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Instruments –
Law &
Procedure
Module contents
• Justification for study of ‘negotiable instruments’
• Understanding negotiable instruments
• Parties to negotiable instruments
• Presentment
• Special provisions relating to cheques
• Discharge from liability
• Noting and protest
• Presumptions and estoppels
• Offences under the act
• Foreign instruments
Understanding the ‘context’ (at macro level)
• Growing concept of ‘securitization’ – as a
mode of finance
• What is securitization?
– “securitization is a process in which pools of
individual loans or receivables or actionable
claims are packaged, under written and
distributed to investors in the form of securities”
-- Kenneth Cox
POOLS OF ASSETS
BELONGS TO THE
1. LOANS & ADVANCES
ORIGINATOR RECEIVE THE LOAN
2. BILLS
(SUPPOSE A ‘BANK’ OR A AMOUNT
3. OTHER RECEIVABLES
‘FINANCIAL INSTITUION’)
4. DEBTORS
CREATION OF SPV
THE SPV MAY BE A POOLED ASSETS ARE
POLLED ASSETS ARE
BANK OR A PASSED ON TO THE
BEING TRANSFERRED TO
FINANCIAL INSTUTIONS SPECIAL PURPOSE
THE SPV FOR
GENERALLY VEHICLE (SPV)
CONSIDERATION
DRAWER DRAWEE
Pratap Singh
s/o Biswas Singh,
Resident of 222, 72 cross, 4th Main,
Rajajinagar, 6th Block,
Bangalore-560 012
Pro Note payable on fixed date
Ashok R. Patil,
s/o Ramappa Chendrashekhar Patil,
Resident of No. 227 “Pratap Chendra Nilaya”
College Road,
Dharwad-580 001.
Pro Note payable on instalments
Ashok R. Patil,
s/o Ramappa Chendrashekhar Patil,
Resident of No. 227 “Pratap Chendra Nilaya”
College Road,
Dharwad-580 001.
Essentials
• it must be in writing and signed by the maker;
• it must contain an unconditional and definite
promise to pay a certain sum, and nothing more;
• it must be payable either on demand or after the
efflux of a fixed or determinable time in future;
• It must be payable to, or to the order of a specified
person named in the note or to the bearer of the
note;
• most importantly, an instrument to be regarded as
promissory note must show a prima facie intention
to make such a note and it must be delivered.
Writing
• No particular form of writing
– Pen, pencil, typed, etc.,
– May be on paper or cloth etc.,
• No need to use specifically the word ‘promise’
• Must be signed by the maker
Undertaking to pay
• Essential is express promise to pay
• No Promissory notes
– Mr. X, I owe you Rs.100
– I have received Rs.100 which I borrowed of you,
and I have to be accountable to you for the same
with interest
– Deposited with me Rs.100 to be returned on
demand
• Good examples
– Rs.1000 balance due to you I am still indebted
and do promise to pay
– Received from X Rs.1000 which I promise to pay
on demand with interest
– I do acknowledge myself to be indebted to X in
Rs.1000 to be paid on demand for value received
unconditional
• ‘Unconditionality’ is essential to achieve the
objective of ‘certainty’ of promissory note
• It is indispensable statutory requisite [Black v
Pilcher (1909)25 TLR 497]
• Notes that are payable on contingency are not
negotiable
“it would perplex the commercial transactions
of mankind if paper securities of this kind
were issued out in to the world, encumbered
with conditions and contingencies and if
persons to whom they were offered in
negotiation were obliged to inquire when
these uncertain events would probably be
reduced to certainty..”
