Professional Documents
Culture Documents
A Negotiable Instrument is that document that includes a ‘promise to pay’ a certain amount of
money to the bearer of the document. Its a mode of transferring a debt from one person to
another. Negotiable Instruments are always in written form.
Documents of a certain type which are used in commercial transactions and monetary dealings,
are known Negotiable instruments.
“instrument” means a written document by which a right is created in favor of some person.
Thus, negotiable instrument means a document which is transferable by delivery.
According to Section 13(i) of negotiable instrument Act, 1881 a negotiable instrument includes
and means a promissory note, bill of exchange or cheque.
The Negotiable Instruments Act mentions orgy three kinds of negotiable instruments (Section
13). These are:
Promissory Notes
Bills of Exchange
Cheques:
Instruments Negotiable by Custom or Usage:
There are certain other instruments which have occupied the character of negotiability as a result
of usage or custom of trade. For example:
Exchequer bills.
Bank notes,
Share warrants,
Circular notes,
Bearer debentures,
Dividend warrants,
Share certificates with blank transfer deeds, etc.
PROMISSORY NOTES:
It contains an unconditional undertaking which is signed by the maker to pay of certain sum of
money to, to the order of certain person, or to the bearer of the instruments. The person, who
makes the promissory note, promises to pay and is called the maker. The person to whom the
payment is to be mode is called the payee.
Essential features:
Maker
Payee
NOTE: An instrument containing a promise to pay a sum after educating necessary expenses or
imposing any other condition is not a promissory note.
Illustrations:
I promise to pay X Rs. 1500, and all other sums which shall be due to him.
I promise to pay Y Rs. 5500, first deducting there out any money which he may owe me.
Cases:
In Chandabolu Bhaskara Rao’s case, the Honble High Court of Andhra Pradesh held that since
promissory note is not a compulsorily attestable document, even if the signatures of the attesters
are taken and after its execution it does not amount the material alteration. So it does not get
vitiated. Therefore, whether there were attesters or not at the time of its execution is immaterial,
more so when its execution is admitted.
In Haribhavandas Parasaran and Co. v. A.D. Thakur [A.I.R. 1963 Mys. 107], it was held
that- It is mandatory that the presumption under Section 118(a) should be made until the contrary
is proved.
BILL OF EXCHANGE:
Essentials:
Illustrations:
CHEQUE:
A cheque is a bill of exchange drawn on a specified banker. It is expressed to be payable
otherwise than on demand.
Essentials:
In writing
Express order to pay
Definite and unconditional order
Signed by drawer
Order to pay certain amount
Payable on demand
Parties:
Payee: To whom or to whose order the money ore directed to be paid by the instruments. The
person named in the instrument only.
Case:
The Supreme Court in this case has changed the basic criteria under Section 138 of Negotiable
Instruments Act to prosecute a person who had presented the cheque which had been returned
due to insufficiency of funds or if the amount exceeds the amount in the bank of the payer.
Types of Cheques:
1. 1.Open cheques: An open cheque is one which is payable in cash across the counter of
the bank
2. 2. Crossed cheques: A crossed cheque is one which has Iwo short parallel lines marked
across its face. It can be paid only to another banker. The advantage of crossing is that it
reduces the danger of unauthorized persons getting possession of a cheque and cashing it.
3. Bearer Cheque
4. Order Cheque
5. Marked Cheque
6. Not payable or bad cheque
7. Ante-dated Cheque
8. Post dated Cheque
9. Stale Cheque
10. Multilated Cheque
11. Digital Cheque- Cheques in Electronic form and Truncated Cheques.
12. Banker Cheque
13. Golden Cheque
14. Travellers Cheque
DIFFERENTITATIONS
I.
Bill in sets:
Foreign bills are generally drawn in set of 3 each. To avoid miscarriage during transit, they are
drawn in different parts and each part is transmitted separately and all these parts, as a whole
constitute a complete bill.
