Short titleKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 1 > Preliminary
1. short title. This Act may be called the Negotiable Instruments Act,1881.
Local Extent, saving of usages relating to Hundis, etc., Commencement.—
It extends to the whole of India but nothing herein contained affects the Indian Paper Currency Act 1871,s 21, or affects any local usage relating to any instrument in an oriental language:
Provided that such usages may be excluded by any words in the body of the instrument, which indicate an intention that the legal relations of the parties thereto shall be governed by this Act; and it shall come into force on the first day of March 1882.
(1)LOCAL EXTENT
Before the passing of the Indian Independence Act 1947, the Negotiable Instruments Act 1881 (the Act) extended to the whole of British India including all territories and places within His Majesty’s dominions which were for the time being governed by His Majesty through the Governor-General of India.
Section 18(3)of the Independence Act 1947 provided:
Save as otherwise expressly provided in this Act, the law of British India and of the several parts thereof existing immediately before the appointed day shall, so far as applicable and with the necessary adaptations, continue as the law of each of the new dominions and the several parts thereof until other provision is made by laws of the legislature or other authority having power in that behalf.
Presently under art 372 of the Constitution of India, all legislations in force in the territory of India immediately before the commencement of the Constitution shall continue to have effect, until altered or repealed or amended by a competent legislature or other competent authority.
Article 246 of the Constitution endows Parliament with the exclusive power to make laws with respect to any of the matters enumerated in List I (Union List) in the Seventh Schedule. Entry 46 in the Union List comprises bills of exchange, cheques, promissory notes and other like instruments. Entry 45 of the List relates to banking. The law pertaining to negotiable instruments and banking, thus, falls within the exclusive jurisdiction of Parliament, which alone can alter or amend the Act.
It is important to note the powers of Parliament and of the state legislatures to enact laws regarding bills of exchange, cheques and promissory notes. The question whether the state legislatures in including law relating subjects within their own list had transgressed their jurisdiction and incidentally encroached upon the jurisdiction of the federal subjects under the Government of India Act 1935, was decided by the Supreme Court in State of Bombay v Narothamdas .1 In that case the plaintiff instituted a suit in the High Court of Bombay for recovery of Rs 11,074 on the basis of a promissory note. He contended that the Bombay City Civil Court Act 1935 enacted by the provincial legislature was ultra vires the Government of India Act 1935; as the subject of promissory notes was covered by entry 53, List I of the Seventh Schedule to the Government of India Act 1935. It was held that the impugned Act was in pith and substance, a law with respect to a matter enumerated in List II (entry 2 read with entry 1) of the Seventh Schedule to the Government of India Act 1935 and hence not ultra vires and the fact that incidentally it affected suits relating to promissory notes (a subject falling within entries 28 and 53 of List I) would not affect its validity.
A similar issue of transgression of power had arisen before the Privy Council in Prafulla Kumar Mukherjee v Bank of Commerce Ltd, Khulna .2 In that case the Bengal Money Lenders Act enacted by the provincial legislature which restricted the amount of loan and interest that may be recovered from the debtor with retrospective effect was challenged being ultra vires the Government of India Act 1935 as the subject of negotiable instruments and banking was covered by Entries of List I. It was held that the impugned Act was in pith and substance, a law with respect to a matter enumerated in List II dealing with money lenders and money lending and for relief of debtors, and hence not ultra vires and the fact that incidentally it affected matters in List I would not affect its validity.
(2) INDIAN PAPER CURRENCY ACT 1871
The Act does not affect the provisions of s 21 of the Indian Paper Currency Act 1871. The Act of 1871 was followed by a succession of paper currency legislations, the last being the Indian Paper Currency Act 1923 which was repealed by the Reserve Bank of India Act 1934. Section 21 of the Act of 1871 has been re-enacted with slight modification as s 31 of the Reserve Bank of India Act 1934 which, as amended by Act 23 of 1946, reads:
(1) No person in India other than the Bank or, as expressly authorized by this Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand, or borrow, owe or take up any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such person:
Provided that cheques or drafts, including hundis, payable to bearer on demand or otherwise may be drawn on a person’s account with a banker, shroff or agent.
