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

)

Dishonour and Discharge of

NEGOTIABLE INSTRUMENTS

Recapturing Negotiable Instruments

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Negotiable “ Transferable by Delivery”

Instrument “ a written document creating a favour of some person”

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

Dishonor and Discharge of

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

Discharge from Liability

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

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

5.
6. 7.

By qualified acceptance [S. 86]
By delay in presenting cheque [S. 84] By material alteration [S. 87,88,89]

8.

By negotiation back of a bill [S. 90]

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

.--<<(( accepted a bill. Case))>>-- Judgment: A was held liable because the tearing of the bill was not so clearly manifest on the face of the bill to indicate to a reasonably person that it has been cancelled. a holder in due course. He later withthe bill in half intending to cancel it. B put the it into circulation and it was received by plaintiff. B A Lets Understand this tore a picked that bill and pasted the two pieces together in such a manner that it seemed to be folded for safe custody rather than cancelled.

are discharged from liability. release or remission). the party so released and all parties subsequent to him. by a separate agreement of waiver. By release If the holder of the negotiable instrument releases any party to the instrument by any method other than cancellation of names (i.Section 82 2. . who have a right to action against the party so released.e.

3. if it is made. it will not discharge the payer and he will remain liable to the true owner of the instrument. payment even to a thief or finder will discharge the maker or acceptor if there is nothing to excite suspicion of a prudent man. .e. By payment [S. Payment is an effective discharge only if it is “payment in due course” i.  On the maturity of the instrument  In good faith and without negligence  To the rightful holder. where the instrument is payable to order then it is necessary that the payment be made to the genuine indorsee. Thus. 82(c)] All parties to an instrument are discharged from liability when the amount due on the instrument is paid. If payment is made to a person whose title is made through a forged indorsement. However.

The acceptor is liable to the real John Smith. . The bill is not discharged. This is a special protection of the paying banker and is necessary in the very nature of banking business.Example A bill is indorsed to John Smith to order. The acceptor pays him. Exception to the rule: It is in favour of a banker who pays cheque to a person whose title is derived through forged indorsement. Another person of the same name gets the bill and presents it.

4. . he should be allowed only 48 hours (exclusive of public holidays) to accept or not. By allowing more than 48 hours to accept [S. 83] • After the bill holder presents it to the drawee for his acceptance. • If the holder allows more than 48 hours all previous parties who do not consent to such allowance are discharged from liability to the holder.

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

(Reasonable time . 84] The holder should present the Instrument within a reasonable time of its issue. facts of the particular case and public holidays are excluded)  If he fails to do and in the meanwhile the bank fails causing damage to the drawer.6. usage of trade and of bankers. By delay in presenting cheque [S.Regard is given to the nature of the instrument. the drawer is discharged as against the holder Provided he had sufficient balance to meet the cheque when it ought to have been presented .

The party in custody of the instrument is bound to preserve it in its integrity.89] What constitutes a material alteration? The negotiable Instruments Act is silent on the question. However. . 87. those who take an altered instrument remain liable under the instrument as altered. However.88. courts in India held that “anything which has the effect of altering the legal relations between the parties or the character of the instrument or sum payable amounts to a material alteration” Any material alteration of a negotiable instrument discharges the instrument and all parties not consenting to the change.7. By material alteration [S.

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

 But the acceptor is liable only for the original tenor of the instrument. He was held liable for $500 only. . the party paying it will be discharged by payment in due course. The acceptor wrote his acceptance.Apparent Alteration  Section 89 provides that where an instrument has been materially altered but does not appear so. Judgment: The acceptor of bill of exchange is not under a duty to take precautions against fraudulent alteration after acceptance. Case Scholfield Vs. The Earl of Londesborough A bill for $500 was presented with spaces left. The drawer then fraudulently filled the spaces and turned it into a bill of $3500 and negotiated it for that value to a bona fide holder.

8. all liability on the instrument comes to an end. By negotiation back of a bill [S. . 90] When a bill of exchange comes back to the acceptor by process of negotiation and he becomes its holder. If this happens at or after maturity. that is known as “negotiation back”.

DISHONOUR OF NEGOTIABLE INSTRUMENTS Another method of ceasing of an instrument is of the Negotiable Instruments… Dishonour Lets venture… .

