Isha Aggarwal (2503) Mehak Sharma (2558) Saurabh Patel (2561) Varun Kalia (2528)

Dishonour and Discharge of

NEGOTIABLE INSTRUMENTS

Recapturing Negotiable Instruments

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Negotiable Transferable by Delivery

Instrument a written document creating a favour of some person

: The great element of negotiability is the acquisition of property by your own conduct ,not by anothers, that if you take it bonafide and for value, nobody can deprive you of it. : A Holder in due course gets the instrument free from all defects. Consideration: Every negotiable instrument is presumed to have been made, drawn,accepted,negotiated for a consideration. Date: The negotiable instrument bearing a date is presumed to be drawn on the same date. Order of Endorsements: The endorsements appearing on a negotiable instrument are presumed to have been made in the order in which they appear thereon

Dishonor and Discharge of

NEGOTIABLE INSTRUMENTS
For a Negotiable Instrument to cease to exist, it must either be Dishonoured or Discharged. Let us study the various modes in which this is done

Discharge from Liability

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A Party is said to be discharged from his/her liability when his/her liability on the instrument comes to an end by any one of the following :
1. 2. 3. 4.

By cancellation [S. 82] By release [S. 82(b)] By payment [S. 82(c)] By allowing more than 48 hours to accept [S. 83]

5.
6. 7.

By qualified acceptance [S. 86]

By delay in presenting cheque [S. 84] By material alteration [S. 87,88,89]

8.

By negotiation back of a bill [S. 90]

1. By cancellation [S. 82]

When a bill is intentionally cancelled by the holder or his agent, and the cancellation is apparent, the bill is discharged.
The cancellation should be apparent on the face of the instrument otherwise the instrument remains valid in the hands of a bona fide holder for value. Section 82(a) deals with the situation where the holder intentionally cancels the name of the acceptor. The effect is that all other parties, being sureties for the acceptor, will also be discharged from liability. But if he cancels the name of an endorser, then all the parties subsequent to him will be discharged but those prior to him will remain liable. . Example: A draws a bill payable to his own order on B, who accepts. A indorses to C, C to D and D to E. As between E and B, B is the principal debtor and A, C and D are his sureties.

--<<(( accepted a bill. He later withthe bill in half intending to cancel it. B A Lets Understand this tore a
picked that bill and pasted the two pieces together in such a manner that it seemed to be folded for safe custody rather than cancelled. B put the it into circulation and it was received by plaintiff, a holder in due course.

Case))>>--

Judgment: A was held liable because the tearing of the bill was not so clearly manifest on the face of the bill to indicate to a reasonably person that it has been cancelled.

Section 82

2. By release

If the holder of the negotiable instrument releases any party to the instrument by any method other than cancellation of names (i.e. by a separate agreement of waiver, release or remission), the party so released and all parties subsequent to him, who have a right to action against the party so released, are discharged from liability.

3. By payment [S. 82(c)]

All parties to an instrument are discharged from liability when the amount due on the instrument is paid.
Payment is an effective discharge only if it is payment in due course i.e. if it is made, On the maturity of the instrument In good faith and without negligence To the rightful holder. Thus, payment even to a thief or finder will discharge the maker or acceptor if there is nothing to excite suspicion of a prudent man.

However, where the instrument is payable to order then it is necessary that the payment be made to the genuine indorsee. If payment is made to a person whose title is made through a forged indorsement, it will not discharge the payer and he will remain liable to the true owner of the instrument.

Example

A bill is indorsed to John Smith to order. Another person of the same name gets the bill and presents it. The acceptor pays him. The bill is not discharged. The acceptor is liable to the real John Smith.

Exception to the rule: It is in favour of a banker who pays cheque to a person whose title is derived through forged indorsement. This is a special protection of the paying banker and is necessary in the very nature of banking business.