(2) Notwithstanding anything contained in the Negotiable Instruments Act 1881, no person in India other than the Bank or, as expressly authorized by this Act, the Central Government shall make or issue any promissory note expressed to be payable to the bearer of the instrument.
The object of the paper currency legislation was to prevent banks and private persons from infringing the government monopoly over the issuance of paper currency in India.3 This monopoly has now been vested in the Reserve Bank of India in certain cases and the Central Government in others. Payable to bearer on demand means that anybody can get payment even without an endorsement from the holder of the note.4 The section allows the issues of bearer cheques on bank accounts, but disallows bank drafts made payable to bearer.
(3) LOCAL USAGE
The Act does not apply to any local custom relating to any instrument in an oriental language.5 The Act applies to promissory notes, bills of exchange and cheques, but where the instrument is in an oriental language, eg a hundi6 or rukka, any local usage relating to such an instrument applies notwithstanding the provisions of the Act. The saving clause does not render the Act altogether inapplicable to hundis. It is only when there is a local usage to the contrary that the local usage overrides the provisions of the Act. The said usage must be alleged and established by the party relying upon it. In the absence of proof as to the existence of any such usage, the Act applies as much to hundis as to instruments in English.7 Such local usage may, however, be excluded by incorporating a specific clause in the body of the instrument indicating an intention that the legal relations of the parties thereto shall be governed by the Act, in which case the local usage shall cease to operate.
By excluding the applicability of the Act to instruments in oriental languages, unnecessary confusion in the state of law has been established. The law of negotiable instruments being closely related to the commercial world should be, by and large, uniform in its application. The Law Commission of India has also suggested that instruments drawn in oriental language which fulfill the requirements of instruments dealt with under the Act should also be governed by the Act.8
3 Jetha Parkha v Ramchandra (1892) 16 Bom 689, p 700.
4 Gopal Chandra v Bepin Behari AIR 1955 Cal 353 [LNIND 1954 CAL 105].
5 Mangumal v ALVRCCT Firm (1908) 4 Mad LT 309; Gulamsa v Viswanatham (1917) MWN 344.
6 The name is derived from a sanskrit word hund which means ‘to collect and thus summarises the very purpose of hundi. Hundis have been in usage long before the Act was passed and varies with each locality and it’s respective customs.
7 Krishnaset v Hari Valji (1918) 20 Bom 488, p 490; Jambu Chetty v Palaniappa (1903) ILR 26 Mad 256.
8 Eleventh Report of the Law Commission of India, 1958.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 1 > Preliminary
3. Interpretation clause
In this Act9-
“Banker“.-[“banker” includes any person acting as a banker and any post office savings bank.10
(1)BANKER
The Act does not define the term banker. In one of the early cases, it was held that a banker is a person who receives the money of his customer to be drawn out again as the customer has occasion for it, the customer being the lender, and the bank being the borrower with the superadded obligation of honouring the customer’s cheques up to the amount of the money received and still in the banker’s hands.11Paget’s Law of Banking stated:
It is therefore a fair deduction that no one and no body, corporate or otherwise, can be a ‘banker’ who does not:
(i) open current accounts;
(ii) pay cheques drawn on himself;
(iii) collect cheques for his ‘customers’.12
In United Dominions Trust Ltd v Kirkwood ,13 the characteristics usually found in modern bankers were stated to be:
(i) they accept money form and collect cheques for their customers and place them to their credit;
(ii) they honour cheques or orders drawn on them by their customers when presented for payment and debit their customers accordingly; and
(iii) they keep current accounts, or something of that nature, in their books in which the credits and debits are entered.
Apart from these, there are characteristics such as stability, soundness and probity that constitute the persona of a banker. Reputation may exclude a person from being a banker; so also it may make him one.
In India, the following definitions of banking and banking company contained in the Banking Regulation Act 1949 would assist in determining whether a person is a banker. of the Banking Regulation Act 1949 Section 5(b) and (c) provides as follows:
…
(b) banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
(c) banking company means any company which transacts the business of banking in India.
Explanation: Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause.
