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DAMODARAM SANJIVAYYA

NATIONAL LAW UNIVERSITY

SABBAVARAM, VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE

DISHONOUR OF CHEQUES WITH SPECIAL FOCUS ON INCHOATE

INSTRUMENTS

SUBJECT

Law relating to Banking and NI

NAME OF THE FACULTY

Mr.Poosarla Bayola Kiran

Name of the Candidate : B. Milinda

Roll No. 2018017

Semester: VITH
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ACKNOWLEDGEMENT

I would like to express my gratitude to all those who gave me the possibility to complete this
project. I want to thanks Mr.Poosarla Bayola Kiran sir for giving me such an opportunity to
do this project. This project has helped me to understand the subject with better clarity and by
sourcing data; my researching abilities have grown by leaps and bounds.

I would also like to express my gratitude to my friends, who were instrumental in bringing
the project to its final stage without any hurdles and to my family, for their constant
motivation and support.
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TABLE OF CONTENT

1. INTRODUCTION………………………………………………………..4
2. DISHONOURING OF A CHEQUE…………………………………….5
3. PENALTIES IN CASE OF DISHONOUR OF CHEQUE FOR
INSUFFICIENCY, ETC. OF FUNDS IN THE ACCOUNT……………...7
4. INCHOATE INSTRUMENTS………………………………………………7
5. HOLDER, HOLDER IN DUE COURSE, EXCESS OF AUTHORITY……10
6. WHETHER PAYEE A HOLDER IN DUE COURSE………………………...10
7. WHAT MISTAKES TO AVOID WHEN DRAWING A BLANK BILL OF
EXCHANGE?...........................................................................................................10
8.
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DISHONOUR OF CHEQUES WITH SPECIAL FOCUS ON INCHOATE

INSTRUMENTS

INTRODUCTION

For commercial transaction, it is always not possible for a business man to carry huge amount
of cash. Businessman, therefore adopt a new method of exchanging documents- Bills of
Exchange, Cheques etc, in place of money. These documents which are used as a substitution
for money are known as negotiable instrument. The Law relating to negotiable instrument is
contained in the Negotiable Instrument Act, 1881.

The word negotiable means transferable by delivery & Instrument means any written
document by which a right is creates in favour of some person Thus, the term negotiable
instrument literally means a written document which creates a right in favour of somebody
and is freely transferable by delivery.

A negotiable instrument is a piece of paper which entitles a person to a certain sum of money
and which is transferable from one to another person by a delivery or by endorsement and
delivery. A negotiable instrument is a document guaranteeing the payment of a specific
amount of money, either on demand, or at a set time, with the payer named on the document
The term Negotiable instrument literally means a written document transferable by delivery .
According to this Act. A negotiable instrument means a Promissory Note, Bill of exchange or
Cheque payable either to order or to bearer.
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Negotiable Instruments can be of two kinds:-

1) Negotiable by Statute: The Act mentions only three kinds of instruments by Law, i.e.
Promissory Note, Bill of Exchange and Cheque.

2) Negotiable by Custom or Usage: Other than above three, all other custom and usage based
locally negotiable instruments belong to this type. Ex:- Hundis, Bankers Draft , Treasury Bill.
Etc.

DISHONOURING OF A CHEQUE

Meaning and Definition

Dishonour of negotiable instruments may be of two kinds:

1. Dishonour by non-acceptance.

2. Dishonour by non-payment.

1. Dishonour by non-acceptance: Section 91 of the Negotiable Instruments Act defines it as

A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of

the several drawees not being partners, makes default in acceptance upon being duly required
to accept the bill, or where the presentment is excused and the bill is not accepted. Where the
drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as
dishonoured.

As we have already noticed that the presentment for acceptance is required only of a bill of
exchange, it is only the bill of exchange which could be dishonoured by non-acceptance and
not a cheque as in the case of a cheque no acceptance is required to be taken of the banker.
Section 91 of the Act provides that the dishonour of a bill of exchange, by non-acceptance,
may take place in any of the following ways:

1. When a bill of exchange is presented for acceptance and the drawee(s) make default in
acceptance, the bill is said to have been dishonoured for non-acceptance. When there are
several drawees and even one of them makes a default in acceptance, the bill shall be deemed
to have been dishonoured unless all of such drawees are partners. If the drawee fails to accept
the bill for 48 hours after the presentment to him for the purpose, the bill shall be deemed to
have been dishonoured.
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2. When presentment for acceptance is excused and the bill is not accepted. Thus, if the
drawee cannot after a reasonable time of search be found, the bill can be said to have been
dishonoured.