Accommodation Bill:
They are drawn, accepted and subsequently discounted from a bank for accommodating a
friend.They are not real bills and hence, do not represent acknowledgement of an actual debt.
Example: A in order to financially help X, writes a bills on a mutual friend X who accepts the
bill, Y then gets the bill discounted from a bank. He pays the required amount on maturity to X
(acceptor) who in turn makes payment to the bank. Thus in an accommodation bill it is the payee
who is the principal debtor and the drawer and accept or act as a surety for him.
An instrument, which in form is such that it may either be treated by the holder as a bill or as a
note, is an ambiguous instrument. Bill drawn to. to the order of the drawee, by an agent on his
principal, by one branch of a bank on another, by the direction of a company, their cashier are
also ambiguous instruments.
Example: where P draws a bill payable to P’s order, it is not an ambiguous instrument and cannot
be treated as a promissory note.
When one person gives to another such a document, the other person is prima facie entitled to
complete the document and make it into a proper negotiable instrument up to the value
mentioned in the instrument, or up to the value covered by the stamp affixed on it.
The person signing the instrument is liable on it to any holder in due course.
Inland and foreign Bills:
A bill which is
Example: A bill of exchange drawn in Bombay and made payable in Mumbai, although the
drawee may be residing outside India. Or a bill of exchange drawn in Raipur on a person resident
in Mumbai, although it may be made payable outside India.
Example : A bill of exchange drawn in India, on a person residing outside India and made
payable outside India.
Forged Instruments:
In Forged instruments, there is a complete absence of title from the very beginning.
Forged instruments in the eyes of law have no existence whatsoever. A forged signature
is altogether inoperative.
HOLDER
While talking about negotiable instruments such as cheques, bills of exchange and
promissory note, we came across the terms holder and holder in due course, quite
commonly. Holder refers to a person; we mean the payee of the negotiable instrument,
who is in possession of it. He/She is someone who is entitled to receive or recover the
amount due on the instrument from the parties thereto.
Definition of Holder
As per Negotiable Instrument Act, 1881, a holder is a party who is entitled in his own name and
has legally obtained the possession of the negotiable instrument, i.e. bill, note or cheque, from a
party who transferred it, by delivery or endorsement, to recover the amount from the parties
liable to meet it.
The party transferring the negotiable instrument should be legally capable. It does not include the
someone who finds the lost instrument payable to bearer and the one who is in wrongful
possession of the negotiable instrument.
Case Law 1
(1952) 2 Q B 216
The payee of the promissory note was identified as F and F. N. & Co. The endorser omitted the
words ‘and company’, and endorsed it as F and F. N. This was a technical flaw. The endorser
could not become a holder in due course because the endorser and the payee were different on the
instrument.
5. Received in Good Faith: To become a holder in due course, the person should have
received the instrument in good faith. If he has received a defective title or a stolen
instrument, but is not aware of it, he gets a valid title. However, he has to enquire about
the title of the instrument and be sure of its legality before accepting it. In other words, he
has to prove that he took all kinds of precaution, and did not suspect any defective title of
the instrument accepted by him.
MATERIAL ALTERATION
A pertinent question arises as to what is ‘material alteration’? The term ‘material alteration’ is
not defined either in the Indian Contract Act, 1872 or in the Negotiable Instruments Act, 1881
even though documents relating to these acts suffer frequent alterations. The term ‘material
alteration’ does not appear to have received any exact definition from legislature in any
enactment in India. It would, therefore, be appropriate to look at the works of legal authorities
and the judgments of the courts to find out as to how the term has been understood/interpreted.
Their Lordships of the Privy Council in the case of Nathu Lal v. Gomti Kuar cited the following
paragraph from the Halsbury's Laws of England, which explains the term material alteration very
succinctly:
"A material alteration is one which varies the rights, liabilities, or legal position of the parties
ascertained by the deed in its original state or otherwise varies the legal effect of the instrument
as originally expressed, or reduces to certainty some provision which was originally
unascertained and as such void, or may otherwise prejudice the party bound by the deed as
originally executed,"
The Supreme Court of India in Loonkaran Sethia v. Ivan E. John looked at the above definition
with approval.