The Act allows banking companies to transact various other kinds of business specified in s 6 of the Act. Section 7 of the Act generally prohibits non-banking companies and co-operative societies other than co-operative banks from using, as part of their names, any of the terms ‘bank’, ‘banker’ or ‘banking’. No company or co-operative society can carry on banking business in India unless it uses at least one of the terms as part of its name.
Under of the Banking Regulation Act 1949 s 49A, no person other than a banking company, the Reserve Bank of India, the State Bank of India or any other banking institution, firm or person notified by the Central Government, on the recommendation of the Reserve Bank, shall accept public deposits that can be withdrawn by cheque. This restriction does not apply to a primary credit society, certain other co-operative societies and any government savings bank scheme such as the postal savings bank.
Receiving money from customers and repaying it by honouring their cheques as and when required is one function which distinguishes banking business from other kinds of business. Therefore, Nattukottai Chettiars who carry on money-lending business cannot be considered bankers.14
A company lacking the power to grant loans and to receive public deposits repayable in the manner indicated under of the Banking Regulation Act 1949 s 5(b) cannot be considered a banking company.15
A government treasury was held to be a banker under the section.16
9 The definition of the terms ‘India’ and ‘Notary Public’ were omitted by Acts 62 of 1956 and 53 of 1952 respectively.
10 See Bills of Exchange Act 1882,s 2.
11 Foley v Hill (1884) 2 HL Cas 28.
12 Seventh edn, p 6.
13 [1966] 1 All ER 968.
14 Karuppan Chettiar v Somasundram Chettiar AIR 1961 Mad 122 [LNIND 1960 MAD 225].
15 Mahalaxmi Bank Ltd v Registrar of Companies, West Bengal (1961) 31 Comp Cas 287; Sajian Bank (P) Ltd v Reserve Bank of India (1959) 2 MLJ 455 [LNIND 1959 MAD 58].
16 Irinjalakuda Bank Ltd v Poruthussery Panchayat (1970) 40 Comp Cas 767; Rangaswami Pillai v Sankaralinga Ayyar (1920) 43 Mad 816; SMA Somasundaram Mudaliar v District Collector, Chitoor AIR 1967 Andh Pra 126.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
4 Promissory note.
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.
Illustrations
A signs instruments in the following terms:-
(a) ‘I promise to pay B or order Rs 500’.
(b) ‘I acknowledge myself to be indebted to B in Rs 1,000 to be paid on demand for value received’.
(c) ‘Mr B, IOU Rs 1,000’.
(d) ‘I promise to pay B Rs 500 and all other sums which shall be due to him’.
(e) ‘I promise to pay B Rs 500, first deducting there out any money which he may owe me’.
(f) ‘I promise to pay B Rs 500 seven days after my marriage with C’.
(g) ‘I promise to pay B Rs 500 on D’s death, provided D leaves me enough to pay that sum’.
(h) ‘I promise to pay B Rs 500 and to deliver to him my black horse on Ist January next’.
The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes.
(1)REQUISITES OF PROMISSORY NOTES
The definition of a promissory note under s 4 is exhaustive and excludes from the category of promissory notes, instruments which do not fall within its terms.1
No particular form of words is essential to constitute a promissory note. Any form of expression from which an undertaking to pay can be inferred is sufficient. The mere nomenclature given to the instrument does not determine the nature of the instrument. The instrument has to fulfill all the requisites of a promissory note to be called so and merely because the parties describe it as a promissory note does not make it so.
The description and language of the instrument taken as a whole, the circumstances under which it came to be executed, the intention of the parties manifest from the face of the instrument and the surrounding circumstances would have a cumulative bearing on a proper construction of the instrument as to whether it is a promissory note.2 A document has to be read as a whole to determine its nature. If there is 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 it will be a promissory note. The mere inscription of words to some effect do not determine its nature. Thus, where the document is in the form of an acknowledgement coupled with a promise to pay by a particular day, it is a promissory note though stated to be a hundi.3
To find out whether a particular document is a promissory note, the intention of the parties has to be looked into
with reference to the substance of the document, the surrounding circumstances in which the document has been executed and its negotiability in the popular sense, whether the document was intended to be promissory note or was intended to be a mere acknowledgement of debt or receipt of consideration.