3. Where the drawee is incompetent to contract, the bill may be treated as dishonoured.

4. Where the drawee makes a qualified (conditional) acceptance then the bill is said to have
been dishonoured.

2. Dishonour by non-payment :

Section 92 defines it as: A promissory note, bill of exchange or cheque is said to be

dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of
the cheque makes default in payment upon being duly required to pay the same.

It may be noted above that dishonour by non-acceptance could only be of a bill of exchange,
but the dishonour by non-payment could be of any negotiable instrument including a bill of
exchange. Thus, cheques are always dishonoured only for the reason of “non-payment” and
not “non-acceptance”.

Effects of Dishonour of Cheque

1. Taking of a legal action: The effect of determining the exact time of dishonouring of a bill
is that on the dishonouring of a bill the payee/holder may take action against the drawer of
such a bill. Thus, in case of a bill the holder of such a bill need not wait for the bill to mature
and then to take action for the dishonouring of the same.

2. Loss of negotiability: When a cheque is said to have been dishonoured it loses its basic
characteristic of negotiability with immediate effect. Thus, in 1Sukanraj Khimraj, Bombay v
Rajagopalan (N), the basic issue involved was about the time of dishonouring of the cheque
as it loses its negotiability after dishonouring.

3. Present again: On the dishonouring of a cheque nothing stops the holder thereof to present
it again particularly on being asked by the drawer of such a cheque.

4. Accrual of cause of action: Dishonouring of cheques gives rise to a cause of action in

favour of the holder of such cheque for civil cases. However, for the cases under section 138
of the Negotiable Instruments Act, 1881 mere dishonouring of cheque does not give rise to a

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(1989) 1 MLJ 446
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cause of action in favour of the complainant but it accrues only after the issue of demand
notice and failure of the drawer to make the payment.

Penalties in case of dishonour of cheque for insufficiency , etc. of funds in the account:

Sec. 138 dishonour of cheque for insufficiency, etc. of funds in the account where any
cheque drawn by a person on an account maintained by him with a banker for payment of any
amount of money to another person from out of that account for the discharge, in whole or in
part, of any debt or other liability, is returned by the bank unpaid, either because of the
amount of money standing to the credit of that account is insufficient to honour the cheque or
that it exceeds the amount arranged to be paid from that account by an agreement made with
that bank, such person shall be deemed to have committed that offence and shall, without
prejudice to any other provision of this Act, be punishable with imprisonment for a term
which may extend to 2 years of with fine which may extend to twice the amount of the
cheque or with both:

INCHOATE INSTRUMENTS

(1) If a person places his signature upon a blank paper and delivers such paper to any other
person in order that it may be converted into a bill, it operates as a prima facie authority to fill
it up as a complete bill for any amount, using the said signature for that of the drawer, the
acceptor or an indorser. [Sub-s. (1) substituted by s. 5 of Act 56 of 2000.]

(2) If a bill is wanting in any material particular, the person in possession of it has in like
manner a prima facie authority to fill up the omission in question in any way he thinks fit.

(3) In order that any instrument referred to in subsection (1) or (2) may, when completed, be
enforceable against any person who became a party thereto prior to its completion, it must be
filled up within the time agreed on or, if no time is agreed on, within a reasonable time, and
strictly in accordance with the authority given: Provided that if any such instrument after
completion thereof is negotiated to a holder in due course it shall be valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled up within the time
allowed and strictly in accordance with the authority given.
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(4) For the purposes of subsection (3) the question what a reasonable time is, is a question of
fact.

The Court of Appeal said in France v. Clark 2 (1884, 26 Ch. D. 257) : " The person who has
signed a negotiable instrument in blank or with blank spaces is, on account of the negotiable
character of that instrument, estopped by the law merchant from dis- ! puting any alteration
made in the document after it has left his hands by tilling up blanks (or otherwise in a way
not ex facie fraudu lent) as against a bond fide holder for value without notice, but it has been
repeatedly explained that this estoppel is in favour only of such a bond fide holder, and a man
who, after taking it in blank, has himself filled up the blanks in his own favour without the
consent or knowledge of the person to be bound, has never been treated in English Courts as
entitled to the benefit of that doctrine." 