4. By allowing more than 48 hours to accept

[S. 83]

After the bill holder presents it to the drawee for his acceptance, he should be allowed only 48 hours (exclusive of public holidays) to accept or not. If the holder allows more than 48 hours all previous parties who do not consent to such allowance are discharged from liability to the holder.

5. By qualified acceptance
The holder of a bill who presents it for acceptance should insist that the bill be accepted without any conditions or qualifications. If the holder acquiesces in a : Qualified acceptance One limited to part of the sum mentioned in the bill Substitutes a different time or place of payment Where the drawees are not partners, is not signed by all the drawees In that case, all prior parties whose consent is not obtained are discharged from liability.

[S. 86]

6. By delay in presenting cheque [S. 84]

The holder should present the Instrument within a reasonable time of its issue.
(Reasonable time - Regard is given to the nature of the instrument, usage of trade and of bankers, facts of the particular case and public holidays are excluded) If he fails to do and in the meanwhile the bank fails causing damage to the drawer, the drawer is discharged as against the holder

Provided he had sufficient balance to meet the cheque when it ought to have been presented

7. By material alteration [S. 87,88,89]

What constitutes a material alteration? The negotiable Instruments Act is silent on the question. However, courts in India held that anything which has the effect of altering the legal relations between the parties or the character of the instrument or sum payable amounts to a material alteration

Any material alteration of a negotiable instrument discharges the instrument and all parties not consenting to the change. However, those who take an altered instrument remain liable under the instrument as altered. The party in custody of the instrument is bound to preserve it in its integrity.

EXAMPLES OF MATERIAL ALTERATION

Any alteration of the date, sum payable, time of payment and the place of payment. Alteration made for the purpose a new party to the instrument. Alteration by the addition of of correcting a mistake or a clerical error. Alteration made the rate out the common intention of the original parties. Alteration of to carry of interest. Alteration made before the part of the instrument. Tearing off the material instrument is issued. Alteration made with the consent of the parties liable on the instrument. Conversion of bearer cheque into an order cheque. Filling blanks in the case of inchoate or incomplete instruments. Conversion of blank indorsement into an indorsement in full. Making qualified acceptance. Crossing of an uncrossed cheque. Alteration which is the result of an accident, e.g. mutilation by washing, ravages by white ants or rats, document torn by a child, document burnt in part by the hot end of a cigarette. [ HSBC Vs. Lo Lee Shi ]

Apparent Alteration
Section 89 provides that where an instrument has been materially altered but does not appear so, the party paying it will be discharged by payment in due course. But the acceptor is liable only for the original tenor of the instrument.

Case Scholfield Vs. The Earl of Londesborough

A bill for $500 was presented with spaces left. The acceptor wrote his acceptance. The drawer then fraudulently filled the spaces and turned it into a bill of $3500 and negotiated it for that value to a bona fide holder. Judgment: The acceptor of bill of exchange is not under a duty to take precautions against fraudulent alteration after acceptance. He was held liable for $500 only.

8. By negotiation back of a bill

[S. 90]

When a bill of exchange comes back to the acceptor by process of negotiation and he becomes its holder, that is known as negotiation back. If this happens at or after maturity, all liability on the instrument comes to an end.

DISHONOUR OF NEGOTIABLE INSTRUMENTS

Another method of ceasing of an instrument is of the Negotiable Instruments

Dishonour
Lets venture

Dishonour of Negotiable Instruments

Dishonour By Non-Acceptance [S. 91]
Dishonour By Non-Payment [S. 92]

NON ACCEPTANCE
A bill of exchange is said to be dishonoured by non-acceptance in the following cases:
When the drawee or one of several drawees makes default in accepting the bill Where presentment is excused and the bill remains unaccepted Where the drawee is incompetent to contract Where the drawee makes the acceptance qualified If the drawee is a fictitious person or after reasonable search cannot be found

Dishonour By Non-Acceptance [S. 91]

NON PAYMENT
A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when it is duly presented to the maker, acceptor or banker and he makes a default in payment.