A single instrument may embody several purposes and the document is to be read as a whole to find out its dominant purpose which is relevant for the purposes of the Act.4
In Kadorilal v Sukhlal ,5 after reviewing several authorities it was held that the whole document, its tenor the purpose for which it was executed, as described in the document itself, should be considered for determining the nature of the documents. Collateral circumstances, which may be contained in evidence, cannot be looked into for this purpose.
The most important element for determination of the question whether the instrument is a promissory note is the intention of the parties. If the parties had no intention to execute a promissory note then, even though the instrument fulfills all the requirements of a promissory note, it may not be a promissory note. Thus, a document primarily intended to be a receipt or a bond and not intended to be negotiable in the ordinary mercantile sense does not become a promissory note within the meaning of the Act.6 Conversely, merely because the parties intended to execute a promissory note does not make it so, if it does not fulfill all the requisites of a promissory note.7
The incident of negotiability is not essential to the validity of the promissory note, provided the requirements of the section are complied with. Therefore, if an instrument satisfies the requirements of the definition contained in the section, it must be held to be a promissory note, irrespective of whether it is negotiable.8
Negotiable instruments, including a promissory note are meant for free circulation and thus the most important requisite of these instruments is certainty regarding all their essential aspects. The essential characteristics of a promissory note statutorily recognise the various aspects as to certainty. A promissory note may contain a promise to pay a certain sum of money to a certain person or to his order or to the bearer. In order to fall within the definition of promissory note, it is necessary that there should be an unconditional undertaking, to pay a certain sum of money, to a certain person or to bearer and the maker should sign it. Apart from fulfilling the above terms, the promise to pay must be the substance of the instrument, there should be nothing else inconsistent with the character of the instrument and the instrument must be intended to be a promissory note.9
A careful examination of the definition will show the following requisites of promissory notes.
(i) A Promissory Note Must be in Writing
Every engagement connected with a promissory note must be signified by writing upon the instrument itself. The object of this requirement is to exclude an oral engagement to pay, from the purview of the Act. The writing may be in pencil or ink, and writing shall be construed to include printing, lithography, and other modes of representing or reproducing words in a visible form.10 The writing may also consist of either printed or typewritten as well as handwritten matter. There is also no requirement that the writing should be on a paper and the note may be written on cloth, linen or any other thing that can be used for such purposes.
No particular form of writing is necessary for the validity of a promissory note, provided the requirements of the section are complied with.11 It is not necessary to adhere to any form of words so long as the conditions of the definition are observed, in which case the language in which the instrument is written is immaterial.12
It is not necessary that the word ‘promise’ should be used, provided the language used clearly shows an intention on the part of the maker to give an unconditional undertaking to pay the amount.13
An instrument, however might satisfy the requirements of the section and yet not be a promissory note. Thus, a banker’s deposit note in the form, received of A Rs 500 to be accounted for on demand and signed by the maker, is not a promissory note.14 Further, the instrument must show the party’s intention to make a note.15 The word ‘hand-note’ in a blank endorsement written across the stamp was held to convey an unqualified undertaking to pay as was necessary in the case of a promissory note.16 The
Page 3 of 17Promissory note.
instrument may be written in any language, but when it is in an oriental language, it is a hundi and may be subject to local usages.17
(ii) A Promissory Note Must Contain an Undertaking to Pay
The essential element of a promissory note is an express promise to pay. A mere acknowledgement of indebtedness without an express promise to pay the debt is not a promissory note. Examples of instruments which are not promissory notes:
(i) ‘Mr X, I owe you Rs 100.’
(ii) ‘I have received Rs 1,000 which I borrowed of you, and I have to be accountable to you for the same with interest.’18
(iii) ‘The amount which I have this day received from you in cash is Rs 1,000. This sum I am bound to pay to you.’
(iv) ‘Deposited with me Rs 1,000 to be returned on demand.’
(v) ‘I am liable to A in sum of Rs 1,000 which is to be paid by instalments for rent.’19
(vi) ‘This receipt is hereby executed by B for Rs 43,900… received from the firm of… for and on behalf of A. The amount to be payable after two years. Interest at the rate of Rs 5-4-0 per cent per year to be charged. Dated: 1 April 1947.’