From the above definition, the following elements emerge, the presence of which would make a
variation in an instrument as material alteration:
A material alteration varies the apparent nature of relationship of the parties as it alters
rights, liabilities or legal position vis-à-vis what was originally stated in the document.
It may also otherwise change the legal character and effect of the document.
Consequence of material alteration could be that it may prejudice the party vis-à-vis his
interests as determined originally.
Material alteration may also remove the unambiguity of the original document and may
make it, through alteration, more certain.
Without defining the term ‘material alteration’, the Negotiable Instruments Act, 1881 has dealt
with the effect of material alteration in the negotiable instruments. Section 87 determines the
consequences of a material alteration as extracted below:
"87. Effect of material alteration --Any material alteration of a negotiable instrument renders
the same void as against any one who is party thereto at the time of making such alteration and
does not consent thereto, unless it was made in order to carry out the common intention of the
original parties. Two other Sections of the Negotiable Instruments Act, 1881 which deal with
material alterations, are as under:
“89. Payment of instrument on which alteration is not apparent. – (1) Where a promissory
note, bill of exchange or cheque has been materially altered but does not appear to have been so
altered, or where a cheque is presented for payment which does not at the time of presentation
appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a
tenor thereof at the time of payment and otherwise in due course, shall discharge such person or
banker from all liability thereon; and such payment shall not be questioned by reasons of the
instrument having been altered, or the cheque crossed.
(2) Where the cheque is an electronic image of 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.
From the above definitions it can be seen that the basic concept as regards the effect of material
alteration in a negotiable instrument is that material alteration avoids the instrument and if done
unilaterally without the consent of the other party in a deceitful manner for one’s own vested
interests is nothing but an offence.
In this regard the following has been stated in Halsbury’s Law of England, “The effect of making
such an alteration, without consent of the party bound, is exactly the same as that of canceling
the deed”. So the instrument becomes void and the party basing its claim upon it, cannot claim
anything. This result follows irrespective of the fact whether the party concerned was responsible
for the alteration or whether it was made by someone else without his consent or knowledge.
In the cases of Firm Sri Chand v. Lajja Ram and Jayantilal Lal Goel v. Zubeda Khanum, it is
held that a material alteration of the instrument discharges all parties who are liable on the
instrument at the time of alteration and who do not consent to such alteration.
In the case of Arumugam v. M.S Narasaich, it is held that if an alteration is made by erasure,
interlineations or otherwise in a material part of a deed after its execution by or with the consent
of any party thereto or person entitled thereunder, but without the consent of the party or person
liable thereunder, the deed is thereby void.
Thus the instrument stands invalidated as a result of material alteration as against the party
whose consent was not taken for alteration. But what is the status of the document subjected to
material alteration as against the person who became a party subsequent to material alterations?
This question was answered in the case of Ramachandran v. Dinesan. It is held in this case that
“As regards the effect of material alteration, the basic principle of law is ……………such a
change invalidates the instrument against the person not consenting to the change………. By
alteration, the identity of the instrument is destroyed. So, the effect of making a material
alteration on a negotiable instrument without the consent of the party bound under it is exactly
the same as that cancelling the instrument. The instrument is rendered void only as against any
one who is a party thereto and not against anyone becoming a party subsequent to the alteration.
If a person indorses an altered instrument without the knowledge of the alteration he may be
liable to the indorsee. A person, who accepts an altered instrument, cannot absolve his liability
on the acceptance on account of the previous alteration.”
Whether the alteration was fraudulent or innocent also makes a difference. In the case of Rajiv
Bhai Nathabhai Patel v. Ranchhod Ragunath Patel, it is held that where there has been a
material alteration in the instrument, the further questions for consideration of the court are
whether the alteration is fraudulent or innocent. Where the alteration is fraudulent, the courts will
not allow the plaint to be amended and the plaintiff to fall back on the original cause of action.