Effect of Dishonour
The holder becomes entitled to sue the parties liable to pay thereon The drawer of cheque, maker of note, acceptor and drawer of bill and all indorsers are liable severally and jointly to a holder in due course The holder must give notice of dishonour to all parties against he intends to proceed.

Dishonour By Non-Payment [S. 92]

NOTICE OF DISHONOUR
It is a formal communication of the fact of dishonour served as a warning to the party to be held liable.

By and to whom notice should be given

Notice may be given to a duly authorised agent of the person.

If he is dead to his legal representative If he is declared insolvent to his assignee

Notice may be oral or written

Notice of Dishonour

Noting is the authentic and official proof of presentment and dishonour of a negotiable instrument.
Protest is a formal certificate of dishonour issued by the notary public to the holder of the bill or note, on his demand.

Lets Study them in Detail!

Noting
It is the authentic and official proof of presentment and dishonour of a negotiable instrument. The holder may cause such dishonour to be noted by a Notary Public upon the instrument or a paper attached to the instrument. Note should be made within reasonable time after dishonour and must specify: The date of dishonour The reason assigned for such dishonour The notarys charges

Authentic and Official Proof

NOTING

Protest
It is a formal certificate of dishonour issued by the notary public to the holder of the bill or note, on his demand.

Protest for Better Security

When before the maturity of a bill, the acceptor has become insolvent, or his credit has been publicly impeached, the holder may through a notary public, demand better security from the acceptor. If the acceptor refuses it, the fact may also be noted and certified by the notary. Such a certificate is called a protest for better security. The demand should be made within reasonable time. However, the holder shall have to wait till the date of maturity to take any action against the acceptor, drawers and indorsers.

Formal Certificate of Dishonour

PROTEST

Contents of Protest
The instrument itself or a literal transcript of the instrument and of everything written or printed thereupon The name of the person for whom and against whom the instrument has been protested

The fact and the reasons for dishonour

The place and time of dishonour The signature of the Notary Public In the case of acceptance for honour or payment for honour, the names of the persons by whom and for whom it is accepted or paid

CRIMINAL LIABILITY FOR ISSUING CHEQUES WITHOUT FUNDS [S. 138-147]

with Latest Amendments to the Act [S. 138-147]

1998 AMENDMENT (NEW SECTIONS FROM 138 TO 141)

CONDITIONS OF SECTION 138 FOR CREATING AN OFFENCE FOR DISHONOUR OF A CHEQUE

CONDITIONS OF SECTION 138 FOR CREATING AN OFFENCE FOR DISHONOUR OF A CHEQUE

Sections 139-141

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2002 AMENDMENT (NEW SECTIONS FROM 143 TO 147)

Sections 143-147

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Sections 143-147

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Legal relationship Rights and obligations of banker Crossing of cheques When a banker may and must dishonour a cheque Protection to paying banker Protection to collecting banker Bouncing of cheques

Banker
The Banking Regulation Act,1949 [Sec5(b)] A banking company is a a company which transacts the business of banking in India [Sec 5(c)] Banking as accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

Deposits Investments

BANKER

Customer
A person who has an account in a bank. Dealings with banker must relate to the business of banking i.e., depositing, withdrawing money or taking loans.
Deposits Investments

CUSTOMER

Merely availing of services rendered by the banker like encashing a cheque, do not create the relationship of banker and customer.

Legal Relationship
Contractual relationship
Debtor (the banker) and customer) or vice versa Agent (the customer) banker) and creditor principal (the (the

Rights and obligations of banker

Obligation to honour cheques [Sec.31] Obligation to keep a proper record of transactions Obligation to abide by the instructions given by the customer General lien of bankers [Sec.171] Obligation not to disclose the state of his customers account or affairs Incidental charges and interest Right to set off

Right of appropriation [Sec 59 to 61 of Indian Contract Act, 1872]

OPEN CHEQUES

Cheques May be of Two Types

CROSSED CHEQUES

Payable at the counter of the drawee bank on the presentation of the cheque.