The Privy Council held that the document was a receipt for money containing the terms on which it was to be repaid; and being primarily a receipt, even if coupled with a promise to pay, it was not a promissory note, or a document which was a negotiable instrument within the meaning of ss 4 and 13 of the Act.20
I, of my own free will and accord approached A and borrowed from him, the sum of Rs 100 bearing interest at the rate of annas eight per cent per mensem… I have, therefore executed these few presents by way of a promissory note so that it may serve as evidence and by of use when needed.
Here, it was held that an instrument is not a promissory note as defined in s 4 unless it contains an express undertaking to pay the amount mentioned in the instrument. An implied undertaking inferred merely from the use of the word debt or pro-note is not sufficient.21
A piece of writing containing a signature with the words ‘Rs 150’ on a one-anna stamp, even if the signature be genuine, was held not a promissory note within the meaning of s 4 of the Act.22
A receipt containing an undertaking to repay a GBP 10,000 loan in full by a stated date at an agreed interest was held not to be a promissory note by the Court of Appeal as the borrower had the option to repay earlier than the stated date. The document was held to be only a receipt setting out the repayment terms, and was not intended to be a negotiable instrument.23
A document that stated: ‘We have received the sum of Rs 9,240 from R. The above amount will be repaid on demand. We have received Rs 9,240 in cash today, which was signed by the maker and also contained an endorsement by a third party guaranteeing repayment’ was held to be a promissory note and not a bond.24
Where a promise to pay is absent, even the fact that the document is written on a hundi paper and attested cannot make it a promissory note.25 However, the mere absence of the words ‘I promise to pay’ does not alter the character of the document, provided a promissory note fulfils the requirements of the section and there is a clear intention on the part of the parties to treat the document as a promissory note.26
A mere acknowledgement of indebtedness does not constitute a promissory note.27 However, if in addition to an acknowledgement of indebtedness, there is an express promise to pay the amount acknowledged as being due, that instrument is a promissory note.28 Where, however, the acknowledgement of indebtedness contained in the document is for a defined sum of money payable on demand, the document need not necessarily stipulate that the debtor promises to repay the amount.29 A document described as an acknowledgement was nevertheless held to be a promissory note as it satisfied the requirements of the section.30 An instrument containing an
Page 4 of 17Promissory note.
acknowledgement of indebtedness without an express promise to pay, though not a promissory note, is valid as an agreement, and may be sued upon as such.31
A document containing a promise to pay would not be a promissory note if it were primarily intended to be a receipt and not intended to be negotiable in the ordinary mercantile sense. The legal character of the document would depend upon the facts of the case.32 The stamping of a document as a receipt reflects the parties’ intention not to treat it as a note.33
The mere fact that the document recites how the consideration was fixed and that a part of it is worded like an agreement does not deprive the document of its character as a promissory note, provided it contains words which, in law can be construed as meaning a promise to pay.34 Similarly, an instrument that satisfies the statutory requirements of a promissory note would not lose its character as such, merely because it states the purpose for which the maker borrowed the money.35 Also, a reference in the note to the sale contract which gave rise to the note would not alter its character.36
The following instruments were held to be promissory notes:
(i) ‘Rs 1,000 balance due to you I am still indebted and do promise to pay.’37
(ii) ‘Received from X Rs 1,000 which I promise to pay on demand with interest.’38
(iii) ‘I do acknowledge myself to be indebted to X in Rs 1,000 to be paid on demand for value received.’39
(iv) ‘We shall order the borrowed moneys to be repaid.’40
(v) ‘Whereas with regard to glass of Hamiman Glass Works account is due from us, we therefore acknowledge and promise to pay on demand Rs 1,781 with interest at two per cent per mensem.’41
(vi) ‘We have executed this promissory note for a total sum of Rs 2,400… made up of…On demand by you [we] will pay the amount [due on] this promissory note along with compound interest at 13 annas per cent per month with annual rests. [We] have executed this promissory note. A four-anna revenue stamp had been affixed. The document, purported to be signed by the executants, was held to be a promissory note.’42
(vii) An undertaking to pay on demand necessarily implies a promise to pay. Therefore, a promissory note expressed as payable on demand is a promissory note within the meaning of the section.
