Negotiable Instrument
NEGOTIABLE INSTRUMENTS ACT
Negotiable Instruments are money/cash equivalents. These can be converted into liquid cash subject to certain conditions. They play an important role in the economy in settlement of debts and claims. The transactions involving the Negotiable Instruments in our country are regulated by law and the framework of the Statute which governs the transaction of these instruments is known as The Negotiable Instruments Act. This act was framed in our country in the year 1881 when the British ruled our country. Prior to 1881 the transactions governing Negotiable Instruments were regulated under the cover of Indian Contract Act 1872. This act has been amended as many as 23 times to meet the needs of the time. The last amendment was made in 2002.
Preamble
It became a statutory necessity to enact law governing Promissory Notes, Bills of Exchange and cheques.
What is a Negotiable Instrument
Section 13:- " A Negotiable instrument means a promissory note, bill of exchange or cheque either to order or bearer."
This definition does not say anything about the characteristics of a negotiable instrument but it mentions about instruments, which can be legally called as a negotiable instrument. It fortunately, however does not prohibit any other instrument which satisfies the features of negotiability from being designated as negotiable instruments. Justice K.C.Wills defines negotiable instrument as "ONE THE PROPERTY IN WHICH IS ACQUIRED BY ANY ONE WHO TAKES IT BONAFIED FOR VALUE, NOT WITHSTANDING ANY DEFECT OF TITLE IN THE PERSON FROM WHOM HE TOOK IT".
Transferability
A Negotiable instrument as a document of title to money is transferable either by the application of the law or by the custom of the trade concerned.
Special feature of N.I
The special feature of such an instrument is the privilege it confers to the person who receives it bonafide and for value, to possess good title thereto, even if the transferor has no title or had defective title to the instrument.
Distinctive features of Negotiable Instruments
- Easily transferable from one person to another
- Confers absolute and good title on the transferee
- The holder of a Negotiable Instrument (P.N./B.E./Cheque) is called as the holder in due course and possesses the right to sue upon the instrument in his own name.
Types of Negotiable Instruments • Negotiable instruments by Statue are of three types, cheques, bills of exchange and promissory note. • Negotiable instruments by custom or usage :- Some other instruments have acquired the character of negotiability by the the custom or usage of trade. Section 137 of Transfer of Property Act 1882 also recognizes that an instrument may be negotiable by Law or Custom. Thus in India Govt. Promissory notes, Shah Jog Hundis, Delivery Orders, Railway Receipts, Bill of Lading etc. have been held negotiable by usage or custom. These can be said as quasi statutory Negotiable Instruments.
Exceptions
Sometimes the Drawer and Holder can take away the negotiability of an instrument by expression such as "Not Negotiable", Pay to "A" only. Here "A" (the holder) cannot transfer a better title to the transferee.
Promissory Note
Section 4: "A promissory note is an instrument in writing (not being a bank note or a currency note), containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument."
Bill of Exchange
Section 5: "A bill of Exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument."
According to Section 7, the maker/creator of the instrument is known as 'Drawer'. The person to whom payment may be made is known as "Payee". The person who is directed to pay the amount is known as Drawee. He accepts to pay the amount mentioned in the instrument. In case of a promissory note Drawer and Drawee are same. In case of a cheque the Drawee is always a Banker.
Cheque
As per Section 6 "A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand." After 2002 amendment cheque includes " the electronic image of a truncated cheque and a cheque in the electronic form." In terms of Explanation I, (a) " 'a cheque in the electronic form' means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) “ 'a truncated cheque' means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing."
M.I.C.R.Cheques/Drafts
In MICR (Magnetic Ink Character Recognition) cheques: • First six number indicate the cheque number • Next three numbers indicate city code • Next three numbers indicate Bank code • Next three numbers indicate Branch code Characteristics of Cheque, Bill of Exchange and Promissory Note
1) Instrument in writing: Pencil writing is not forbidden by the law but to prevent alternation, etc. the custom and usage do not allow this.
(2) Unconditional order/promise: Cheque and bill of exchange are orders of creditors (Drawers) to the debtors (Drawee) to pay money. Instruments with expressions such as "I.O.U. Rs.500/-" is not a bill of exchange. On the other hand a promise with following narration duly signed, dated and accepted by a drawee is a Bill of Exchange B/E – "I promise to pay B or order Rs.5,000/-"
(3) Difference between cheque and bill of exchange: The main difference between a cheque and a bill of exchange is that the former is always drawn on and is payable by a banker specified therein.
(4) Certainty of the sum: The amount of the instrument must be certain.
(5) Payable to order or bearer: The instrument must be payable either to order or to bearer as per the provision of Section 13 of the Act. For example if a cheque is drawn with the expression " Pay to Ram Lal" it indicates that it can be paid to Ram Lal or any person as per his order. But if it is written pay to 'Ram Lal' only it must be paid to Ram Lal only. A bill of exchange and cheque are payable to bearer if it is expressed to be so payable or if the only or the last endorsement is an endorsement in blank.
(6) Payee must be a certain person: The term 'person' includes besides individuals, bodies corporate, local authorities, Co-operative Societies, etc. and it also includes Registrar, Principal, director, Secretary, etc. of those institutions. Payee may be more than one person
(7) Term of payment: A cheque is always payable on demand, though words to this effect are not mentioned therein. A bill may be payable at sight or after a period of time specified therein. A promissory note or bill of exchange in which no time for payment is specified is payable on demand (Section 19). If the bill is payable after a certain period it must be accepted by a drawee. But no such acceptance is necessary in case of a cheque.
(8) Signature of the drawer/promisor: The negotiable instrument is valid only if it bears the signature of the drawer/promisor.
(9) Delivery of the instrument: The making, acceptance or endorsement of an instrument is completed by delivery in terms of Section 46 of the Act. Stamping of promissory notes and bill of exchange is necessary. The Indian Stamp Act 1899 requires that the promissory note and the bill of exchange except cheques to be stamped.
(11) Currency note: The currency note is a promissory note payable to bearer on demand. Section 21 of RBI Act prohibits creation of this type of promissory notes by others excepting the Reserve Bank of India.
Holder and holder in due-course
A negotiable instrument is transferable from person to person. The Negotiable Instrument Act confers upon the person who acquires it bonafide and for value, the RIGHT TO POSSESS good title to the instrument. such a person is called HOLDER IN DUE COURSE.
Each and every person in possession of a cheque or bill cannot be its holder in due course and cannot claim statutory protection available under the Act.
In terms of Section 8, "The Holder of a Promissory Note, Bill of Exchange or cheque means any person entitled in his own name to the possession thereof and to receive and recover the amount due thereon from the parties thereto."
Two fold entitlements • He must be entitled to the possession of the instrument in his own name and under legal title. Actual possession of the instrument is not essential; the holder must have legal right to possess the instrument in his own name. He must have lawfully derived the title as an endorsee or payee. • He must be entitled to receive or recover the amount from the parties concerned in his own name.
In case of order instruments, the name of the person must appear as its endorse or payee.