Payable only through a collecting banker and not directly at the counter of the bank

Where a cheque bears across its face two parallel traverse lines without any words or with the words and company or not negotiable written between those two parallel lines. It can take the following forms:

Types of crossing

Where a cheque bears across its face (traverse lines are not necessary) an addition of the name of a banker either with or without the words not negotiable.

It can take the following forms:

Types of crossing

It can be made in the case of general as well as special crossing by adding the words Account Payee (A/c Payee), Account Payee only (A/c Payee only).

It can take the following forms:

Types of crossing

A person taking a cheque crossed generally or specially, bearing in either case the words 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.

Types of crossing

SECTION 125
Section 125 permits the crossing being made even after issue of a cheque in the following ways:
(1) Where a cheque is uncrossed, the holder may cross it generally or specially (2) Where a cheque is crossed generally, the holder may cross it specially (3) Where a cheque is crossed generally or specially, the holder may add the words not negotiable (4) Where a cheque is crossed specially, the banker to whom it is crossed may cross it again specially to another banker as his agent for collection

Who May Cross A Cheque

MAY DISHONOUR
Insufficient funds to the credit of the customer Where the customers funds are not applicable to the payment of the cheque Where the cheque is ambiguous or of doubtful legality Where the cheque is mutilated Where the cheque has become stale. Where the customers signature does not agree with his specimen signatures. Where the cheque is post dated. Where the cheque is presented at a branch other than the one where the customer has the account.

When a banker may dishonour a customers cheque

MUST DISHONOUR
When the banker receives notice of the customers death, insolvency or insanity. When the customer countermands payment Garnishee order Notice of assignment Defective title of the party Loss of cheque When the cheque is irregular Closing of account

When a banker must dishonour a customers cheque

Protection to a Paying Banker

Protection In Case of Ordered Cheques

Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by `payment in due course`.
The banker can debit his customers account with the amount so paid even though(1)the indorsement by the payee may turn out to be a forgery or (2)the indorsement might have been placed on the cheque by the payees agent without his authority.

Section 85(1)

Protection In Case of Bearer Cheques

Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, not withstanding any indorsement whether in full or blank appearing thereon, and not withstanding that any such indorsement purports to restrict or exclude further negotiation.
As regards bearer cheques, the rule is Once a bearer cheque, always a bearer cheque

Section 85(2)

Protection of Collecting Banker

Crossed cheques [Sec 131] Banker is not liable if (1) he acted in good faith and without negligence (2) The cheque was already crossed (3) he acted as an agent Open cheques [Sec 131]

Protection of Collecting Banker

If a collecting banker acquires a cheque for value and in good faith, he collects it for himself and has all the privileges of a holder in due course

Bouncing of Cheques
A cheque is said to be bounced or dishonoured by non payment when the drawee of the cheque makes default in payment upon being duly required to pay the same. Amendments By Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act,1988 Came into force on April 1,1989 Chapter XVII Penalties in case of dishonour of certain cheques for insufficeincy of funds in the accounts was inserted Includes sections 138 to 142

Requirements to be Satisfied
Cheque should be dishonoured due to insufficiency of funds. Cheque should be issued by drawer in favour of another person for the discharge of legally enforceable debt or other liability, in whole or in part. When cheque issued for meeting social obligations is dishonoured, it is not considered an offence. 3. Cheque should be presented to bank in due time. (within six months from the date on which it is drawn or within the period of its validity, whichever is earlier)

Requirements to be Satisfied
4. Payee should make demand for payment by giving a written notice to drawer within 30 days of awareness of dishonour of cheque. 5. Drawer fails to make payment within 15 days 6. The payee should make a written complaint of the offence to a court not inferior to that of a metropolitan magistrate or a first class judicial magistrate, within one month of the date on which the course of action arose under the said provisions.

Any Questions? THANK YOU