Example, a person signed a blank acceptance and kept it in his drawer and some person stole
it and filled it up for 2000 and negotiated it to an innocent person for value, it was held that
the signer to the blank acceptance was not liable to the holder in due course because he never
delivered the instrument intending it to be used as a negotiable instrument (Baxendale vs
Bennett). Further, as a condition of liability, the signer as a maker, drawer, endorser or
acceptor must deliver the instrument to another. In the absence of delivery, the signer is not
liable. Furthermore, the paper so signed and delivered must be stamped in accordance with
the law prevalent at the time of signing and on delivering otherwise the signer is not estopped
from showing that the instrument was filled without his authority.

principle of Inchoate stamped instruments.

1. The principle of the rule contained in the section is that a person who gives possession
of his signature on a blank stamped paper to another person, prima facie authorises
the latter as his agent to fill up and give to the world, the instrument as accepted by
him. The principle is one of estoppel.
2. The section enables a person to lend his mercantile credit to another by the issue or
negotiation of a stamped paper containing his signature and intended to be filled up by
the holder as a negotiable instrument. By virtue of such signature, the signatory binds
himself as drawer, maker, acceptor or indorser. His signature on the blank paper
purports to be the authority given to the holder to fill up the blanks and complete the

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1884, 26 Ch. D. 257
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paper as a negotiable instrument, and thereafter, the signatory becomes liable in the
capacity in which he signed.
3. The instrument may be either wholly blank or incomplete as regards some particulars
but, in either case, the holder is authorised to make or complete the instrument as a
negotiable instrument. The instrument might be wholly blank or incomplete. It could
not be taken as a defence to avoid a decree on the basis of such an instrument, if it
satisfies the The right of filling up a blank or inchoate instrument may be exercised by
any holder, and the first holder to whom the paper is delivered is not the only person
who is empowered to fill the omission. However, the liability of a person who signs
and delivers a blank or an inchoate instrument arises only when the blanks are filled
in and the instrument is completed. Till then, the instrument is not a valid negotiable
instrument, and no action is maintainable on it.
4. The capacity in which a person signs an inchoate instrument may be determined by
the mode and place in which he puts his signature.
5. If the date is left blank, on an instrument any holder has a right to insert the true date.
If a man accepts a bill that is blank as to the name of the drawer and delivers it to
another person, the latter is entitled to insert his name as a drawer, or to negotiate it.
Similarly, where an instrument is executed with the name of the payee left blank, any
bona fide holder for value may fill it up with his own name and sue upon it.
6. If an inchoate instrument is delivered by the signer to another for safe custody, and
the latter, without instructions fills up and negotiates it, under the English law the
person so delivering the instrument is not even liable to a holder in due course, as he
did not deliver the instrument for the purpose of converting it into a bill3.

Dishonour of post-dated cheques

The return of a post-dated cheque by the bank unpaid is a cognizable criminal offence 4. A
cheque is a bill of exchange drawn on a banker and payable on demand5. A post-dated cheque
is not payable until the date which is shown on the face of the document, and as a post-dated
cheque cannot be presented before the date which is mentioned on the cheque, there is no

3
Smith v Prosser, [1907] 2 KB 735 .
4
Anil Kumar Sawhney v Gulshan Rai (1993) 4 SCC 424 [LNIND 1993 SC 853].
5
Negotiable Instruments Act 1881 s ;
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question of it being returned by the bank unpaid before that date. In a complaint, combined
grounds of the commission of offences under the Indian Penal Code 1860 and the Negotiable
Instruments Act 1881 can be taken.

HOLDER, HOLDER IN DUE COURSE, EXCESS OF AUTHORITY

Under the section, the authority to fill up a blank or inchoate instrument may be exercised by
any “holder”. This is not restricted to the first holder to whom the paper is delivered, and the
person who receives an instrument, while still incomplete, from a former holder, has the
authority of the former holder delegated to him. However, this right cannot be exercised by a
person who is not a “holder”. Thus, an agent, to whom a blank stamped paper is given to be
retained till further instructions are received from his principal, has no authority to fill up and
negotiate it.