Bearer/Order instrument
In case of a bearer instrument, the bearer may claim the money without having his name mentioned on the cheque. In case a Bill, a Promissory note or a cheque is lost or destroyed its holder is the person so entitled at the time of such loss or destruction.
Holder in due course
As per Section 9, "Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or payee or endorsee thereof if payable to order before the amount mentioned in it became defect in the title of the person from whom derived his title."
Conditionalities
A person becomes holder in due course if the following conditions are satisfied:- • The instrument must be in the possession of the holder in due course and in case of an order instrument he must be its payee or endorsee. • The negotiable instrument must be regular and complete in all aspects. Alterations if any must be authenticated. • The instrument must have been obtained for valuable consideration i.e. by paying its full value.
Exceptions
A person who receives a cheque (not being a gift cheque issued by banks) as a gift will not be called its holder in due course for want of consideration.
If a cheque is given in respect of a debt incurred in gambling the consideration of the cheque is unlawful and hence cheque received on such consideration cannot make the payee thereof a holder in due course provided: • The instrument must have been obtained before the amount mentioned therein became payable. • He must have received it without having sufficient cause to believe that any defect existed in the title of the transferor.
The title of a Negotiable Instrument is deemed to be defective if it is acquired by unfair means, e.g. fraud, coercion, undue influence or by any other illegal means.
Section 9 thus lays heavy responsibility on the person accepting a negotiable instrument.
Rights of a Holder • An endorsement in blank may be converted by him into an endorsement in full.
(2) He is entitled to cross a cheque either generally or specially with the words Not Negotiable.
(3) He can negotiate a cheque to a third person.
(4) He can obtain a duplicate of the lost instrument.
Privileges of a Holder in Due Course (1) He possesses a better title free from all defects, which is the greatest privilege of all. Section 53 states that a holder of negotiable instrument who derives title from a holder in due course has rights thereon of that of a holder in due course. (2) Every prior party to negotiable instrument, i.e, maker or drawer, acceptor or endorser is liable thereon to a holder in due course until the instrument is duly satisfied. (Section 36). (3) If a negotiable instrument was originally inchoate (i.e. incomplete) instrument and a subsequent transfer completed the instrument for a sum greater than what was the intention of the maker, the right of a holder in due course to recover the money of the instrument is not affected at all.
(4) Right in case of fictitious instrument is unaffected.
(5) Right in case the instrument was obtained by unlawful means or for unlawful consideration is unaffected.
(6) Estoppel against denying original validity of the instrument.
(7) Estoppel against denying capacity of payee to endorsee.
(8) Estoppel against denying signature or capacity of prior party.
Payment in due course
Section 10 defines payment in due course as “Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of amount mentioned therein.” The other important provisions relating to payment in due course are the following.
i. The payment should be made in accordance with the apparent tenor of the instrument i.e. according to the true intentions of the parties. ii. The payment should be made in good faith and without negligence. iii. The payment should be made to the person in possession of the instrument in circumstances, which do not arouse suspicion about his title to possess the instrument and to receive payment thereof.
Negotiation
According to Section 14 an instrument is said to have been negotiated when a promissory note, of exchange or cheque is transferred to any person so as to constitute the person the holder thereof, the instrument is said to be negotiated.
Negotiation can be done in any of the two indicated below –
I. By delivery – A promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof (Section 47)
II By endorsement and delivery – AP/N, B/E or cheque payable to order is negotiable by the holder by endorsement and delivery (Section 48)
Endorsement
Definition of Endorsement
When the maker or holder of negotiable instrument signs the same, otherwise than as maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called the endorser. Endorsement consists of the signature of the maker (or drawer) payee of a negotiable instrument with the intention of negotiation.
Provisions Regarding Endorsement
Effect of endorsement
The endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation.
Endorsee – an agent
The section permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser.
Right to endorse
Every sole maker, drawer, payee or endorsee or all of several joint makers, drawers, payees or endorsees of an negotiable instrument m ay endorse and negotiate the same.'
Time limit for endorsement
A negotiable instrument may be negotiated until its payment has been made by the banker, drawee or acceptor. (Section 60)
Endorsement for a part amount
Endorsement for a part amount is prohibited (Section 56) but instruments which have been partly paid can be negotiated for the balance amount.
No right to legal representative
The Legal representative of the deceased cannot endorse the instrument.
Order of endorsement
Unless contrary is proved, it is presumed under Section 118 that the endorsements appearing upon a negotiable instrument were made in order in which they appear thereon (Section 118)
General Rules regarding the form of Endorsements
1. Signature of the endorser on the document for the purpose of endorsement must be that of the endorser or any other person who is duly authorized to endorse on his behalf.
2. Spelling: The endorser should spell his name in the same way as his name appears on the instrument as its payee or endorsee.
3. No addition or omission of initial of the name. For example, J.C. Mishra cannot endorse as J.Mitra.
4. Prefixes and suffixes to be struck out (Mr., M/s, Miss, Shri, Smt. Lala, Babu,General, Dr., Major)
Payee Regular Irregular Endorsement Endorsement
Mrs. Asha Gupta Asha Gupta Mrs. Asha Gupta
If a cheque is payable to a woman in her maiden name e.g. to Miss Jyoti Mishra now married to Mrs.S.C.Das may endorse it as follows.
Jyoti Mishra
(Now Mrs.S.C.Das) or Jyoti Das nee (or formerly) Jyoti Mishra Illiterate Person
If the payee of a negotiable instrument is an illiterate person, he may endorse the instrument by affixing his thumb impression duly witnessed or attested by somebody who should give his full address.
Thumb Impression of 'A'
Attested and witnessed by XYZ, Advocate
111, G.K.Road, Pune-16
Partnership Firm
In case of a partnership firm, the name of the firm must be signed by a person (partner, manager etc.) who is duly authorized to sign on behalf of the partnership firm. For example a cheque payable to M/s Krishen Chand Raja Ram may be endorsed in any of the following ways:-
(Per pro) (For) Kishan Chand Raja Ram
For (on behalf of)
Raja Ram (Sd/-)
Partner
Agent
A person may duly authorize his agent to endorse the cheque on his behalf
Kinds of Endorsements
1. Endorsement in blank
If the endorser signs his name only, endorsement is said to be in blank (Section-16). The endorser does not specify the name of the endorsee with the effect that an instrument endorsed in blank becomes payable to bearer, even though originally payable to order (Section 54) and no further endorsement is required for negotiation.
2. Endorsement in full
If in addition to signature, the endorser adds a direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be endorsement in full.
3. Conditional Endorsement
If the endorser of a negotiable instrument by express words in the endorsement makes his liability or the right of the endorsee to receive the amount due thereon is called a conditional endorsement.
Restrictive Endorsement (Section 50)
Examples:
a) Pay the contents to 'C' only
b) Pay to 'C' for my use
Endorsement Sans Recourse (Section 52)
Example: (i) Pay to 'A' or order at his own risk Sd/-R (ii) Pay to 'B' without recourse to me Sd/'C'
Crossing of Cheques : Section 123 to Section 131
Types of Crossing
General Crossing
Section 123: Where a cheque bears across its face an addition of words 'and company' or any abbreviation thereof, between two parallel transverse lines or of two pair parallel lines simply, either, with or without the words 'Not Negotiable' that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.
