally, the bunker on whom itis drawa banker (Sec, 126). In the case of general 1 the cheque collected through some {the choice of the holder. Where a cheque is crossed shall not pay it otherwise than to @ crossing, therefore, the holder may ge! bank, Collecting bank may be any bank 0! § ACTOSS face (transverse lines are ofa banker, either with or without 2. Special crossing, Where a cheque bears not compulsory) an addition of the name i the words ‘not negotiable,’ that addition shall be d jeemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker of the [allowing forn (ec. 124). Thus, special crossing may take any |Law of Negotiable Instruments. 4 s Sy Sy Sf & r, y cy ey, & by Where a cheque is crossed specially, the banker ‘on whom it is drawn sha not pay it otherwise than to the banker to whom it is crossed, or his AE fo collection (Sec. 126). Thus, in the case of special crossing the paying bake, is to honour the cheque only when it is presented through the banker meq, tioned in the crossing, or an agent of such bank (i.e., another banker Acting as agent for collection of that bank). According to Section 127, where a ch is crossed specially to more than one banker, except when that bank to whoy it has been specially crossed makes another special crossing in the name of another bank for the purpose of collection, the banker on whom it is dray shall refuse payment thereof. A special crossing makes the cheque more safer than a general Crossing because now a thief will have to search an account-holder of that particular bank only whose name appears in the crossing which may create more: difficulty, Account Payee or Restrictive Crossing To give still more protection to the payee of a cheque the practice of restrictive crossing is also prevalent in the business community. Such crossing can be made in both the cases of ‘general’ as well as ‘special’ crossing by adding the words ‘Account Payee’ (A/c Payee), “Account Payee only’ (A/c Payee orl) or “Account Alok Kuchhal only.’ Thus, restrictive crossing may take any of the forms shown below. . The effect of “Account Payee’ crossing is that the collecting banker Supposed to credit the amount of the cheque to the account of the payee ot and nobody else. This should not be taken to mean that an ‘Account Paye? crossed cheque cannot be negotiated further. Such a cheque remains transfe" able!, but the liability of the collecting banker is enhanced in case he credis the proceeds ofa cheque so crossed to any person other than the payee and” 1 National Bank vs Silke, (1891), 1 Q.B. 415. maient in favour of last Crossing and Bouncing of Cheques ors aligence in such a cage PFOVEM forged, The banker wil be held guild Ofer Section 131 (where a barre Mil Note entitled to the protection ven ynnker acting bona fide will not be liable to < mm ve title is defective). Thus the colle ed cheque for a customer lecting banker must act like a blood whose ad make proper enqui ma dnd pore ent in his favour 3 abn 8S 10 the ttle of the last endorse (whether ‘tine or not) from the original payee named in en dorsemen é co ing . the cheque before collecting an Account Payce’ crossed cheque in his (es the last endorse) account, However, the Reserve Bank of India has directed? the banks that they should not collect “Account Payee’ cheques to ci than the payee named therein, es to the account of any person other mye owner, if he receives pay, ‘ ‘Not Negotiable’ Crossing Asstated earlier, the ‘iota “Not Negotiable’ may also be written in both pen of crossing— “general and special’ (Secs. 123 and 124), and a crossing with these words is said to be Not Negotiable’ crossing. Section 130 states the effect of such a crossing in the following words: “A person taking a cheque crossed generally or specially, bearing in ei- ther case the worils ‘not negotiable,’ shall not have, and shall not be capable of giving, a better-title to the cheque than that which the person from whom he took it had.” Thus, the effect of such a crossing is that it takes away one of the essential characteristics of a negotiable instrument, in the sense, that the transferee of such a crossed cheque cannot get a better title than that of the transferor (i.e., cannot become the holder in due course) and cannot convey a better title to his own transferee, though the instrument remains transferable. The object of ‘not negotiable’ crossing is to afford protection to the holder or drawer of a cheque, because even if such a cheque goes to wrong hands and from there it is transferred to holder in due course, the true owner will not lose __ his claim against such an endorsee. Thus an endorsee’of such a crossed cheque must not accept the cheque unless he knows the endorser very well and is | convinced about his having a good title thereto. Who may Cross a Cheque? Crossing of an uncrossed cheque does not amount to a material alteration so 48 to.affect the validity of the instrument. Obviously the drawer ofa shes may cross it generally or specially at the time of issue. Section 125 permits 6 Ctossing being made even after issue of a cheque mn the following ways: Shoe ee is 2 For deals see “Protection to Collecting Banker’ discussed later im his CMAPISS | * Vide Circular RPCD. CO. RF, BC No 78/07 38,3/2005°2006 dai ca Reiterated vide Circular No. DBOD.BP.BC. No. 50/21.014 2011. =&> nner fiss Law of Negotiable Instruments () Where a cheque is uncrossed, the holder may cross it generally