But where the alteration, though material, is innocent and the plaint is based on the original cause
of action as well as on the document altered, the claim if properly proved can be allowed on the
original cause of action. Or if the original plaint is not on the original cause of action, it is open
to the plaintiff to apply and the court to consider whether the plaintiff should be allowed to
amend it.
It has been held in a no of cases that if alteration is made in a document when it was in the
custody of a party, that party is bound to suffer because a party who has the custody of an
instrument made for his benefit, is bound to preserve it in its original state. It has also been held
that a material alteration made with the consent of the other party would operate as a new
agreement and as such the consequences of material alteration made with the consent of the other
party are different from those when material alteration is made without such consent.
In order to ascertain the obligations of the banks in India vis-à-vis material alteration in a
negotiable instrument, best way could be to find out how the courts have determined such
obligations.
In Brahma Shum Shere Jung Bahadur v. Chartered Bank of India, Australia & China ,the
following points have been laid down:-
Banker is protected even though he has paid a materially altered cheque if (i) the
alterations were not apparent at the time of payment and (ii) he pays in due course, i.e. in
good faith and without negligence
Mere indication that the writer of the body of the cheque is different from the signatory,
is not sufficient to arouse suspicio
Banker’s obligation to pay cheques arises out of contract. Under the contract, the banker
may have agreed to follow an overdraft to the customer and pay his cheques upto an
agreed limit. Here, the banker’s obligation to pay cheques is subject to the same rules as
are applicable to a deposit account.
In Tanjore Permanent Bank Ltd. v. S.R. Rangachari, the question that arose for decision was
whether T.P Bank was entitled to debit the account of Mr. Rangachari with the amount of two
cheques which were signed in blank by the said customer and which were subsequently filled in
by the accountant of the said banks. The facts were that Mr. Rangachari had drawn the two
cheques in favour of his two clerks and the said cheques appeared to be discharged by the said
clerks. Mr. Rangachari, flatly denied the veracity of the signatures and in the suit there was no
evidence to rebutt. The trial court held that it was a criminal act of forgery and misappropriation
by the servant of the bank and no protection could be available under Section 89 of the
Negotiable Instrument Act, 1881. When the matter came in appeal, a different issue was framed
as to “whether under the peculiar circumstances, the bank lawfully can debit the two enteries in
Mr. Rangachari’s account and secondly whether the bank should bear the loss for any other
person than considered by the trial court”. The High Court held that the bank could not claim the
amounts of the two debits from Shri Rangachari. The High Court Judges after looking at the
cheques, were of the opinion that there are clear indications of material alteration. They also
accepted the following statement of law in Bhashyam & Adigas,‘Negotiable Instruments Act,
‘10th edition:
“The bank has also to see whether there are any alterations in the cheque and whether they have
been properly authenticated. Therefore, where an alteration in a cheque is initialed not by all
the drawers but only by some of them, the bank will be paying the amount on the said cheque at
its own risk. In this connection it is necessary to notice that under Section 89 protection is
afforded to the bank paying a cheque where the alteration is not apparent”.
It is also observed that in the above case the High Court had also looked into some English
authorities and noted the observations by House of Lords in London Joint stock v. Macmillan
and Arthur that a customer when he signs a cheque in blank and permits another person to fill it
up, is bound by the said instrument. However, this cannot absolve the bank of its responsibility
in the case of material alteration which is apparent on the Negotiable Instrument. A banker has
no right to set up the rule of estoppel against the constituent in a case where the negligence of the
bank has contributed to the loss. Court held that in this case inspite of the negligence on the part
of the customer, the real cause for material alteration was the fraudulent action of an officer of
the bank.
Thus, from the above, three principles emerge relating to material alteration vis-à-vis a bank’s
liability which may be stated as under:
Section 89 of the Negotiable Instrument Act, 1881, does not afford protection to the
banker if the alterations on the cheque are apparent and not authenticated by the drawer.