What constitutes a crossing • It is an addition • The addition is of two transverse parallel lines in cross direction • The words "&Co." may or may not be enclosed in between the parallel lines.
The effect of general crossing is that the cheque must be presented to the paying banker through any banker and not by payee himself at the counter. The collecting banker credits the proceeds to the account of the payee or the holder of the cheque. It is a direction to the paying banker.
Special crossing
According to Section 124:- Where a cheque bears across its face an addition of the name of a 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.
It should be noted that in addition to these minimum statutory requirements for two types of crossing addition of words or lines may also be 'A/c payee', "Not Negotiable".
What does Not Constitute Crossing
(i) When a cheque bears the words 'Not Negotiable' or A/c payee without two parallel lines or the name of the bank it not treated as crossed.
(ii) If a cheque bears single line across is face or simply an 'X' mark, the cheque is not treated as crossed cheque.
Note that the inclusion of any other word/words within two parallel lines is irrelevant and the cheque is still deemed to be a crossed cheque.
Under Rupees One hundred % Co., Pune
Specimen of General crossing Specimen of special Crossing
1. and Co. 1.Punjab National Bank
2. A/c Payee 2.State Bank of India
Persons who can cross the cheque
Crossing is a direction to the paying banker regarding the mode of payment.
i. The Drawer can cross ii. The holder can cross iii.The banker to whom the cheque is crossed specially may again cross it specially to another banker as his agent or collection only.
Liability of the Paying Banker (Section 126)
Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. And where a cheque is crossed specially, the banker on whom it is drawn shall not pay it other wise than to the banker to whom it is crossed or his agent for collection.
Any banker paying a cheque crossed generally, otherwise than to a banker, or a cheque crossed specially, otherwise than to the banker to whom the same is crossed, or his agent for collection being banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.[Sec.129]
1. Liability to the True Owner of the cheque.
2. Liability to the Drawer
Not Negotiable 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.[Sec.130]
The effect of the words 'not negotiable' in the crossing will be clear from the following examples:
(1) A draws a crossed cheque on his banker in favour of 'B' without the words not negotiable therein C steals it from the house of B and endorses it to D who receives it for value and in good faith from C (i.e. without the knowledge of the fact that C had no title to the cheque). D will be its holder in due course and will have valid title, though his transferor (endorser) had no title thereto.
(2) In the above, example if the cheque bears the words "NOT NEGOTABLE" then 'D' will not have a valid title even if all the above circumstances are satisfied.
Collection of 3rd Party Crossed bearer cheques
In trade circles particularly in Mumbai in textile trade it was observed that as per practice the crossed bearer cheques were circulated exchanged freely for trade transactions and were in the past collected by bank through the instrument was issued in the name of third parties and were presented by the customers of the bank for credit to their account without endorsement on the reverse of the instrument. The issue whether collecting banker can get protection under Section 131 of NI Act 1881 in such cases had been examined and it is opined that the negotiability of a bearer cheque is not affected by the crossing. Under section 47 of the Act ibid a cheque payable to bearer is negotiable even by a mere delivery and section 47 does not exempt (forbid) crossed cheques. As such it is permissible to negotiate crossed bearer cheques by delivery thereof without endorsement.
Case laws on liability of the paying bankers • When customer's signature is forged there is no mandate to the bank to pay. As such the bank is not entitled to debit customers account on such forged note cheque. [Canara Bank vs. Canara Sales Corporation & others 1987, SC] • In a joint account if one of the signatures is forged then there is no mandate and banker cannot make payment. [Bihta Coop. Development and Cane Marketing Union Ltd. vs. Bank of Bihar, SC] • Payment should be made in due course to seek protection under Sec. 85 [Bank of Bihar vs. Mahabir Lal 1964, SC] • Where there are no circumstances which afforded any reasonable ground for believing that the payee was not entitled to receive payment of the cheques, the bank is deemed to have made payment in due course. [Bhutoria Trading Co. vs. Allahabad Bank 1977, Calcutta HC] • Payment made to a liquidator against the cheques presented across the counter was not payment in due course. [Madras Provincial Coop. Bank Ltd. vs. Official Liquidator, South Indian Match factory Ltd. 1945, Madras HC] • Bank is protected if payment was made in good faith without negligence of a cheque on which alteration was not apparent. [Bank of Maharashtra vs. M/s Automotive Engineering Co. 1993, SC] • The bank is liable where payment was made on cheques on which alterations were authenticated by not all but some of the drawers. [Brahma Shumshere Jung Bahadur vs. Chartered Bank of India, Australia & China 1956 Calcutta HC]
Case laws on liability of the paying bankers
Under Section 131 a collecting bank is protected if following conditions are met. • The collecting banker should have acted in good faith • .He should have acted without negligence • He should receive payment for customer • The check should have been crossed generally or specially to the bank.
Some important case laws are following:
It is the duty of the bank to open account with references. [Syndicate Bank vs. Jaishree Industries & others, 1994 Karnataka HC, Indian Bank vs. Catholic Syrian Bank, 1981, Madras HC]
Duty to follow up references where referee is not known. [Harding vs. London Joint Stock Bank, 1914]
Duty to ensure crossing in favour of the bank. [Crumpling vs. London Joint Stock Bank Ltd. 1911]
Duty to verify instruments or any apparent defect in instruments [Underwood Ltd. vs. Bank of Liverpool Martin Ltd. 1924, Savory Co. vs. Lloyds Bank 1932, ANZ Bank vs. Ateliers de Constructions Electriques Cherleroi, 1967 etc.]
Appendix
THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) BILL, 2002 a BILL further to amend the Negotiable Instruments Act, 1881, the Bankers' Books Evidence Act, 1891 and the Information Technology Act, 2000.
Be it enacted by Parliament in the Fifty-third Year of the Republic of India as follows:—
CHAPTER I
Preliminary
1. Short title and commencement.-(1) This Act may be called the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.
(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act.
CHAPTER II
Amendments to the Negotiable Instruments Act, 1881
2. Substitution of new section for section 6.-For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881) (hereinafter referred to as the principal Act), the following section shall be substituted, namely:—
‘6. “Cheque”.-A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
Explanation I.—For the purposes of this section, the expression—
(a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
Explanation II.—For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.’.
3. Amendment of section 64.-Section 64 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-section shall be inserted, namely:—
“(2) Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification:
Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly.”.
4. Amendment of section 81.-Section 81 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted, namely:—
“(2) Where the cheque is an electronic image of a truncated cheque, even after the payment the banker who received the payment shall be entitled to retain the truncated cheque.
(3) A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument, shall be prima facie proof of such payment.”.
5. Amendment of section 89.-Section 89 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted, namely:—
“(2) Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image.
(3) Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.”.