o, specially. ci (i) Where a cheque is crossed generally, the holder may cross it specially (iii) Where a cheque is crossed generally or specially, the holder may add the words ‘not negotiable’, se (iv) Where a cheque is crossed specially, the banker to whom it is crosseq may again cross it specially to another banker as his agent for collection, Crossing once made becomes a material part of the cheque and only the drawer of the cheque is entitled to cancel or open the crossing by writing the words ‘Pay Cash’ and cancelling the crossing along with his full signature Similarly, any alteration in the crossing, except in the ways stated above, must be authenticated by the signature of the drawer, otherwise the same will b treated as material alteration so as to discharge the instrument itself Thus where a cheque is crossed ‘Account Payee’ and the holder alters it into a gen. eral crossing by striking out the words ‘Account Payee,’ the alteration is i. regular and discharges the instrument. _/iabilty of Banker The relationship between banker and customer primarily is that of a debtor and a creditor and, therefore, it is the prime duty of a banker to honour his customers’ cheques unless there are valid reasons for refusing payment ofthe same. In case he dishonours a cheque without justification he is liable to compensate the customer (i.e,, the drawer) for any loss or any damage caused by such default (Sec. 31). It must be noted that the liability of the banker for ‘wrongful refusal to pay a cheque is only towards the drawer and not towards the payee of the cheque. The payee has no right of action against the banker for refusing to honour the cheque for the simple reason that there is no privity of contract between him and the banker. He can, however, hold the drawer liable in damages for breach of contract. The rule of awarding damages. In case of wrongful dishonour of cheque, 2 non-trader customer is entitled only to general damages for such monetary loss which he might have actually suffered. But a trader or businessman Customer is entitled to claim not only the general damages, but special damages also for loss of credit or reputation in the market and even without proving the actual loss suffered by him, “In cases where a cheque issued by a trader customer is wrongfully dishonoured even special damages could be awarded without proof of special loss or damage. The faét that such dishonouring took place due to a mistake of the bank is no excuse nor can the offer of the bank to write and apologize to the payees of such dishonoured cheques affect the liability of the bank to pay damages for their wrongful act.” (New Central Hall vs United Commercial Bank Ltd). In the case of a trader customet 4 (1959), ALR. Mad. 153. =pCrossing and Bouncing of Cheques claiming damages, the rule of Awarding damages is, of the cheque wrongfully dishonoured 4 When Banker ‘Must Refuse’ “the smaller the amount fe larger the amount of damages.’ Payment of his Customer's Cheques 1, When customer countermands y 1 ke after a due notice of countermanding the payment is not good against the drawer, nor is the banker entitled to refund from the payee (because the payce gets payments of an otherwise valid cheque), and the banker will have to bear the loss caused by such payment. 2. Garnishee order. On receipt of the ‘gamishee order,’ ie, a prohibitory order by any court attaching money in customer's account, the banker is bound ‘o dishonour the customer's cheques. If by mistake the banker makes payment of any cheque after the receipt of such an order, he will have to bear the loss himself. He cannot recover from the payee who gets payment of an otherwise valid cheque. 3. Death, insolvency or insanity of the customer. When the banker receives 4 notice that his customer has died, or has been adjudged insolvent, or has become insane, his authority to pay cheques drawn by the customer stands tevoked and therefore he must not pay the cheques. Any payment made after a due notice is not good against the drawer, nor is the banker entitled to a Tefund from the payee, who gets payment of an otherwise valid cheque. i i ice of assignment of 4. Notice of assignment. When the banker receives a notice o his credit balance from a customer, he must refuse payment of the cheques drawn by the customer. The banker would be liable if he makes the payment of any cheque after the receipt of such a notice. a 5. Defective title of the party. When the banker rer i. ey Be defective title of the person presenting the cheque, e.g., he is a thief, Must refuuse to honour the cheque. i bout the 6. Loss of cheque. When the customer has informed ee Beale ee ie loss of the cheque, he must not pay it. In case the PE re made by mistake it is not good against the drawer but the bankera | ‘vm the wrong payee, if traceable, as he is not entitled to possession ang ayment of the cheque, aw of Nogotiable Instruments . When the cheque is irregular, When there is material alteration in the ‘hoque orthe signature ofthe drawer does no tally with the specimen signature sept in the bank, the banker must dishonour the customer’s cheque, In case of payment by mistake the banker can recover from the wrong payce, if traceable, otherwise he will have to bear the loss himself, 8. Closing of account. On receipt of the ‘notice for closing the account’ from the customer, the banker must not pay the customer’s cheques. If the banker makes