If the customer hands over signed but otherwise blank cheques to the bank officials, his
negligence would not give right to the bank to claim protection against fraudulent or
forged material alteration committed by an employee of the bank.
In the case of fraudulent material alteration in a cheque by a bank employee, the bank
cannot setup a defence that a customer should guard against fraud / forgery by an
employee of the bank.
Whereas generally speaking material alteration avoids an instrument, alterations which are
material in nature may not always vitiate an instrument. In following cases, though the alteration
was held to be material, but was held not to be vitiating the document.
(i) When the alteration is made before the bill or note is issued
When the alteration is made before the bill or note is issued, it does not vitiate the instrument.
Thus where a note intended to be executed by father and son was signed by the son, but as the
father did not turn up, his nishani was put in by the son, it was held that Section 87 did not apply,
and that there was no material alteration. Further, when an instrument is altered from a note to a
bill before it is negotiated or where in a joint and several note by three, after two have signed, the
third before signing inserted new words in the instrument or where the place of drawing was
changed before the instrument was available as a bill or where the bill or note was altered by the
consent of all the parties before delivering it over to the payee, it was held that alteration took
place before the instrument was available as such and so not void.
When alteration is made merely to correct a mistake or to make it what it was originally intended
to be, it does not vitiate the contract, as, where a provision for interest was inserted in accordance
with the original intention. Again, where an indorsement is inserted to rectify a mistake or where
a bill was dated by mistake 1832 instead of 1823, and subsequently the agent of the drawer
corrected the mistake, or again where a note by the defendant was altered by him after delivery
to the plaintiff, by the insertion of the words ‘or order’ and it was proved that the alteration was
in pursuance of the original intention of the parties, it was held that the alteration did not vitiate
the contract.
Conclusion
Sometimes, changes though subtle, may change the entire meaning and intent contained in an
instrument. On the other hand, changes which do not create any new right or liability in favour of
the persons executing the changes may be of little consequence. For instance, acknowledgment
or receipts on the documents, even though alterations in themselves by way of addition of a few
words do not change the character of the original document. Similarly there are other innocent
alterations such as alterations made to correct typographical mistakes, spelling errors etc, with
the consent of the parties concerned. Such alterations would not lead to a Negotiable Instrument
losing its substance or identity nor would they be considered material alterations.
However where the changes are material in nature i.e. varying the rights, liabilities, or legal
position of the parties then such an alteration would render the instrument void (as the identity of
the instrument gets destroyed) against anyone who is a party thereto at the time of making such
alterations and does not consent thereto unless it was made in order to carry out the common
intention of the original parties. To hold one of the parties liable under such circumstances,
wherein he does not consent to alteration would amount to making for him a contract that he
never agreed to.
The principle behind this concept being that for smooth and orderly running of affairs of the
society, it is necessary that no person should be allowed to take advantage of the fraud
committed by him, and he should run the risk of being caught for the fraud. Further, if material
alterations are not made liable to consequences of the instrument being avoided, people would
lose respect for the integrity and sanctity of the instruments and no body would be deterred from
committing forgery. Tolerance of material alteration would also be detrimental to public policy
if the perpetrator of forgery is not in a worse position after detection thereof than he was when he
held the instrument in its original form.
Cheques - Types and Crossing of Cheques
Section 6 of the Negotiable Instrument Act defines a cheque as, "A bill of exchange drawn on
a specified banker and not expressed to be payable otherwise than on demand."
In simple words,
* Bills of Exchange - It is written and signed order directing the person named in it to pay a
certain amount of money only to, or to the order of a certain person or to the bearer.
PARTIES TO CHEQUE
o DRAWER - The person who signs the cheque and order for payment
o DRAWEE - It is always bank on which cheque is drawn and is ordered to pay the amount
of cheque.
o PAYEE - The person to whom the cheque is payable. ( In many cases, drawer and payee
can be the same person.)