(viii) I have already received Rs 15,000 from Colombo AS shop for doing business of my own. I shall pay it after two years on demand by you with interest at two annas per month per Rs 100 to you or to your order and receive back this promissory note.’43
A promissory note is no less a note merely because it contains a recital that the maker of the note has deposited title deeds with the payee.44
The expression ‘on demand’ is a technical expression meaning that the amount mentioned in the instrument is payable immediately. However, it does not imply that a demand has to be made before payment can be enforced.45
The word ‘on demand’ only means that the note is payable immediately or at sight, and does not in itself take the promissory note out of the purview of s 49 of the Indian Contract Act 1872.46
A holder, who sues on an on demand instrument without having first demanded payment thereon, may have to bear the costs of the action, if the debtor shows that he was always ready and willing to pay. Further, where a note is payable after demand or when demanded, it is not deemed to be payable till an actual demand has been made. Where a promissory note payable on demand is accompanied by a writing which postpones the time for payment to a fixed period, such a writing is valid and enforceable.47 The negotiable character of the promissory note is not affected and bona fide holders, without notice of the accompanying writing will be protected, even if they sue before the term mentioned in the accompanying writing expires. However, as between the parties to the note and as between the drawer and holders with notice, or holders who are not holders in due course, the accompanying writing would be enforced.
Where there is an express promise to pay, an instrument will not be any less a promissory note because it contains expressions of politeness or gratitude.48
Page 5 of 17Promissory note.
A promissory note payable on demand would not cease to be so merely because of an endorsement thereon by the maker and the payee that no interest would be payable if the note was paid within a month. 49
A promissory note need not be payable on demand. It may be made payable on a fixed future date or on the expiry of a specified period. An instrument containing a mere acknowledgement of indebtedness coupled with a promise to repay within a few days was held not to be a promissory note.50
A promissory note does not lose its character as such, merely because it contains a promise to pay at a certain place.51
(iii) The Promise to Pay Should be Unconditional
An unconditional undertaking to pay a certain sum of money is an indispensable statutory requisite without which no instrument can be a promissory note within the meaning of the Act. Thus, a valid promissory note must contain an unconditional promise to pay.52
Certainty is the key element in negotiable instruments, and unless they are per se valid, they are not negotiable. Lord Kenyon stated thus, in Carlos v Fancourt :53
It would perplex the commercial transactions of mankind if paper securities of this kind were issued out into the world encumbered with conditions and contingencies and if persons to whom they were offered in negotiation were obliged to inquire when these uncertain events would probably be reduced to certainty.
Notes that are payable on a contingency are, therefore, not negotiable as their actual payment is not certain.
An instrument must be valid ab initio and carry its own validity on its face. Therefore, if payment is contingent upon the happening of an uncertain event, it would be invalid even if the event occurs before the expiry of the period fixed for the performance of the obligation.54
The following are examples of instruments held as not promissory notes:
(i) ‘I promise to pay X Rs 5,000 in instalments with a proviso that no payment shall be made after my death.’55
(ii) A letter requesting a loan stating that the amount lent would be repaid is not a promissory note because the repayment is dependent on the advance being made. Thus, a document stating: ‘Rs 100 already received. A sum of Rs 500 is also required. Please send it per bearer.’ The amount will be returned with interest at 6 per cent without delay, is not a promissory note.56
(iii) ‘I promise to pay X Rs 500 on A’s death, provided he leaves me sufficient money to pay the said sum’ is conditional and void as promissory note.57
(iv) An instrument containing a promise to pay a certain sum to X, a certain time after his marriage is not a good promissory note, as X may not marry at all.58
(v) ‘I promise to pay AB Rs 500 out of money due to me from XY as soon as XY pays,’ it is conditional because XY may never pay the money.