6. Amendment of section 131.-In section 131 of the principal Act, Explanation shall be re-numbered as Explanation I thereof, and after Explanation I as so re-numbered, the followingExplanation shall be inserted, namely:—
“Explanation II.—It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.”.
7. Amendment of section 138.-In section 138 of the principal Act,—
(a) for the words “a term which may be extended to one year”, the words “a term which may be extended to two years” shall be substituted;
(b) in the proviso, in clause (b), for the words “within fifteen days”, the words “within thirty days” shall be substituted.
8. Amendment of section 141.-In section 141 of the principal Act, in sub-section (1), after the proviso, the following proviso shall be inserted, namely:—
“Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.”.
9. Amendment of section 142.-In section 142 of the principal Act, after clause (b), the following proviso shall be inserted, namely:—
“Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.”.
10. Insertion of new sections after section 142.-After section 142 of the principal Act, the following sections shall be inserted, namely:—
“143. Power of Court to try cases summarily.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials:
Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees:
Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code.
(2) The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing.
(3) Every trial under this section shall be conducted as expeditiously as possible and an endeavour shall be made to conclude the trial within six months from the date of filing of the complaint.
144. Mode of service of summons.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session.
(2) Where an acknowledgement purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorised by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served.
145. Evidence on affidavit.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be read in evidence in any enquiry, trial or other proceeding under the said Code.
(2) The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein.
146. Bank’s slip prima facie evidence of certain facts.-The Court shall, in respect of every proceeding under this Chapter, on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved.
147. Offences to be compoundable.-Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), every offence punishable under this Act shall be compoundable.
CHAPTER III
Amendment to the Bankers’ Books Evidence Act, 1891
11. Amendment of section 2.-In section 2 of the Bankers’ Books Evidence Act, 1891 (18 of 1891),—
(a) for clause (3), the following clause shall be substituted, namely:—
‘(3) “bankers’ books” include ledgers, day-books, cash-books, account-books and all other records used in the ordinary business of the bank, whether these records are kept in written form or stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism, either onsite or at any offsite location including a back-up or disaster recovery site of both’.”
(b) in clause (8), after sub-clause (b), the following sub-clause shall be inserted, namely:—
“(c) a printout of any entry in the books of a bank stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism obtained by a mechanical or other process which in itself ensures the accuracy of such printout as a copy of such entry and such printout contains the certificate in accordance with the provisions of section 2A.”.
CHAPTER IV
Amendments to the Information Technology Act, 2000
12. Amendment of section 1.-In the Information Technology Act, 2000 (21 of 2000) (hereinafter referred to as the principal Act), in section 1, in sub-section (4), for clause (a), the following clause shall be substituted, namely:—
“(a) a negotiable instrument (other than a cheque) as defined in section 13 of the Negotiable Instruments Act, 1881 (26 of 1881);”.
13. Insertion of a new section 81A.-After section 81 of the principal Act, the following section shall be inserted, namely:—
‘81A. Application of the Act to electronic cheque and truncated cheque.-(1) The provisions of this Act, for the time being in force, shall apply to, or in relation to, electronic cheques and the truncated cheques subject to such modifications and amendments as may be necessary for carrying out the purposes of the Negotiable Instruments Act, 1881 (26 of 1881) by the Central Government, in consultation with the Reserve Bank of India, by notification in the Official Gazette.
(2) Every notification made by the Central Government under sub-section (1) shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the notification or both Houses agree that the notification should not be made, the notification shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that notification.
Explanation.—For the purposes of this Act, the expressions “electronic cheque” and “truncated cheque” shall have the same meaning as assigned to them in section 6 of the Negotiable Instruments Act, 1881 (26 of 1881).’.
Statement of objects and reasons
The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourge the culture of use of cheques and enhancing the credibility of the instrument. The existing provisions in the Negotiable Instruments Act,1881, namely, sections 138 to 142 in Chapter XVII have been found deficient in dealing with dishonour of cheques. Not only the punishment provided in the Act has proved to be inadequate, the procedure prescribed for the Courts to deal with such matters has been found to be cumbersome. The Courts are unable to dispose of such cases expeditiously in a time bound manner in view of the procedure contained in the Act.
2. A large number of cases are reported to be pending under sections 138 to 142 of the Negotiable Instruments Act in various courts in the country. Keeping in view the large number of complaints under the said Act pending in various courts, a Working Group was constituted to reveiw section 138 of the Negotiable Instruments Act, 1881 and make recommendations as to what changes were needed to effectively achieve the purpose of that section.
3. The recommendations of the Working Group along with other representations from various institutions and organisations were examined by the Government in consultation with the Reserve Bank of India and other legal experts, and a Bill, namely, the Negotiable Instruments (Amendment) Bill, 2001 was introduced in the Lok Sabha on 24th July, 2001. The Bill was referred to Standing Committee on Finance which made certain recommendations in its report submitted to Lok Sabha in November, 2001.
4. Keeping in veiw the recommendations of the Standing Committee on Finance and other representations, it has been decided to bring out, inter alia, the following amendments in the Negotiable Instruments Act,1881, namely:—
(i) to increase the punishment as prescribed under the Act from one year to two years;
(ii) to increase the period for issue of notice by the payee to the drawer from 15 days to 30 days;
(iii) to provide discretion to the Court to waive the period of one month, which has been prescribed for taking cognizance of the case under the Act;
(iv) to prescribe procedure for dispensing with preliminary evidence of the complainant;
(v) to prescribe procedure for servicing of summons to the accused or witness by the Court through speed post or empanelled private couriers;
(vi) to provide for summary trial of the cases under the Act with a view to speeding up disposal of cases;
(vii) to make the offences under the Act compoundable;
(viii) to exempt those directors from prosecution under section 141 of the Act who are nominated as directors of a company by virtue of their holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government, or the State Government, as the case may be;
(ix) to provide that the Magistrate trying an offence shall have power to pass sentence of imprisonment for a term exceeding one year and amount of fine exceeding five thousand rupees;
(x) to make the Information Technology Act, 2000 applicable to the Negotiable Instruments Act,1881 in relation to electronic cheques and truncated cheques subject to such modifications and amendments as the Central Government, in consultation with the Reserve Bank of India, considers necessary for carrying out the purposes of the Act, by notification in the Official Gazette; and
(xi) to amend definitions of "bankers' books" and "certified copy" given in the Bankers' Books Evidence Act,1891.
5. The proposed amendments in the Act are aimed at early disposal of cases relating to dishonour of cheques, enhancing punishment for offenders, introducing electronic image of a truncated cheque and a cheque in the electronic form as well as exempting an official nominee director from prosecution under the Negotiable Instruments Act,1881.
6. The Bill seeks to achieve the above objects.
New Delhi;
JASWANT SINGH.
The 9th July, 2002.
Negotiable Instruments are money/cash equivalents. These can be converted into liquid cash subject to certain conditions. They play an important role in the economy in settlement of debts and claims. The transactions involving the Negotiable Instruments in our country are regulated by law and the framework of the Statute which governs the transaction of these instruments is known as The Negotiable Instruments Act. This act was framed in our country in the year 1881 when the British ruled our country. Prior to 1881 the transactions governing Negotiable Instruments were regulated under the cover of Indian Contract Act 1872. This act has been amended as many as 23 times to meet the needs of the time. The last amendment was made in 2002.