-- Lord Kenyon in Carlos v FAncourt, (1794)
5 TR 484
Examples
• I promise to pay X, Rs.5000 in installments
with a proviso that no payment shall be made
after my death
• I promise to pay X, Rs.500 on A’s death,
provided he leaves me sufficient money to pay
the said sum
• I promise to pay AB, Rs.500 out of money
due to me from XY as soon as XY pays
• I promise to pay on demand at my
convenience
Certainty regarding the sum
• Bad promissory notes
– I promise to pay A, Rs.100 and all other sums
which may be due to him
– I promise to pay A, Rs.100 after deducting any
interest or money which he may owe me
– I promise to pay A the proceeds of a shipment of
goods value of Rs.2000
– I promise to pay A Rs.1000 and all fines
according to rule
Payee must be certain
• The payee’s name may be set out in any part
of the instrument; and so long as it appears
on a reading of the whole instrument that the
payee is specified with certainty the
instrument is a promissory note, assuming
other requirements of the definition are
satisfied
Other formalities
• Must be stamped
• Although not obligatory –
– Generally dated
– And the place of delivery is mentioned
• There are in general two parties to a pro-note
– the maker and the payee.
• There can also be ‘Joint makers’ and ‘Joint
Payees’
Bill of Exchange
• “an instrument in writing containing an
unconditional order, signed by the maker,
directing a certain person to pay a certain sum
of money only to, or to the order of a certain
person or to the bearer of the instrument”
- Sec. 5 of NI Act
Essentials
• Must be in writing
• Must contain an order to pay
• Order contained in the bill shall be
unconditional
• Must be signed by the drawer
• Drawee must be certain
• Sum payable must be certain
• Order to pay ‘money and money only’
• The payee must be certain
‘Three parties’
DRAWER DRAWEE/
ACCEPTOR
PAYEE
Ashok R. Patil,
To
Bhavesh Solanki,
College Road,
Dharwad-580 001.
BOE shall contain an order
• Essence of BOE is an order by the drawer to
the drawee to pay the money to payee
• Polite assertion may also do
– ‘Please pay affixed to the order’ will not be invalid
– ‘Mr. AB will much oblige Mr. CD by paying to
the order of P’ was held to be good bill
BoE and Pro Note compared
• The liability of the maker
– In Pro Note it is primary
– In BOE it is secondary and conditional
• Parties
– Pro Note – two
– BOE – three
• BOE require specially
– Acceptance by the drawee; and
– presentment
cheque
• “Cheque is a bill of exchange drawn on a
specified banker and not expressed to be
payable otherwise on demand and it includes
the electronic image of the truncated cheque
and a cheque in the electronic form”
- Sec. 6 of NI Act
• There are two explanations
– Explaining – ‘a cheque in the electronic form’
and ‘a truncated cheque’; and
– Clearing house for the purpose of this section
Broadening the definition of ‘cheque’ in 2002
• The definition broadened to include
– electronic image of a truncated cheque; and
– cheque in the electronic form
• The Information Technology Act, 2002
recognizes
– electronic transfers; and
– digital signatures
• The present amendment was intended to
tune the NI Act with Information Technology
law
‘Three parties’
DRAWER BANKER
PAYEE
1824 to 1836 – the rule of honesty was replaced by ‘due care and caution’
Bills of Exchange Act, 1882 (sec. 90) put the controversy to rest
PART II
Assignment v negotiation
• The transfer of an instrument by one party to
another so as to constitute the transferee as
holder is called ‘negotiation’
• A bearer instrument is transferable by simple
delivery [s. 14]
• An instrument payable to order can be
transferred by endorsement and delivery [ss.
15 and 46].
• When a person transfers his right to receive
the payment of a debt is called ‘assignment of
a debt’.
– The holder of a life insurance policy transfers the
right to receive the payment to another person
that is an assignment
• The rights which the ‘transferee’ of an
instrument by negotiation acquires are
substantially superior to those of an ‘assignee’
Notice of Assignment
• An assignment does not bind the debtor
unless a notice of the assignment has been
given to him and he has, expressly or
impliedly, assented to it
• But no information of the transfer of a
negotiable instrument has to be given to the
debtor
– The acceptor of a bill and the maker of a
promissory note are liable on maturity to the
person who is at the time the holder in due
course of the instrument
Presumptions
• Consideration is presumed in case of
• The burden lies upon the opposite party to
show that there is no consideration
• But there are no such presumptions in favor
of an assignee -- He has to prove that, he has
given consideration for the assignment.