TYPES OF CHEQUES
(A) OPEN CHEQUE - It is an uncrossed cheque which is payable at counter of the bank.
o BEARER CHEQUE - When a cheque is payable to a person whose name appears on the
cheque or to the bearer i.e. to the person who presents the cheque to the bank for
encashment, is called bearer cheque. It can be transferred by mere delivery and do not need
endorsement.
o ORDER CHEQUE - When a cheque is payable to person named in the cheque or to his
order, is called Order Cheque.When the word Bearer is cancelled , the cheque becomes the
order cheque. It can be transferred only by endorsement and delivery.
(B) CROSSED CHEQUE - It is the cheque on which two parallel transverse lines are drawn
across the top left , with or without the word :
It can not be encashed at the counter of the bank , can only be credited to the account of the
payee.
(C) STALE CHEQUE - The validity of cheque is for three months. It cheque is not presented
within the three months, it got expired and becomes the Stale Cheque or Out-dated cheque.
* Earlier the validity of cheque was for six months, it has been reduced to three months, with
effect from April 1, 2012.
(D) ANTE- DATED CHEQUE - A cheque contains the date on which it is drawn. If it bears a
prior date or back date, it is called Ante-Dated cheque. Bank will honour this cheque until it
exceed the three months, i.e. stale period of cheque.
(E) POST-DATED CHEQUE - If the cheque bears the date later than the date on which it is
drawn, is called Post-Dated Cheque. This cheque can not be honoured before the date written on
it.
(F) MULTILATED CHEQUE - A cheque which is torn into pieces is called Multilated cheque.
CROSSING OF CHEQUES
Crossing of Cheques means to draw two lines transverse parallel on left hand corner of the
cheque.It directs the bank to deposit the money directly into the account and not to be pay cash at
the bank counter.
MODES OF CROSSING
Below are the modes of crossing of cheques and the effect of crossing of cheques:
(1) GENERAL CROSSING - When a cheque bears two transverse parallel lines at the left hand
of its top corner. Words such as 'and company' or any other abbreviation (such as & co.) may be
written between these two parallel lines, either with or without words 'not negotiable', is called
General Crossing.
Effect - Payment can be paid through bank account only, and should not be made at counter of
paying bank.
(2) SPECIAL CROSSING - When a cheque bears the name of the bank in between the two
parallel lines, with or without the words 'not negotiable' is called Special Crossing.
Effect - The bank will pay to the banker whose name is written in between the crossing lines.
(3) RESTRICTIVE CROSSING / ACCOUNT PAYEE CROSSING - In this, crossing of
cheques is done by writing Account Payee or Account Payee only in between the crossing lines.
Effect - Payment will be credited to the account of payee named in the cheque.
(4) DOUBLE CROSSING - When a cheque bears two special crossing, is called Double
Crossing. In this second bank act as agent of the first collecting banker. It is made when the
banker in whose favour the cheque is crossed does not have branch where the cheque is paid.