Preamble
It became a statutory necessity to enact law governing Promissory Notes, Bills of Exchange and cheques.
What is a Negotiable Instrument
Section 13:- " A Negotiable instrument means a promissory note, bill of exchange or cheque either to order or bearer."
This definition does not say anything about the characteristics of a negotiable instrument but it mentions about instruments, which can be legally called as a negotiable instrument. It fortunately, however does not prohibit any other instrument which satisfies the features of negotiability from being designated as negotiable instruments. Justice K.C.Wills defines negotiable instrument as "ONE THE PROPERTY IN WHICH IS ACQUIRED BY ANY ONE WHO TAKES IT BONAFIED FOR VALUE, NOT WITHSTANDING ANY DEFECT OF TITLE IN THE PERSON FROM WHOM HE TOOK IT".
Transferability
A Negotiable instrument as a document of title to money is transferable either by the application of the law or by the custom of the trade concerned.
Special feature of N.I
The special feature of such an instrument is the privilege it confers to the person who receives it bonafide and for value, to possess good title thereto, even if the transferor has no title or had defective title to the instrument.
Distinctive features of Negotiable Instruments
- Easily transferable from one person to another
- Confers absolute and good title on the transferee
- The holder of a Negotiable Instrument (P.N./B.E./Cheque) is called as the holder in due course and possesses the right to sue upon the instrument in his own name.
Types of Negotiable Instruments • Negotiable instruments by Statue are of three types, cheques, bills of exchange and promissory note. • Negotiable instruments by custom or usage :- Some other instruments have acquired the character of negotiability by the the custom or usage of trade. Section 137 of Transfer of Property Act 1882 also recognizes that an instrument may be negotiable by Law or Custom. Thus in India Govt. Promissory notes, Shah Jog Hundis, Delivery Orders, Railway Receipts, Bill of Lading etc. have been held negotiable by usage or custom. These can be said as quasi statutory Negotiable Instruments.
Exceptions
Sometimes the Drawer and Holder can take away the negotiability of an instrument by expression such as "Not Negotiable", Pay to "A" only. Here "A" (the holder) cannot transfer a better title to the transferee.
Promissory Note
Section 4: "A promissory note is an instrument in writing (not being a bank note or a currency note), containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument."
Bill of Exchange
Section 5: "A bill of Exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument."
According to Section 7, the maker/creator of the instrument is known as 'Drawer'. The person to whom payment may be made is known as "Payee". The person who is directed to pay the amount is known as Drawee. He accepts to pay the amount mentioned in the instrument. In case of a promissory note Drawer and Drawee are same. In case of a cheque the Drawee is always a Banker.
Cheque
As per Section 6 "A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand." After 2002 amendment cheque includes " the electronic image of a truncated cheque and a cheque in the electronic form." In terms of Explanation I, (a) " 'a cheque in the electronic form' means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) “ 'a truncated cheque' means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing."
M.I.C.R.Cheques/Drafts
In MICR (Magnetic Ink Character Recognition) cheques: • First six number indicate the cheque number • Next three numbers indicate city code • Next three numbers indicate Bank code • Next three numbers indicate Branch code Characteristics of Cheque, Bill of Exchange and Promissory Note
1) Instrument in writing: Pencil writing is not forbidden by the law but to prevent alternation, etc. the custom and usage do not allow this.
(2) Unconditional order/promise: Cheque and bill of exchange are orders of creditors (Drawers) to the debtors (Drawee) to pay money. Instruments with expressions such as "I.O.U. Rs.500/-" is not a bill of exchange. On the other hand a promise with following narration duly signed, dated and accepted by a drawee is a Bill of Exchange B/E – "I promise to pay B or order Rs.5,000/-"
(3) Difference between cheque and bill of exchange: The main difference between a cheque and a bill of exchange is that the former is always drawn on and is payable by a banker specified therein.
(4) Certainty of the sum: The amount of the instrument must be certain.
(5) Payable to order or bearer: The instrument must be payable either to order or to bearer as per the provision of Section 13 of the Act. For example if a cheque is drawn with the expression " Pay to Ram Lal" it indicates that it can be paid to Ram Lal or any person as per his order. But if it is written pay to 'Ram Lal' only it must be paid to Ram Lal only. A bill of exchange and cheque are payable to bearer if it is expressed to be so payable or if the only or the last endorsement is an endorsement in blank.
(6) Payee must be a certain person: The term 'person' includes besides individuals, bodies corporate, local authorities, Co-operative Societies, etc. and it also includes Registrar, Principal, director, Secretary, etc. of those institutions. Payee may be more than one person
(7) Term of payment: A cheque is always payable on demand, though words to this effect are not mentioned therein. A bill may be payable at sight or after a period of time specified therein. A promissory note or bill of exchange in which no time for payment is specified is payable on demand (Section 19). If the bill is payable after a certain period it must be accepted by a drawee. But no such acceptance is necessary in case of a cheque.
(8) Signature of the drawer/promisor: The negotiable instrument is valid only if it bears the signature of the drawer/promisor.
(9) Delivery of the instrument: The making, acceptance or endorsement of an instrument is completed by delivery in terms of Section 46 of the Act. Stamping of promissory notes and bill of exchange is necessary. The Indian Stamp Act 1899 requires that the promissory note and the bill of exchange except cheques to be stamped.
(11) Currency note: The currency note is a promissory note payable to bearer on demand. Section 21 of RBI Act prohibits creation of this type of promissory notes by others excepting the Reserve Bank of India.
Holder and holder in due-course
A negotiable instrument is transferable from person to person. The Negotiable Instrument Act confers upon the person who acquires it bonafide and for value, the RIGHT TO POSSESS good title to the instrument. such a person is called HOLDER IN DUE COURSE.
Each and every person in possession of a cheque or bill cannot be its holder in due course and cannot claim statutory protection available under the Act.
In terms of Section 8, "The Holder of a Promissory Note, Bill of Exchange or cheque means any person entitled in his own name to the possession thereof and to receive and recover the amount due thereon from the parties thereto."
Two fold entitlements • He must be entitled to the possession of the instrument in his own name and under legal title. Actual possession of the instrument is not essential; the holder must have legal right to possess the instrument in his own name. He must have lawfully derived the title as an endorsee or payee. • He must be entitled to receive or recover the amount from the parties concerned in his own name.
In case of order instruments, the name of the person must appear as its endorse or payee.
Bearer/Order instrument
In case of a bearer instrument, the bearer may claim the money without having his name mentioned on the cheque. In case a Bill, a Promissory note or a cheque is lost or destroyed its holder is the person so entitled at the time of such loss or destruction.
Holder in due course
As per Section 9, "Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or payee or endorsee thereof if payable to order before the amount mentioned in it became defect in the title of the person from whom derived his title."