Negotiation by delivery
• Sec. 47
• An instrument payable to bearer can be
negotiated by simple delivery
• The person to whom the instrument is
delivered becomes the holder
• Delivery, though simple, is an important
formality, for without it no possessor is
constituted as the holder of the instrument
• A person who steals or finds a bearer
instrument is not the holder
Negotiation by endorsements
• Sec. 48
• An instrument payable to order is negotiated
by indorsement and delivery
• Indorsement is made by signing the name of
the indorser, usually on the back of the
instrument
– But when the back is already full - indorsements
may be signed on a slip of paper annexed to the
instrument
– Such a slip is called ‘allonge’ and becomes part of
the instrument
Endorsement & ‘delivery’
• An indorsement is completed by the delivery of the
instrument to the indorsee
• “An indorsement means an indorsement completed
by delivery”
– Thus when a person indorses an instrument to another
and keeps it in his papers where it is found after his death
and then delivered to the indorsee, the latter gets no rights
on the instrument
– Similarly, where a person finds or takes away an
instrument duly indorsed to him he gets no rights on the
instrument
– A note cut in into two pieces and posted one-half to a
person whom he wanted to remit money, was held entitled
to withhold delivery of the other half, because a partial
delivery does not make a complete indorsement
• Tukaram Bapuji v Belgaum Bank, AIR 1976
Bom. 185
– after sending a bank draft to the payee by post,
the sender issued instruction to the bank not to
pay the draft
– The court held that a draft cannot be cancelled by
the sender after it has been delivered to the payee
and
– The delivery in this case became effective from the
date of posting
Who may endorse
• Sec. 51
• The payee of an instrument is the rightful
person to make the first indorsement
• Thereafter, by the holder in due
• Ordinarily the maker of a note and the
drawer of a bill cannot endorse
– But if any one of them has become holder in his
own right, he may endorse the instrument.
• Sec. 51, enables all parties to an instrument to
indorse
Kinds of
endorsement
Endorsement in blank
• Ss. 16 and 54
• Where the endorser signs only his name on the back
of the instrument for the purpose of negotiating it
that is an indorsement ‘in blank’
• The effect of a blank endorsement is to convert the
order instrument into bearer
– It may be negotiated by simple delivery and the bearer is
entitled to its payment
– It remains so until the indorsement in blank is converted
by the holder into indorsement in full
Endorsement in full
• Sec. 16
• Where the indorser adds to his signature the name
of a person whom or to whose order he wants the
instrument to be paid, that is an indorsement in full
– For Example “pay B or order. Sd/- A” is the usual form
– He may not add the words ‘or order’
– This is the usual form, but no form is prescribed
– Any words will do so long as they show clearly the
indorser’s intention
• The effect is that the instrument can be paid only to
the indorsee and can be further negotiated only by
his indorsement
Restrictive endorsement
• Sec. 50
• when this right of further negotiation is, by express
words in the indorsement, restricted or taken away,
that is called ‘restrictive’ indorsement
• The indorser may
– altogether exclude the right of further negotiation or
– only restrict it or
– ‘may merely constitute the indorsee an agent to indorse the
instrument, or
– to receive its contents for the indorser or for some other
specified person
Liability of parties
Liability of acceptor or maker
• Sec. 32
• The liability of the acceptor of a bill of
exchange and of the maker of a promissory
note is the same
• They are liable to pay the instrument on its
maturity
• In default, they become liable to compensate
any subsequent party for the loss caused to
him by the dishonour
Liability of the drawer of the bill
• Sec. 30
• The drawer of a bill of exchange is primarily liable
until the bill has been accepted by the drawee
• After the acceptance the acceptor becomes primarily
liable
• Thus the liability of the drawer of a bill can be put in
terms of the following propositions –
– by drawing and issuing the bill he engages that, it shall be
accepted and paid by the drawee according to its apparent