I.A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when
the maker ofthe note, acceptor ofthe bill or drawee ofthe cheque makes default in payment upon
being duly required to pay the same.1 It has been noted above that dishonour by non-acceptance
could be only of a bill of exchange, but dishonour by non-payment could be of any negotiable
instrument including a bill of exchange. When presentment for payment is made and the maker,
acceptor or drawee, as the case may be, makes default in making the payment, there is dishonour
of the instrument. Dishonour is oftwo kinds:
dishonoured, unless these several drawees are partners. Ordinarily, when there are a number of
drawees all ofthem must accept the same, but when the drawees are partners acceptance by one
ofthem means acceptance by all. If the drawee does not accept within 48 hours of the
presentment of the bill of him, the bill is deemed to be dishonoured because the drawee is
entitled to only 48 hours time (exclusive of public holidays) to consider whether he will accept or
not. (B) Where presentment for acceptance is excused and the bill is not accepted, for example,
ifthe drawee cannot, after a reasonable search, be found, the bill is dishonoured. (C) Where the
drawee is incompetent to contract, the bill is treated to be dishonoured. According to section 26,
a person capable of entering into a contract can accept a bill and a person who is not competent
to contract cannot make any acceptance. Since a person incompetent cannot contact to make any
acceptance, therefore, when such a person is the drawee, the bill is deemed to be dishonoured by
non-acceptance. (D) When the drawee makes a qualified acceptance, the holder may treat the bill
of exchange having been dishonoured. It is expected that the drawee will make an unqualified
acceptance. If the drawee makes a qualified acceptance and the holder agrees to that all those
parties who do not consent to such an acceptance are discharged from their liability towards the
holder. It is, therefore, in the interest ofthe holder that when there is a qualified acceptance by the
drawee he should consider the bill to be dishonoured. Examples of qualified acceptance are
accepting to pay a different sum, or to pay subject to fulfillment of condition, or to pay at a
different place than stated by the drawer in the bill of exchange. III. DISHONOUR BY NON-
PAYMENT: A promissory note, bill of exchange or cheque is said to be dishonoured by non-
payment when the maker ofthe note, acceptor ofthe bill or drawee ofthe cheque makes default in
payment upon being duly required to pay the same.6 7It has been noted above that dishonour by
non-acceptance could be only of a bill of exchange, but dishonour by non-payment could be of
any negotiable instrument including a bill of exchange. When presentment for payment is made
and the maker, acceptor or drawee, as the case may be, makes default in making the payment,
there is dishonour of the instrument. Apart from that there are certain circumstances when
presentment for payment is excused and the instrument is deemed to be dishonoured even
without n presentment. Thus, when the maker, acceptor or drawee intentionally prevents the
presentment of the instrument, or. cannot, after a reasonable search, be found, the instrument is
deemed to be dishonoured even without presentment. IV. DISHONOUR OF CHEQUE
With the advancement and progress of society and the increase of commerce and various
activities of trade, the transaction of money between human beings became complex and the
ancient law givers were also forced by the circumstances to evolve new rules and regulations to
regulate the transaction of money. The present day economies of the world which are functioning
beyond the international boundaries are relying to a very great extent on the mechanism of the
Negotiable Instruments such as cheques and bank drafts and also the oriental bill of exchange
prevalent in India and known as Hundies. Since business activities have increased, the attempt to
commit crimes and indulge in activities for making easy money has also increased. Thus besides
civil law, an important development both, in internal and external trade is the growth of crimes
and we find that banking transactions and banking business is every day being confronted with
criminal actions and this has led to an increase in the number of criminal cases relating to or
concerned with the Banking transactions. Whenever a cheque is dishonoured, the legal
machinery relating to the dishonour of a cheque comes into motion. What is dishonour has first
to be considered and for this we have to refer to Section 92 and 93 of the Negotiable Instruments
Act, 1881. Section 92 reads as under: “Dishonour by non payment- A promissory note, bill of
exchange or cheque is said to be dishonoured by non payment when the maker of the note,
acceptor ofthe bill or drawee ofthe cheque makes default in payment upon being duly required to
pay the same.” Thus ifon presentation the banker does not pay then dishonour takes place and the
holder acquires at once the right ofrecourse against the drawer and the other parties on the
cheque.