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

NON ACCEPTANCE A bill of exchange is said to be dishonoured by non-acceptance in the following cases: When the drawee or one of several drawees makes default in accepting the bill Where presentment is excused and the bill remains unaccepted Where the drawee is incompetent to contract Where the drawee makes the acceptance qualified If the drawee is a fictitious person or after reasonable search cannot be found Dishonour By Non-Acceptance [S. 91] .

acceptor and drawer of bill and all indorsers are liable severally and jointly to a holder in due course  The holder must give ‘notice’ of dishonour to all parties against he intends to proceed. Effect of Dishonour  The holder becomes entitled to sue the parties liable to pay thereon  The drawer of cheque. 92] . acceptor or banker and he makes a default in payment. Dishonour By Non-Payment [S. bill of exchange or cheque is said to be dishonoured by non-payment when it is duly presented to the maker.NON PAYMENT A promissory note. maker of note.

NOTICE OF DISHONOUR It is a formal communication of the fact of dishonour served as a warning to the party to be held liable. By and to whom notice should be given  Notice may be given to a duly authorised agent of the person.   If he is dead  to his legal representative If he is declared insolvent  to his assignee  Notice may be oral or written Notice of Dishonour .

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

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

on his demand. If the acceptor refuses it. the holder may through a notary public.Protest It is a formal certificate of dishonour issued by the notary public to the holder of the bill or note. Such a certificate is called ‘a protest for better security’. demand better security from the acceptor. drawers and indorsers. However. The demand should be made within reasonable time. the acceptor has become insolvent. or his credit has been publicly impeached. Protest for Better Security When before the maturity of a bill. the holder shall have to wait till the date of maturity to take any action against the acceptor. the fact may also be noted and certified by the notary. Formal Certificate of Dishonour PROTEST .

the names of the persons by whom and for whom it is accepted or paid .Contents of Protest  The instrument itself or a literal transcript of the instrument and of everything written or printed thereupon  The name of the person for whom and against whom the instrument has been protested  The fact and the reasons for dishonour  The place and time of dishonour  The signature of the Notary Public  In the case of acceptance for honour or payment for honour.

138-147] with Latest Amendments to the Act [S.CRIMINAL LIABILITY FOR ISSUING CHEQUES WITHOUT FUNDS [S. 138-147] .

1998 AMENDMENT (NEW SECTIONS FROM 138 TO 141) .

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

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

Sections 139-141 . ..

2002 AMENDMENT (NEW SECTIONS FROM 143 TO 147) .

.Sections 143-147 ..

.Sections 143-147 ..

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

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

e. do not create the relationship of banker and customer. .. withdrawing money or taking loans.Customer A person who has an account in a bank. Deposits Investments CUSTOMER Merely availing of services rendered by the banker like encashing a cheque. Dealings with banker must relate to the business of banking i. depositing.

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

171] Obligation not to disclose the state of his customer’s account or affairs Incidental charges and interest Right to set off Right of appropriation [Sec 59 to 61 of Indian Contract Act. 1872] .Rights and obligations of banker Obligation to honour cheques [Sec.31] Obligation to keep a proper record of transactions Obligation to abide by the instructions given by the customer General lien of bankers [Sec.

OPEN CHEQUES Cheques May be of Two Types CROSSED CHEQUES Payable at the counter of the drawee bank on the presentation of the cheque. Payable only through a collecting banker and not directly at the counter of the bank .

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

Where a cheque bears across its face (traverse lines are not necessary) an addition of the name of a banker either with or without the words ‘not negotiable.’ It can take the following forms: Types of crossing .

‘Account Payee only’ (A/c Payee only).It can be made in the case of general as well as special crossing by adding the words ‘Account Payee’ (A/c Payee). It can take the following forms: Types of crossing .

shall not have. a better title to the cheque than that which the person from whom he took it had. Types of crossing . bearing in either case the words ‘not negotiable’.A person taking a cheque crossed generally or specially. and shall not be capable of giving.

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

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

MUST DISHONOUR         When the banker receives notice of the customer’s death. insolvency or insanity. When the customer countermands payment Garnishee order Notice of assignment Defective title of the party Loss of cheque When the cheque is irregular Closing of account When a banker must dishonour a customer’s cheque .

Protection to a Paying Banker .

” The banker can debit his customer’s account with the amount so paid even though(1)the indorsement by the payee may turn out to be a forgery or (2)the indorsement might have been placed on the cheque by the payee’s agent without his authority. the drawee is discharged by `payment in due course`.Protection In Case of Ordered Cheques “Where a cheque payable to order purports to be indorsed by or on behalf of the payee. Section 85(1) .

and not withstanding that any such indorsement purports to restrict or exclude further negotiation. the drawee is discharged by payment in due course to the bearer thereof. the rule is “Once a bearer cheque. not withstanding any indorsement whether in full or blank appearing thereon. always a bearer cheque” Section 85(2) .” As regards bearer cheques.Protection In Case of Bearer Cheques “Where a cheque is originally expressed to be payable to bearer.

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

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

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

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

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

Any Questions? THANK YOU .

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