payment of any cheque after the receipt of such a notice, he will have to bear the loss himself, When Banker ‘May Refuse’ Payment of his Customer's Cheques There are some cases when a banker may refuuse payment of his customer's cheques. In these cases, if payment is refused, the banker shall not be liable for damages, and if payment is actually made, the court will decide as to whether the payment made is good against the drawer (i, the customer) or not, taking into account the various facts of the case. The cases in which a banker may dishonour his customer’s cheques are as follows: 1. Where the cheque is post-dated and is presented before the ostensible date, A customer’s order to pay a cheque is deemed to be made on the date it bears and therefote if the cheque is presented before that date the banker is justified in refusing the payment of the same. But if a banker pays a post- dated cheque, the payment is good against the drawer provided the cheque is not countermanded until the stated date. The banker honouring a post-dated cheque, thus takes a great risk. Such a banker may also be made liable for damages to the customer if he is not able to meet the customer’. presented within the intervening period. 2. When the balance to the credit of the customer’s account is insufficient to meet the cheque and there is no overdraft arrangement, 3. When the funds of the customer in the hands of the banker are not properly applicable to the payment of such cheque. Thus, if the funds in his hands are earmarked for some specific purpose by the customer, or he is en- titled to a set-off in respect of them, the said funds are not available for honouring the cheque and the banker may refuse the payment. 4. When the cheque is not properly presented, for ‘example, it is presented at a branch where the customer has no account, or where the cheque is pre- sented after banking hours, the banker is justified in dishonouring the cheque. But for personal reasons he may make the payment, 5. Where the cheque is not presented within a reasonable time of its issue- Ordinarily a period of six months is considered sufficient within which the sheque must be presented for payment, On the expiry of this period the cheque 26 other chequesCrossing and Bouncing of Cheques is treated as ‘stale’ and the banker may dishonour the same. He may, after getting the stale cheque confirmed by the drawer, honour it. "6, When the cheque is of doubtful validity, i.e., it is drawn on a paper different from what has been issued by the bank, the bank may refuse pay- ment. But if he so likes he may make the payment because legally a cheque can be totally handwritten and may be drawn on any paper. It is relevant to state that where payment is refused, a holder can sue the drawer within three years from the date of issue of the cheque because a cheque becomes time-barred after three years from its date of issue.account, i.e., he acted Crossing and Bouncing of Cheques hee led as an ay ita aA holder for value, gent for collection and not in the capacity of It may be noted that if a bank er credit i "§ i anit chs be reing py cata older ‘alue and the protection of thi i | lable to such a 1 : is Section shi availa oa reel well (Explanation | to See, 13 th tall bee day of the banl eS 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, fc i ination Ito See. I ha ith due diligence and ordinary care planation fo See. 131)” This protection, however, isnot available where the banker allows the proceeds of an “Account payee crossed cheque” to be credited to any account other than the payee and the endorsement in favour of the last payee is proved forged. The protection afforded by Section 131 to the collecting banker is very valuable in view of the fact that when one person deals with the goods of another without his permission, he is liable to an action for ‘conversion’, and in the absence of this protection the position of the banker would not be different from that of any other person. + Rights of Holder against Banker As observed earlier, the liability of a banker for wrongful refusal to pay a cheque is only towards the customer (ie., the drawer) and not towards the holder or payee of the cheque. The holder has no right of action against the banker for refusing to pay the cheque because there is no privity of contract between him and the banker. But the holder is entitled to enforce payment from the banker in the following two cases: 1. Where the holder does not present the cheque within a reasonable time of its issue and on account of the delay the drawer suffers actual damage by the failure of the bank and is therefore discharged to the extent of such damage, then the holder can prove his debt to the extent of such discharge against the banker in insolvency proceedings. The holder in such case shall be a creditor, in place of such drawer, of such banker to the extent of such discharge and can recover the amount from him (Sec. 84). (append on ,000, and, when the ct ‘meet it, The bank fails before the holder can proveLaw of Negotiable Instruments 2. Where a banker pays a cheque crossed generally over the counter cheque crossed specially otherwise than to the banker to whom the same ig crossed, he is liable to the true owner of the cheque for any loss he may Sustain owing to the cheque having been so paid (Sec. 129). Of course the banker ca, recover from the open if traceable. Bp Ta ALINAIIA AE AuUEACe