Conditionalities
A person becomes holder in due course if the following conditions are satisfied:- • The instrument must be in the possession of the holder in due course and in case of an order instrument he must be its payee or endorsee. • The negotiable instrument must be regular and complete in all aspects. Alterations if any must be authenticated. • The instrument must have been obtained for valuable consideration i.e. by paying its full value.
Exceptions
A person who receives a cheque (not being a gift cheque issued by banks) as a gift will not be called its holder in due course for want of consideration.
If a cheque is given in respect of a debt incurred in gambling the consideration of the cheque is unlawful and hence cheque received on such consideration cannot make the payee thereof a holder in due course provided: • The instrument must have been obtained before the amount mentioned therein became payable. • He must have received it without having sufficient cause to believe that any defect existed in the title of the transferor.
The title of a Negotiable Instrument is deemed to be defective if it is acquired by unfair means, e.g. fraud, coercion, undue influence or by any other illegal means.
Section 9 thus lays heavy responsibility on the person accepting a negotiable instrument.
Rights of a Holder • An endorsement in blank may be converted by him into an endorsement in full.
(2) He is entitled to cross a cheque either generally or specially with the words Not Negotiable.
(3) He can negotiate a cheque to a third person.
(4) He can obtain a duplicate of the lost instrument.
Privileges of a Holder in Due Course (1) He possesses a better title free from all defects, which is the greatest privilege of all. Section 53 states that a holder of negotiable instrument who derives title from a holder in due course has rights thereon of that of a holder in due course. (2) Every prior party to negotiable instrument, i.e, maker or drawer, acceptor or endorser is liable thereon to a holder in due course until the instrument is duly satisfied. (Section 36). (3) If a negotiable instrument was originally inchoate (i.e. incomplete) instrument and a subsequent transfer completed the instrument for a sum greater than what was the intention of the maker, the right of a holder in due course to recover the money of the instrument is not affected at all.
(4) Right in case of fictitious instrument is unaffected.
(5) Right in case the instrument was obtained by unlawful means or for unlawful consideration is unaffected.
(6) Estoppel against denying original validity of the instrument.
(7) Estoppel against denying capacity of payee to endorsee.
(8) Estoppel against denying signature or capacity of prior party.
Payment in due course
Section 10 defines payment in due course as “Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of amount mentioned therein.” The other important provisions relating to payment in due course are the following.
i. The payment should be made in accordance with the apparent tenor of the instrument i.e. according to the true intentions of the parties. ii. The payment should be made in good faith and without negligence. iii. The payment should be made to the person in possession of the instrument in circumstances, which do not arouse suspicion about his title to possess the instrument and to receive payment thereof.
Negotiation
According to Section 14 an instrument is said to have been negotiated when a promissory note, of exchange or cheque is transferred to any person so as to constitute the person the holder thereof, the instrument is said to be negotiated.
Negotiation can be done in any of the two indicated below –
I. By delivery – A promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof (Section 47)
II By endorsement and delivery – AP/N, B/E or cheque payable to order is negotiable by the holder by endorsement and delivery (Section 48)
Endorsement
Definition of Endorsement
When the maker or holder of negotiable instrument signs the same, otherwise than as maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed thereto, or signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to have endorsed the same and is called the endorser. Endorsement consists of the signature of the maker (or drawer) payee of a negotiable instrument with the intention of negotiation.
Provisions Regarding Endorsement
Effect of endorsement
The endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation.
Endorsee – an agent
The section permits that an instrument may also be endorsed so as to constitute the endorsee an agent of the endorser.
Right to endorse
Every sole maker, drawer, payee or endorsee or all of several joint makers, drawers, payees or endorsees of an negotiable instrument m ay endorse and negotiate the same.'
Time limit for endorsement
A negotiable instrument may be negotiated until its payment has been made by the banker, drawee or acceptor. (Section 60)
Endorsement for a part amount
Endorsement for a part amount is prohibited (Section 56) but instruments which have been partly paid can be negotiated for the balance amount.
No right to legal representative
The Legal representative of the deceased cannot endorse the instrument.
Order of endorsement
Unless contrary is proved, it is presumed under Section 118 that the endorsements appearing upon a negotiable instrument were made in order in which they appear thereon (Section 118)
General Rules regarding the form of Endorsements
1. Signature of the endorser on the document for the purpose of endorsement must be that of the endorser or any other person who is duly authorized to endorse on his behalf.
2. Spelling: The endorser should spell his name in the same way as his name appears on the instrument as its payee or endorsee.
3. No addition or omission of initial of the name. For example, J.C. Mishra cannot endorse as J.Mitra.
4. Prefixes and suffixes to be struck out (Mr., M/s, Miss, Shri, Smt. Lala, Babu,General, Dr., Major)
Payee Regular Irregular Endorsement Endorsement
Mrs. Asha Gupta Asha Gupta Mrs. Asha Gupta
If a cheque is payable to a woman in her maiden name e.g. to Miss Jyoti Mishra now married to Mrs.S.C.Das may endorse it as follows.
Jyoti Mishra
(Now Mrs.S.C.Das) or Jyoti Das nee (or formerly) Jyoti Mishra Illiterate Person
If the payee of a negotiable instrument is an illiterate person, he may endorse the instrument by affixing his thumb impression duly witnessed or attested by somebody who should give his full address.
Thumb Impression of 'A'
Attested and witnessed by XYZ, Advocate
111, G.K.Road, Pune-16
Partnership Firm
In case of a partnership firm, the name of the firm must be signed by a person (partner, manager etc.) who is duly authorized to sign on behalf of the partnership firm. For example a cheque payable to M/s Krishen Chand Raja Ram may be endorsed in any of the following ways:-
(Per pro) (For) Kishan Chand Raja Ram
For (on behalf of)
Raja Ram (Sd/-)
Partner
Agent
A person may duly authorize his agent to endorse the cheque on his behalf
Kinds of Endorsements
1. Endorsement in blank
If the endorser signs his name only, endorsement is said to be in blank (Section-16). The endorser does not specify the name of the endorsee with the effect that an instrument endorsed in blank becomes payable to bearer, even though originally payable to order (Section 54) and no further endorsement is required for negotiation.
2. Endorsement in full
If in addition to signature, the endorser adds a direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be endorsement in full.
3. Conditional Endorsement
If the endorser of a negotiable instrument by express words in the endorsement makes his liability or the right of the endorsee to receive the amount due thereon is called a conditional endorsement.
Restrictive Endorsement (Section 50)
Examples:
a) Pay the contents to 'C' only
b) Pay to 'C' for my use
Endorsement Sans Recourse (Section 52)
Example: (i) Pay to 'A' or order at his own risk Sd/-R (ii) Pay to 'B' without recourse to me Sd/'C'
Crossing of Cheques : Section 123 to Section 131
Types of Crossing
General Crossing
Section 123: Where a cheque bears across its face an addition of words 'and company' or any abbreviation thereof, between two parallel transverse lines or of two pair parallel lines simply, either, with or without the words 'Not Negotiable' that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.