(vi) ‘I promise to pay on demand at my convenience.’ The words at ‘my convenience’ import a condition and the writing is not a promissory note.59
(vii) An instrument containing a promise to pay on settlement of account when the litigation comes to an end.60
An instrument given for an executed consideration, eg liquidated damages, was held to be a promissory note.61
An instrument expressed to be a promissory note, but which merely states the fact that a certain sum is due and that as the executant was unable to pay the amount, he has agreed to pay an interest, is not a promissory note as it contains no unconditional promise to pay.62
Also, a letter stating: ‘shall repay within 10 days, amount of Rs 300 which I borrowed today from you together with interest at 1 per cent per month and shall take return of this letter’, was held not a promissory note.63
Page 6 of 17Promissory note.
An undertaking to repay the amount only when demanded is not a conditional promise to pay.64 In view of the first explanation to s 5, an undertaking to pay on demand after a specified period of time was held not unconditional.65 This was differed from in Thenappa Chettiar v Andiyappa Chettiar ,66 where an undertaking to pay the amount after two years was held to be an unconditional promise to pay. A document containing such an undertaking was held to be chargeable as a bond under Indian Stamp Act 1899,sch I, art 15.67
A note contained an undertaking to pay on or before a specified date and that actions on the note would be subject to the jurisdiction of courts in India, Singapore and Seychelles. It was held that the promise was not conditional.68
In Kochuthressia v Devadas ,69 the Kerala High Court seemed inclined to treat a promise to pay the amount after receiving a month’s notice as an unconditional undertaking to pay.
In Y Veeraiah v Margadarsi Chit Fund Ltd ,70 a chit-fund subscriber executed in favour of the fund a document which stated: ‘On demand I… promise to pay MC Fund or order the sum of Rs 9,800 repayable with interest at 12 per cent pa being the amount of future instalments due to MC Fund in respect of ticket 3 in LT 12E series in monthly instalments of Rs 200 for 49 months on or before fifth of each month commencing from August 1975 and in default of any single monthly instalment on demand the entire balance shall be due.’ A Division Bench of the Andhra Pradesh High Court held that the instrument was only an agreement and not a promissory note, on the grounds that it was not negotiable and for the fund to make a demand, certain events had to take place and payment by the promisors was subject to the satisfaction of certain conditions and contingencies (which the judgment does not specify). The Bench relied on Venkata Subbayya v Satyanamyanamurthy 71 and Mehrunnisa Begum v Sheik Chand Bi .72
A document in which the executant recited that he had borrowed a certain sum against the mortgage of his property and agreed to repay the loan within a certain period and undertook to establish a good title to the property was held to be a mortgage bond and not a promissory note.73
A promissory note is not invalidated by a default clause that allows the promisee to realize the amount from certain properties of the promisor, in the event of his default to pay.74
A promise to pay is not ‘conditional’ within the meaning of the section, if it depends upon an event that is certain to happen though the time of its happening may be uncertain. Thus, a promissory note in the form: ‘I promise to pay X Rs 500 seven days after the death of AB’ is not conditional as it is certain that AB will die, though the exact time of his death is uncertain.75 An instrument promising payment on a certain date if the promisee performed a specified agricultural activity was held as not a promissory note.76
(iv) The Promissory Note Must be Signed by the Maker
Until the maker of a promissory note affixes his signature thereto, the instrument is incomplete and of no effect. The maker of a note, the drawer of a bill of exchange or cheque or an indorser may, if he is unable to write his name, sign by a mark in lieu of a signature.77 Mere marks and initials have been held to be signatures, if they were intended to be such.
A signature in pencil is valid.78 It may be lithographed or even printed, but in such a case it must be shown that it has been adopted and used by the party as his signature. Even the affixing of initials may amount to a signature.
Signature is ordinarily understood to mean the writing of a person’s name in order to authenticate and give effect to the contract contained in the document. Hence, the signature need not be in any particular part of the instrument.79 The words ‘self of my own handwriting’ written at the foot of an instrument whereby, the writer declares himself to be bound to pay may be a sufficient signature.80 Further, it is an essential requirement of a signature that the mind of the signatory should accompany the signature, ie, the executant should intend to subscribe to the terms of the document.