tenor; and
– that if it is dishonoured either by non-acceptance or by
non-payment, he shall compensate the holder or every
endorser who has been compelled to pay the loss suffered
by him
Drawer of a cheque
• The drawer of a cheque gives a guarantee to the
holder that, it shall be paid by the banker when it is
duly presented for payment
• If the cheque is dishonored, the drawer is liable to
compensate the holder provided that he has received
notice of dishonor
• however
– The liability of the drawer of a cheque is primary and not
secondary
– This is so because the holder of a bill can sue the acceptor,
but the holder of a cheque has no remedy against the
banker
– His remedy is only against the drawer
Criminal liability (drawer of a cheque)
• Ss. 138 to 142
• The amendment of 1988 added a new
chapter to the Act
• Vide Sec. 4 of Banking, Public Financial
Institutions and Negotiable Instruments Laws
(Amendment) Act,1988 [Act 66 of 1988]
– Came into effect on 01.04.1989
– First edition Ss. 138 to 142
– Latest addition Ss. 143 to 147 [vide Amendment
Act of 2002]
• ‘to enhance the acceptability of cheques in
settlement of liabilities by making the drawer liable
for penalties, in case of bouncing of cheques due to
insufficiency of funds in the accounts or for the
reason that it exceeds the arrangement made by the
drawer, with adequate safeguards to prevent
harassment of honest drawers’
• The object is to
– inculcate faith in the efficacy of banking operations and
– credibility in transacting business on the basis of negotiable
instruments
Ingredients (sec. 138)
1. The cheque should have been issued in discharge
of a legally enforceable debt or liability;
2. The cheque should have been dishonored within
the period of its validity;
3. The cheque should have been dishonored for want
of funds in the account of the drawer;
4. The payee or holder of the cheque should have
issued, within a specified time limit, a notice in
writing to the drawer demanding the amount of
cheque; and
5. The drawer must have failed to make payment
within 15 days of receipt of the notice.
Dishonor of the cheque for want of funds
Payment in due
Sec. 10 course
(generic)
PROTECTION Altered
TO THE instrument and
Protection to PAYING
the paying making
BANKER payment
banker
(specific) (generic)
Sec. 85 Sec. 89
S. 10 – payment in due course
“payment in due course means payment in
accordance with the apparent tenor of the
instrument in good faith and without
negligence to any person in possession thereof
under circumstances which does not afford a
reasonable ground from believing that he is
not entitled to receive payment of the amount
therein mentioned”
Ingredients
• The payment shall be
– In accordance with the apparent tenor of the
instrument
– Payment made in good faith
– Payment made without negligence
– To the person in possession of the instrument;
and
– No belief that the person in possession of the
instrument is not entitled to receive payment of
the amount in the instrument
s. 85 – specific protection to the banker
1. where the cheque is payable to ‘order’
purports to be endorsed by or on behalf of
the payee – the drawee is discharged by
payment in due course
2. Where the cheque is originally expressed to
be payable to ‘bearer’ – the drawee is
discharged by payment in due course to the
bearer thereof
• Bhutoria Trading Company v Allahabad Bank, AIR
1977 Cal. 363
– BTC sold some jute to WFD (another limited Company)
in payment of which WFD issued an uncrossed cheque
payable to BTC or order
– The same was delivered to one of the officials of the BTC
– That official used the official seal and endorsed the cheque
as ‘manager’ and en-cashed over the counter
– BTC later sued the bank for recovery of the money
“the cheque is an uncrossed cheque payable to the
plaintiff or order. The cheque was endorsed by
the plaintiff through its Manager. The fact that
Jethmall is the Manager is borne out of the seal of
the Company which is unquestionably an
authentic seal. The seal of the Manager is also
equally authentic. That the payment was made in
good faith has not been disputed for all practical
purposes. There is not a grain of evidence before
the court from which it remotely appears that the
payment was not made in good faith…”
“… there was no circumstances which afforded any