What constitutes a crossing • It is an addition • The addition is of two transverse parallel lines in cross direction • The words "&Co." may or may not be enclosed in between the parallel lines.
The effect of general crossing is that the cheque must be presented to the paying banker through any banker and not by payee himself at the counter. The collecting banker credits the proceeds to the account of the payee or the holder of the cheque. It is a direction to the paying banker.
Special crossing
According to Section 124:- Where a cheque bears across its face an addition of the name of a 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.
It should be noted that in addition to these minimum statutory requirements for two types of crossing addition of words or lines may also be 'A/c payee', "Not Negotiable".
What does Not Constitute Crossing
(i) When a cheque bears the words 'Not Negotiable' or A/c payee without two parallel lines or the name of the bank it not treated as crossed.
(ii) If a cheque bears single line across is face or simply an 'X' mark, the cheque is not treated as crossed cheque.
Note that the inclusion of any other word/words within two parallel lines is irrelevant and the cheque is still deemed to be a crossed cheque.
Under Rupees One hundred % Co., Pune
Specimen of General crossing Specimen of special Crossing
1. and Co. 1.Punjab National Bank
2. A/c Payee 2.State Bank of India
Persons who can cross the cheque
Crossing is a direction to the paying banker regarding the mode of payment.
i. The Drawer can cross ii. The holder can cross iii.The banker to whom the cheque is crossed specially may again cross it specially to another banker as his agent or collection only.
Liability of the Paying Banker (Section 126)
Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. And where a cheque is crossed specially, the banker on whom it is drawn shall not pay it other wise than to the banker to whom it is crossed or his agent for collection.
Any banker paying a cheque crossed generally, otherwise than to a banker, or a cheque crossed specially, otherwise than to the banker to whom the same is crossed, or his agent for collection being banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.[Sec.129]
1. Liability to the True Owner of the cheque.
2. Liability to the Drawer
Not Negotiable 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.[Sec.130]
The effect of the words 'not negotiable' in the crossing will be clear from the following examples:
(1) A draws a crossed cheque on his banker in favour of 'B' without the words not negotiable therein C steals it from the house of B and endorses it to D who receives it for value and in good faith from C (i.e. without the knowledge of the fact that C had no title to the cheque). D will be its holder in due course and will have valid title, though his transferor (endorser) had no title thereto.
(2) In the above, example if the cheque bears the words "NOT NEGOTABLE" then 'D' will not have a valid title even if all the above circumstances are satisfied.
Collection of 3rd Party Crossed bearer cheques
In trade circles particularly in Mumbai in textile trade it was observed that as per practice the crossed bearer cheques were circulated exchanged freely for trade transactions and were in the past collected by bank through the instrument was issued in the name of third parties and were presented by the customers of the bank for credit to their account without endorsement on the reverse of the instrument. The issue whether collecting banker can get protection under Section 131 of NI Act 1881 in such cases had been examined and it is opined that the negotiability of a bearer cheque is not affected by the crossing. Under section 47 of the Act ibid a cheque payable to bearer is negotiable even by a mere delivery and section 47 does not exempt (forbid) crossed cheques. As such it is permissible to negotiate crossed bearer cheques by delivery thereof without endorsement.
Case laws on liability of the paying bankers • When customer's signature is forged there is no mandate to the bank to pay. As such the bank is not entitled to debit customers account on such forged note cheque. [Canara Bank vs. Canara Sales Corporation & others 1987, SC] • In a joint account if one of the signatures is forged then there is no mandate and banker cannot make payment. [Bihta Coop. Development and Cane Marketing Union Ltd. vs. Bank of Bihar, SC] • Payment should be made in due course to seek protection under Sec. 85 [Bank of Bihar vs. Mahabir Lal 1964, SC] • Where there are no circumstances which afforded any reasonable ground for believing that the payee was not entitled to receive payment of the cheques, the bank is deemed to have made payment in due course. [Bhutoria Trading Co. vs. Allahabad Bank 1977, Calcutta HC] • Payment made to a liquidator against the cheques presented across the counter was not payment in due course. [Madras Provincial Coop. Bank Ltd. vs. Official Liquidator, South Indian Match factory Ltd. 1945, Madras HC] • Bank is protected if payment was made in good faith without negligence of a cheque on which alteration was not apparent. [Bank of Maharashtra vs. M/s Automotive Engineering Co. 1993, SC] • The bank is liable where payment was made on cheques on which alterations were authenticated by not all but some of the drawers. [Brahma Shumshere Jung Bahadur vs. Chartered Bank of India, Australia & China 1956 Calcutta HC]
Case laws on liability of the paying bankers
Under Section 131 a collecting bank is protected if following conditions are met. • The collecting banker should have acted in good faith • .He should have acted without negligence • He should receive payment for customer • The check should have been crossed generally or specially to the bank.
Some important case laws are following:
It is the duty of the bank to open account with references. [Syndicate Bank vs. Jaishree Industries & others, 1994 Karnataka HC, Indian Bank vs. Catholic Syrian Bank, 1981, Madras HC]
Duty to follow up references where referee is not known. [Harding vs. London Joint Stock Bank, 1914]
Duty to ensure crossing in favour of the bank. [Crumpling vs. London Joint Stock Bank Ltd. 1911]
Duty to verify instruments or any apparent defect in instruments [Underwood Ltd. vs. Bank of Liverpool Martin Ltd. 1924, Savory Co. vs. Lloyds Bank 1932, ANZ Bank vs. Ateliers de Constructions Electriques Cherleroi, 1967 etc.]
Appendix
THE NEGOTIABLE INSTRUMENTS (AMENDMENT AND MISCELLANEOUS PROVISIONS) BILL, 2002 a BILL further to amend the Negotiable Instruments Act, 1881, the Bankers' Books Evidence Act, 1891 and the Information Technology Act, 2000.
Be it enacted by Parliament in the Fifty-third Year of the Republic of India as follows:—
CHAPTER I
Preliminary
1. Short title and commencement.-(1) This Act may be called the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.
(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act.
CHAPTER II
Amendments to the Negotiable Instruments Act, 1881
2. Substitution of new section for section 6.-For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881) (hereinafter referred to as the principal Act), the following section shall be substituted, namely:—
‘6. “Cheque”.-A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
Explanation I.—For the purposes of this section, the expression—
(a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
Explanation II.—For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.’.
3. Amendment of section 64.-Section 64 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-section shall be inserted, namely:—
“(2) Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification:
Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly.”.
4. Amendment of section 81.-Section 81 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted, namely:—
“(2) Where the cheque is an electronic image of a truncated cheque, even after the payment the banker who received the payment shall be entitled to retain the truncated cheque.
(3) A certificate issued on the foot of the printout of the electronic image of a truncated cheque by the banker who paid the instrument, shall be prima facie proof of such payment.”.
5. Amendment of section 89.-Section 89 of the principal Act shall be re-numbered as sub-section (1) thereof, and after sub-section (1) as so re-numbered, the following sub-sections shall be inserted, namely:—
“(2) Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image.
(3) Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.”.
