LAWS RELATED TO CHEQUE & DISHONOR OF CHEQUE

Presented By:
Anubhuti Singh Anuradha Sharma Kiran Gupta Priyanshi Lakhera Sanjay Aggarwal

Definition of a Negotiable Instrument

Negotiable- Freely Transferable from one person to another by delivery or by endorsement and delivery. Instrument any written document by which right is created in favor of a person. Thus, a Negotiable Instrument is a document by which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable instruments Act1881

In simple words NI is a written document which guarantees the payment of specific amount of money, either on demand or at a set time.

Characteristics of NI

According to NI act 1881a Negotiable Instrument Must Be In Writing Must Be Signed by the Maker/ Drawer Must be unconditional promise or order to pay Involve payment of money only (certain amount) Certain time (presumed it bears the date on which it is made) Drawee must be named or described Transferrable by delivery or by endorsement and delivery NI can be transferred any no of time before maturity this is called Transfer Infinitum Holders title free from defects. The holder can sue in his own name.

Types of NI

The NI act 1881 mentions only follwing three as negotiable instruments these are called NI by Statue and are governed by NI act 1881
1. 2. 3. Promissory notes Bill of exchange Cheques

NI not governed by NI act 1881 are called negotiable by custom or usage or quasi negotiable these are:
1. 2. 3. 4. 5. Bank draft Pay order Govt. promissory notes Hundies Delivery order

Not Negotiable Instruments

1. 2. Share certificate Postal order etc..

What is a Cheque?
A cheque, in essence, is an order by the customer of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer. Section 6 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Thus, a cheque is a bill of exchange with two added features, viz.

1. It is always drawn on a specified banker. 2. It is always payable on demand and not otherwise.

Types of Cheque
There are mainly two types of Cheques viz.
Open Cheques
Those which are paid across the counter eg. Bearer cheque

Parties to a Cheque
The following are the parties to a Cheque:
The Drawer: The person who draws the cheque. The Drawee: The banker of the drawer on whom the cheque is drawn. The Payee: To whom Payment is to be made The Holder: Endorser: Endorsee:

Crossed Cheques
If Cheque if crossed by drawing two parallel lines across the face it cannot be paid on counter it is deposited in account of person , in whose favor it is drawn

Requisites of a Cheque
E E E E E E E E Written instrument. Unconditional order. On a specified banker only. A certain sum of money. Payee to be certain. Payable on demand. Amount of the cheque. Dating of cheque.

Specimen of a cheque

Overdue, Stale or Out-of-date Cheque

A cheque is overdue or becomes statute-barred after three years from its due date of issue. A holder cannot sue on the cheque after that time. Apart from this provision, the holder of a cheque is required to present it for payment within a reasonable time, as a cheque is not meant for indefinite circulation. In India, a cheque, which has been in circulation for more than six months, is regarded by bankers as stale. If, as a result of any delay in presenting a cheque, the drawer suffers any loss, as by the failure of the bank, the drawer is discharged from liability to the holder to the extent of the damage.

Endorsement and Kinds of Endorsement

An endorsement is the mode of negotiating a negotiable instrument. 1. Endorsement in blank. 2. Endorsement in full. 3. Restricted endorsement. 4. Conditional endorsement. 5. Partial endorsement. 6. Endorsement sans recourse. 7. Facultative endorsement.

Liability of Endorser
In order to charge an endorser, it is necessary to present the cheque for payment within a reasonable time of its delivery by such endorser. 'A' endorses and delivers a cheque to B, and B keeps it for an unreasonable length of time, and then endorses and delivers it to C. C presents it for payment within a reasonable time after its receipt by him, and it is dishonored. C can enforce payment against B but not against A, as qua A, the cheque has become stale.

Rights of Holder against the Banker

A banker is liable to his customer for wrongful dishonor of his cheque but it is not liable to the payee or holder of the cheque. The holder has no right to endorse payment from the banker except in two cases, namely, (1) where the holder does not present the cheque within a reasonable time after issue, and as a result the drawer suffers damage by the failure of the banker in liquidation proceedings; and (2) where banker pays a crossed cheque by mistake over the counter, he is liable to the owner for any loss occasioned by it.

Crossing of Cheque

A cheque is either "open" or "crossed". An open cheque can be presented by the payee to the paying banker and is paid over the counter. A crossed cheque cannot be paid across the counter but must be collected through a banker. A crossing is a direction to the paying banker to pay the money generally to a banker or to a particular banker, and not to pay otherwise. The object of crossing is to secure payment to a banker so that it could be traced to the person receiving the amount of the cheque. To restrain negotiability, addition of words "Not Negotiable" or "Account Payee Only" is necessary. A crossed bearer cheque can be negotiated by delivery and crossed order cheque by endorsement and delivery. Crossing affords security and protection to the holder of the cheque.

Modes of Crossing (Sections 123131A)

There are two types of crossing which may be used on cheque, namely: (1) General, and (2) Special. Who can cross a cheque? It can be crossed by any of the following: (1) The holder of the cheque, (2)The drawer of the cheque.

Dishonor of cheque
Dishonor by Non-Acceptance(Section 91)
Section 91 provides that a bill is said to be dishonored by nonacceptance: (a) When the drawee does not accept it within 48 hours from the time of presentment for acceptance. (b) When presentment for acceptance is excused and the bill remains unaccepted. (c) When the drawee is incompetent to contract. (d) When the drawee is a fictitious person or after reasonable search can not be found. (e) Where the acceptance is a qualified one.

Dishonor by Non-payment (Section 92)

A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. Also, a negotiable instrument is dishonored by non-payment when presentment for payment is excused and the instrument when overdue remains unpaid. If the bill is dishonored either by non-acceptance or by non- payment, the drawer and ail the endorsers of the bill are liable to the holder, provided he gives notice of such dishonor. The drawee is liable only when there is dishonor by non-payment.

Few news related to the dishonor of cheque

Cheque bouncing Bill passed: The Lok Sabha on Thursday passed a Bill providing for stringent penalties, including imprisonment up to two years, for cheques that bounce. The move comes as part of its efforts to bring greater discipline in the financial transactions in the country. The Negotiable Instrument (Amendment & Miscellaneous Provisions) Bill, 2002, moved by Jaswant Singh, was passed by a voice vote without discussion amidst protest by CPI (M) member V Radhakrishnan. (November 22, 2002)

Signature mismatch on cheques to invite penalty:

Cheque-bouncing charges will be slapped even if the cheque is dishonored on the ground that signatures on the cheque did not match the specimen signatures with the bank, the Supreme Court has said. A twojudge bench, comprising Justices TS Thakur Gyan and Sudha Mishra, overturned a Gujarat High Court judgement, which had ruled to the contrary. (December 2, 2012)

ICICI Bank drags Deccan Chronicle promoters to court in cheque bounce case: ICICI Bank, the biggest lender to the
cash-strapped media house Deccan Chronicle Holdings (DCHL), has moved a local court in Hyderabad against the promoters after a cheque issued for Rs 350 crore by them bounced. ICICI Bank had in all lent Rs 511 crore to DCHL, which is still to repay Rs 350 crore of loans. (January 17,

2013)