reasonable ground for believing that he was not
entitled to receive payment of the cheque. It
must be held that the bank made the payment in
due course. The learned judge, in our opinion
has rightly pointed out that payment in due
course is necessarily payment in the ordinary
course…”
• Madras Provincial Cooperative Bank Ltd., v
Official Liquidator, South Indian Match
Factory Ltd., AIR 1945 Mad. 30
– The Official Liquidator of the Company had sold
certain properties of the company -- payment was
made by the purchaser by giving a cheque in favor
of the liquidator
– The liquidator collected cash over the counter
and misappropriated the same
– Held it is no payment in due course
“…they knew or must have deemed to have
known that this money could only be
collected by the payee through his own bank
and therefore it was most improper on his
part to ask for payment over the drawee’s
counter. In our judgment there was a clear
breach of a statutory duty placed upon the
bank and the learned judge was right in
holding the bank liable…”
• Bank of Maharashtra v M/s Automotive
Engineering Co., (1993) 2 SCC 97
– The respondent – a partnership firm, opened a
current account with the appellant bank
– The said bank’s branch was in the outskirts of
Bombay (where forgery of cheques were rampant)
– although other banks were provided with
ultraviolet ray lamps; the said branch was not
provided with such lamp
– A Cheque was presented for collection (through
Union Bank of India) by one Mr. Shah on 29
May 1967 for Rs.6,500
– The appellant bank passed the cheque and
debited the amount to the Respondent
– Upon objection the cheque was examined
through ultraviolet ray-lamp then found out that
it was originally issued to one Mr. G R Pardawala
for Rs.95.98
– The writing of the cheque was chemically altered
with regard to date, the name of the payee and
also the amount
– All subordinate courts & High Court found the
bank guilty of negligence (as they did not use the
ultraviolet lamp)
– Then an appeal was preferred to the SC, which
was allowed
“simply because the ultraviolet ray lamp was
not kept in the branch and the said cheque
was not subjected to such lamp, would not be
sufficient to hold the appellant bank guilty of
negligence more so when it has not been
established on evidence that the other
branches of the appellant bank or the other
commercial banks had been following a
practice of scrutinizing each and every cheque
or cheques involving a particular amount
under such lamp by way of extra precaution”
• Bareilly Bank Ltd., v Naval Kishore, AIR 1964 All.
78
– ‘N’ opened an account and made a cash deposit of
Rs.19,900; he was also issued a cheque book of 25 leaves
– After 17 months of operation ‘N’ drew a cheque for the
first time for Rs.5,900 which was dishonoured by the bank
– ‘N’ was informed that, 11 months back 3 cheques
aggregating to Rs.19,500 were pad by the bank, which ‘N’
denied (about their issuance)
– And he also sued the bank for recovery of the money
– In evidence it came out that 3 cheques used to
withdraw, were not from the cheque book issued
to ‘N’
– There was some difference between the ‘specimen
signature’ and the signature on the cheques
– Held that banker’s are responsible
S. 89 – altered instrument and payment
Forged cheque &
banker’s liability
Proposition
• When the cheque is forged – there is no
mandate to the bank to pay
• Hence, banker is not entitled to debit the
customer’s account (on the basis of that
forged cheque)
• Canara Bank v Canara Sales Corporation and
Others [(1987) 2 SCC 666]
– The current account of the company was to be
operated by the MD
– The accountant of the company had the custody
of the cheque book, who forged the signature on
42 cheque leaves and took out Rs.3,26,047.92
over a period of time
– Upon detection – demanded the amount back
from the bank, which was denied
– Company filed the suit for recovery; this attempt
was successful at the initial level
– The bank appealed to the Supreme Court, which
dismissed the same
“since the relationship between the customer and
the bank is that of creditor and debtor, the bank
had no authority to make payment of a cheque
containing a forged signature. The bank would
be acting against the law in debiting the customer
with the amount of the forged cheque as there
would be no mandate on the bank to pay….”