6. Amendment of section 131.-In section 131 of the principal Act, Explanation shall be re-numbered as Explanation I thereof, and after Explanation I as so re-numbered, the followingExplanation shall be inserted, namely:—
“Explanation II.—It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.”.
7. Amendment of section 138.-In section 138 of the principal Act,—
(a) for the words “a term which may be extended to one year”, the words “a term which may be extended to two years” shall be substituted;
(b) in the proviso, in clause (b), for the words “within fifteen days”, the words “within thirty days” shall be substituted.
8. Amendment of section 141.-In section 141 of the principal Act, in sub-section (1), after the proviso, the following proviso shall be inserted, namely:—
“Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter.”.
9. Amendment of section 142.-In section 142 of the principal Act, after clause (b), the following proviso shall be inserted, namely:—
“Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period.”.
10. Insertion of new sections after section 142.-After section 142 of the principal Act, the following sections shall be inserted, namely:—
“143. Power of Court to try cases summarily.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials:
Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees:
Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code.
(2) The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing.
(3) Every trial under this section shall be conducted as expeditiously as possible and an endeavour shall be made to conclude the trial within six months from the date of filing of the complaint.
144. Mode of service of summons.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session.
(2) Where an acknowledgement purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorised by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served.
145. Evidence on affidavit.-(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be read in evidence in any enquiry, trial or other proceeding under the said Code.
(2) The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein.
146. Bank’s slip prima facie evidence of certain facts.-The Court shall, in respect of every proceeding under this Chapter, on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved.
147. Offences to be compoundable.-Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), every offence punishable under this Act shall be compoundable.
CHAPTER III
Amendment to the Bankers’ Books Evidence Act, 1891
11. Amendment of section 2.-In section 2 of the Bankers’ Books Evidence Act, 1891 (18 of 1891),—
(a) for clause (3), the following clause shall be substituted, namely:—
‘(3) “bankers’ books” include ledgers, day-books, cash-books, account-books and all other records used in the ordinary business of the bank, whether these records are kept in written form or stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism, either onsite or at any offsite location including a back-up or disaster recovery site of both’.”
(b) in clause (8), after sub-clause (b), the following sub-clause shall be inserted, namely:—
“(c) a printout of any entry in the books of a bank stored in a micro film, magnetic tape or in any other form of mechanical or electronic data retrieval mechanism obtained by a mechanical or other process which in itself ensures the accuracy of such printout as a copy of such entry and such printout contains the certificate in accordance with the provisions of section 2A.”.
CHAPTER IV
Amendments to the Information Technology Act, 2000
12. Amendment of section 1.-In the Information Technology Act, 2000 (21 of 2000) (hereinafter referred to as the principal Act), in section 1, in sub-section (4), for clause (a), the following clause shall be substituted, namely:—
“(a) a negotiable instrument (other than a cheque) as defined in section 13 of the Negotiable Instruments Act, 1881 (26 of 1881);”.
13. Insertion of a new section 81A.-After section 81 of the principal Act, the following section shall be inserted, namely:—
‘81A. Application of the Act to electronic cheque and truncated cheque.-(1) The provisions of this Act, for the time being in force, shall apply to, or in relation to, electronic cheques and the truncated cheques subject to such modifications and amendments as may be necessary for carrying out the purposes of the Negotiable Instruments Act, 1881 (26 of 1881) by the Central Government, in consultation with the Reserve Bank of India, by notification in the Official Gazette.
(2) Every notification made by the Central Government under sub-section (1) shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the notification or both Houses agree that the notification should not be made, the notification shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that notification.
Explanation.—For the purposes of this Act, the expressions “electronic cheque” and “truncated cheque” shall have the same meaning as assigned to them in section 6 of the Negotiable Instruments Act, 1881 (26 of 1881).’.
Statement of objects and reasons
The Negotiable Instruments Act, 1881 was amended by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 wherein a new Chapter XVII was incorporated for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque. These provisions were incorporated with a view to encourge the culture of use of cheques and enhancing the credibility of the instrument. The existing provisions in the Negotiable Instruments Act,1881, namely, sections 138 to 142 in Chapter XVII have been found deficient in dealing with dishonour of cheques. Not only the punishment provided in the Act has proved to be inadequate, the procedure prescribed for the Courts to deal with such matters has been found to be cumbersome. The Courts are unable to dispose of such cases expeditiously in a time bound manner in view of the procedure contained in the Act.
2. A large number of cases are reported to be pending under sections 138 to 142 of the Negotiable Instruments Act in various courts in the country. Keeping in view the large number of complaints under the said Act pending in various courts, a Working Group was constituted to reveiw section 138 of the Negotiable Instruments Act, 1881 and make recommendations as to what changes were needed to effectively achieve the purpose of that section.
3. The recommendations of the Working Group along with other representations from various institutions and organisations were examined by the Government in consultation with the Reserve Bank of India and other legal experts, and a Bill, namely, the Negotiable Instruments (Amendment) Bill, 2001 was introduced in the Lok Sabha on 24th July, 2001. The Bill was referred to Standing Committee on Finance which made certain recommendations in its report submitted to Lok Sabha in November, 2001.
4. Keeping in veiw the recommendations of the Standing Committee on Finance and other representations, it has been decided to bring out, inter alia, the following amendments in the Negotiable Instruments Act,1881, namely:—
(i) to increase the punishment as prescribed under the Act from one year to two years;
(ii) to increase the period for issue of notice by the payee to the drawer from 15 days to 30 days;
(iii) to provide discretion to the Court to waive the period of one month, which has been prescribed for taking cognizance of the case under the Act;
(iv) to prescribe procedure for dispensing with preliminary evidence of the complainant;
(v) to prescribe procedure for servicing of summons to the accused or witness by the Court through speed post or empanelled private couriers;
(vi) to provide for summary trial of the cases under the Act with a view to speeding up disposal of cases;
(vii) to make the offences under the Act compoundable;
(viii) to exempt those directors from prosecution under section 141 of the Act who are nominated as directors of a company by virtue of their holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government, or the State Government, as the case may be;
(ix) to provide that the Magistrate trying an offence shall have power to pass sentence of imprisonment for a term exceeding one year and amount of fine exceeding five thousand rupees;
(x) to make the Information Technology Act, 2000 applicable to the Negotiable Instruments Act,1881 in relation to electronic cheques and truncated cheques subject to such modifications and amendments as the Central Government, in consultation with the Reserve Bank of India, considers necessary for carrying out the purposes of the Act, by notification in the Official Gazette; and
(xi) to amend definitions of "bankers' books" and "certified copy" given in the Bankers' Books Evidence Act,1891.
5. The proposed amendments in the Act are aimed at early disposal of cases relating to dishonour of cheques, enhancing punishment for offenders, introducing electronic image of a truncated cheque and a cheque in the electronic form as well as exempting an official nominee director from prosecution under the Negotiable Instruments Act,1881.
6. The Bill seeks to achieve the above objects.
New Delhi;
JASWANT SINGH.
The 9th July, 2002.
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