CONSEQUENCES OF DISHONOUR - There are two points relating to the consequences of the
dishonour of the cheques. The first is that by dishonour of the cheque the negotiability of a
cheque is lost. In Sukanraja Khimraja, a firm of Merchants, Bombay v. N. Rajagopalan,51 the
facts were that after the dishonouring of a cheque, the payee (M) endorsed it to (R) for valuable
consideration. (R) Demanded payment of the amount as per the cheque from defendants,
( namely the firm which issued the cheque and its partners), and they having neglected to pay,
the suit was filed. The Trial Court decreed the suit and it was affirmed on appeal. In the Letter
Patent Appeal it was contended for the appellantsdefendants 1 and 2 ,that the crucial point
involved was, whether the alleged cheque was negotiable after being dishonoured, and whether
the endorsee (M) who filed the suit could be a holder in due course as defined in Section 9 of the
Negotiable Instruments Act. It was held that the plaintiff as the brother of (M), was fully aware
that the cheque had been dishonoured, and the endorsement in his favour was only after the Bank
returned it. Therefore, Ex. A-l had lost its negotiability. Hence, he cannot be a holder in due
course. This essential characteristics having not been comprehended and more so, when the
cheque had never been thereafter presented to the Bank for encashment, the suit as laid, could
not have been decreed at all. The second aspect is relating to the question of limitation. In the
case it was held that in the event of a post dated cheque given on the date ofloan in repayment of
debt, being dishonoured, there is no payment at all either on the part ofthe debt or the whole of it
with the result that the debt in question continues to exist and hence, limitation could not be
counted from the date when the cheque was dishonoured but from the date ofthe loan.
1. a person must have drawn a cheque on an account maintained by him in a bank for payment
of a certain amount of money to another person from out of that account
2. the cheque should have been issued for the discharge, in whole or in part, of any debt or
other liability;
3. that cheque has been presented to bank within a period of three months from the date on
which it is drawn or within the period of its validity whichever is earlier;
4. that cheque is returned by the bank unpaid, either because of the amount of money standing
to the credit of the 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 the bank;
5. the payee or the holder in due course of the cheque makes a demand for the payment of the
said amount of money by giving a notice in writing, to the drawer of the cheque, within 30
days of the receipt of information by him from the bank regarding the return of the cheque as
unpaid;
6. the drawer of such cheque fails to make payment of the said amount of money to the payee
or the holder in due course of the cheque within 15 days of the receipt of the said notice;
To put it in simpler terms the law stated that the person must owe some amount of money to
another and draws a cheque in that regard to fulfil that liability, the cheque be drawn on an
account in a bank by him. The cheque was then presented to the bank within 3 months of the date
on which it is drawn. However due to insufficiency of funds the cheque is returned by the bank
unpaid. The payee (the bank) makes a demand for payment of said amount which the person
owed within 30 days of the information received by him (the person who owed the money) that
the cheque was returned unpaid; and thereafter the person fails to pay the amount within 15 days
of the notice by the bank.
Latest Law
By a landmark judgment, Dashrath Roopsingh Rathod Vs. Stae of Maharashtra & Anr.
In this case, the Supreme Court has changed the basic criteria under Section 138 of Negotiable
Instruments Act which is to prosecute a person who had presented the cheque which had been
returned due to insufficiency of funds or if the amount exceeds the amount in the bank of the
payer.
Earlier, a case under Section 138 could be initiated by the holder of the cheque at his place of
business or residence. But, a bench of justices TS Thakur, Vikramjit Sen and C Nagappan ruled
that the case has to be initiated at the place where the branch of the bank on which the cheque
was drawn is located.
And the judgment would apply retrospectively. This means, lakhs of cases pending in various
courts across the country would witness a interstate transfer of cheque bouncing cases.
The bench said: “In this analysis, we hold that the place, situs or venue of judicial inquiry and
trial of the offence must logically be restricted to where the drawee bank is located.”
Example: Mr. X who resides in Chennai owes Rs. 1 Lakh to Mr. B who resides in Chandigarh,
Mr. X issues a cheque in delhi in favour of Mr. B. The cheque bounces in Ludhiana (place of
bank where the cheque is given by Mr. B) for insufficiency of funds.
According to the earlier law Mr. X could have chosen any of the four places. But by the recent
judgment the only place for institution of case would be Ludhiana, i.e. where the cheque has
dishonored at the payee bank which is located in Ludhiana in this example.
The change in the existing law shifts the inconvenience and hardship on the payer because now
he would have to travel to the place of the drawee bank where the cheque gets dishonored due to
insufficiency of funds. Hence, guaranteeing more precaution by the payer at the time of issuing
the cheque.