WHETHER PAYEE A HOLDER IN DUE COURSE

A person, who for consideration obtains from the maker, a signed but inchoate document that
is properly stamped and who, in pursuance of the prima facie authority conferred on him by
the maker under the section completes it by making himself the payee, is not a holder in due
course within the meaning of section 9. It is only a person who comes into possession of a
negotiable instrument after paying consideration for it, and being a bona fide transferee, who
can be a holder in due course within the meaning of section 9.6

WHAT MISTAKES TO AVOID WHEN DRAWING A BLANK BILL OF

EXCHANGE?

A blank bill of exchange, also known as an inchoate bill of exchange, is a security that is
often used to secure receivables and as their repayment bond. It replaces cash offered as a
deposit. Deciding to apply this security instrument, we should bear in mind several points
which can protect us from the risk of the other party using the bill of exchange contrary to the
agreement made.

It is a typical feature of a blank bill of exchange that it misses at least one of the statutory
components of a traditional bill of exchange, e.g. the person to whom the liability on the bill
is to be paid (payee), bill of exchange amount, date of payment, etc. These are completed
only after the presentation of the bill for payment by its holder. Consequently, a blank bill of
exchange can be used to secure receivables whose amount or date of payment are not yet
6
N.R. Thiagarajan v O.V. Rengaswamy Reddiar, (2000) 1 BC 136
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known at the time the bill of exchange is drawn. Unfortunately, this can easily turn against
the debtor, should the holder of the bill of exchange choose to complete it contrary to the
agreement, if only for an amount in excess of the required one. In order to prevent that from
happening, the parties should draw up the so- called bill of exchange declaration (bill of
exchange agreement) setting out the terms and conditions for completing the bill. However,
for such an agreement to have any significance, one must bear in mind a number of important
details.

Above all, a blank bill of exchange should not be a completely blank form with only the
drawer’s signature on it. When the holder of the bill completes it contrary to the agreement,
that would be very hard to prove despite having concluded the bill of exchange agreement.
This is because, filling in the missing details, the bill’s holder will in a way draw up a
promissory note. Under such circumstances it is impossible to demonstrate that it used to be a
blank bill of exchange. However, it is very easy to avoid these difficulties. One only needs to
include on the bill of exchange all the details known at the time of drawing: date and place of
drawing, currency symbol, and the designation of the payee. One does not need to worry that
the date of drawing will affect the bill’s period of limitation, as pursuant to Article 70 of the
Bill of Exchange Law (Journal of Laws of 1936, no. 37, item 282, as subsequently amended)
the period of limitation commences on the date of payment and runs for three years. It is also
worth indicating that the bill of exchange being drawn is a blank bill of exchange and that the
parties have concluded a bill of exchange agreement, as well as adding the “not to order”
clause. This will prevent the bill’s payee from endorsing it (assigning rights arising under it),
following which the drawer would be unable to pursue any claims against the new holder. In
addition, the instrument can state that the drawer promises to redeem the blank bill of
exchange for a price designated by the payee and on the date specified by it. The details
(maximum period, amount) can be included in the bill of exchange agreement, the execution
of which is also stated on the bill of exchange.

On the other hand, one need not enter the drawer on a blank bill of exchange. If the bill is
signed on behalf of a company, e.g. by one of its shareholders, it is not sure if on the date of
payment the drawer will still act in the same capacity. A signature affixed next to a business
name, without expressly stating the capacity to represent the company, does not mean that the
declaration of intent has been made on behalf of the company and may result in the
signatory’s liability for the company’s obligations still continuing at a time when he or she no
longer has anything to do with the operations of the business. Under such circumstances, the
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provisions of the bill of exchange declaration will be irrelevant. To determine the identity of
the drawer and decide who contracted obligations under the bill of exchange, it is important
whose signature was affixed beneath the contents of the bill of exchange and in what capacity
the signatory acted. So to be on the safe side, it is advisable not to enter these details, as one
cannot be certain whether or not they will remain unchanged until the bill of exchange
payment date.

An inchoate bill of exchange is a very good way of securing receivables. It can be employed
both in relations between undertakings, e.g. as security for receivable arising under various
types of agreements, and in dealings with consumers. The awareness of the issues outlined
above helps make the most of the advantages offered by this security instrument without any
concerns that the bill might be used contrary to the agreement.
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BIBLIOGRAPHY

1. Khergamvala on the Negotiable Instruments Act, 22nd ed KhergamvalaS Abdul

Khader Kunju.
2. Law of Dishonour of Cheques, 5th ed.
3. Negotiable Instruments Act 1881.