Additional proposition
• In a joint account if one the signatures is
forged – same consequence will follow
• As there is no mandate – banker cannot debit
the customer’s account
Crossing of
cheques
Introduction
• ‘Crossing’ is a feature which is unique to
cheques and distinguishes cheques from other
negotiable instruments
• Crossing is a usage born of commercial
practice
• The objective – give direction to the banker
that, he is not to pay the cheque across the
counter but to pay it only to another banker
• Crossing of a cheque accords a protection or
safeguards the interest of the drawer
• If wrongful person seeks payment – it can be
traced back (as he has acted through another
banker)
Kinds of crossing
• General crossing
• Special crossing
General crossing
• Sec. 123
• “where a cheque bears across its face an
addition the words ‘and company’ or any
abbreviation thereof, between two parallel
transverse lines or of two parallel transverse
lines simply, either with or without word ‘not
negotiable’, that addition shall be deemed a
crossing, and the cheque shall be deemed to
be crossed generally”
Special crossing
• Sec. 124
• “where a cheque bears across its face an
addition of the name of banker, either with
or without the words ‘not negotiable’, that
addition shall be deemed a crossing and the
cheque shall be deemed to be crossed
specially, and to be crossed to that banker”
Classification of ‘crossing’
crossing
General crossing
Special crossing
any
o mp
d c
An
Co
&
Special crossing
• Two transverse parallel lines may or may not
be drawn
• Name of the banker should e written across
the cheque
• The words ‘not negotiable’ may also be
included
specimens
t d.
aL
di ia
I n nd
k of ofI
b an ank
e e b
Th ta t
e s
a ye
n tp
c ou B I
Ac S
b le
a
g oti
t ne
No
Account payee crossing
• ‘account payee’ crossing does not restrict the
negotiability of the cheque
• It is only an indicating to the banker to pay
the monies in to the bank account of the
holder or payee
• If the banker receives payment of such cheque
on behalf of third person (any one other than
payee/holder or one who does not have
account) he will be guilty of negligence
Not negotiable
• Sec. 130 decals with the concept of ‘not
negotiable’
• Earlier notion (of both English and India law)
– That by striking ‘order or bearer’ the cheque is
made non transferable
– But now Sec. 13 – states the mere absence of the
word does not mean that it is non transferable
• Hence, only way is crossing it with ‘not
negotiable’ marking
Who can cross the cheque?
• Crossing can be done
– By the drawer
– By the payee
– By the holder; or
– By the banker
• Sec. 125
Proposition of law
• ‘crossing’ by itself does not amount to
material alteration
• However
– Intensity of the crossing can not be reduced by
subsequent holder
– The banker crossing the cheque should do so only
in favour of another banker
Can the crossing be cancelled?
• The answer (by analogy) of law is – NO
• However the practice is different
– Whereby the crossing is cancelled by writing with
initials ‘please pay cash’
– However the banker is probably to take some risk
in such situations
London Clearing House Bankers –
resolution
“That no opening of cheques be recognized
unless the full signature be appended to the
alteration and then only when presented for
payment by the drawer or by his known
agent”
Protection of the
collecting banker
Collecting banker
• Collecting banker is one who collects money
on behalf of the holder
• This is essential as a crossed cheque can be
paid only by bankers and to another banker
• Sec. 131
“A banker who has in good faith and without
negligence received payment for a customer of
a cheque crossed generally or specially to
himself shall not, in case the title to the
cheque proves defective, incur any liability to
the true owner of the cheque by reason only
of having received such payment”
Discharge from
liability
introduction
• ‘Discharge’ in legal sense means ‘release from
liability’
• In our context ‘discharge’ means ‘release of
liability on the instrument’
• Discharge of parties and discharge of
instrument
– The former is releasing one party; and
– The other is extinguishment of all rights over the
instrument
Classification for easier understanding
DISCHARGE
BY ACT OF OTHER
BY OPERATION
PARTIES CIRCUMSTANCES
OF LAW
SEC. 82 SEC. 83-90