(v) The Maker Must be Certain
It is of utmost importance that the promissory note should give a clear indication of the person who enters into the contract and engages or undertakes to pay.
A promissory note may be made by several persons jointly or jointly and severally. Where a promissory note is
Page 7 of 17Promissory note.
made in the form: ‘I promise to pay’ and is signed by A and B, it is deemed to be made by them jointly and severally.81
In the UK, it was held that on a note in the form: ‘I promise to pay…’ and signed by A, a partner of a firm, on behalf of himself and his copartners, A is not severally liable, as it was a joint note of all the partners.82
In India, the liability of partners of a firm is both joint and several.
A joint and several note though on one piece of paper, comprises in reality and in legal effect, several notes. Thus, if A, B and C jointly make a joint and several promissory note, there are, in effect four notes. There is the joint note of the three makers, and there are also several notes of each of the three.83
A note cannot be made in the alternative or with several liability.84 Thus, a promissory note in the form ‘I, JC, promise to pay’ and signed by JC or also HB, is not a valid note as regards HB, but is a valid note as against JC.
(vi) The Sum Payable Must be Certain
The sum expressed to be payable in the instrument must be certain and not susceptible to contingent changes. An instrument that envisaged payment of interest at a certain time before the principal amount had been demanded, was held to be an instrument for a uncertain sum.85 The following instruments were as held not promissory notes:
(i) ‘I promise to pay A Rs 100 and all other sums which may be due to him’.86
(ii) ‘I promise to pay A Rs 100 after deducting any interest or money which he may owe me.’87
(iii) ‘I promise to pay A the proceeds of a shipment of goods value of Rs 2,000.’88
(v) ‘I promise to pay A Rs 1,000, and all fines according to rule.’89
The sum payable under a promissory note is, however, certain within the meaning of the section although it is required to be paid with interest, or at an indicated rate of exchange or according to the course of exchange, or by instalments, with a provision that on default being made in payment of an instalment the balance unpaid shall become due.90
Where a promissory note expressed a promise to pay the sum mentioned therein with interest at 10 percent per annum with quarterly rests, it was held that the note was for a sum certain under ss 4 and 5 of the Act, and was, therefore, a negotiable instrument.91
Where a bill contained an order to pay Rs 21,000 inclusive of interest at nil, it was held to be a certain sum of money under s 5 of the Act.92
Where a document acknowledged a debt and contained a promise to repay the debt with interest, but no interest rate was mentioned, it was held not to be a promissory note as the sum payable was not certain.93 However, in Seth Tulsidoss Lalchand v Rajagopal 94 it was held that where the rate of interest was not mentioned a rate of six95 percent would be applicable under s 80 of the Act.
(vii) The Instrument Must Contain a Promise to Pay Money and Money Only
To operate as a valid promissory note the medium of payment must be money and money only, ie, in legal tender. A promissory note is a document which consists substantially of a promise to pay a sum of money, and of nothing else.96 An agreement containing an undertaking other than to pay money cannot be a promissory note. Thus, an instrument promising to pay money and deliver paddy is not a promissory note.97
An instrument containing a promise to pay X in East India Bonds, or a promise to deliver to X 100 tones of iron, or a promise to pay Rs 100 and to deliver up a wharf to the payee is not a promissory note.98
A document in the following form was held in Scotland, not to be a promissory note:
‘I, X, do hereby agree to pay Y the sum of £ 950 to be paid at the rate of £ 50 per month. First payment on the first day of every month commencing 1 February 1969. Also the present staff employed and paid by myself for the next two weeks (from 20 January 1969).’99
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A document, containing a promise to pay money in a currency, which is not that of the country where the note is made and payable may, notwithstanding that, be a promissory note.1
(viii) The Payee Must be Certain
To make a promissory note, there must be a payee ascertained by name or designation.2 The instrument must point out with certainty the party, who is to receive the money.3 The payee’s name may be set out in any part of the instrument and so long as it clearly appears on a reading of the whole instrument that the payee is specified with certainty, the instrument is a promissory note, assuming other requirements of the definition are satisfied.4
Where a debtor made an entry of receipt of money in his creditor’s book and stated that the money borrowed by him would be repaid on a certain date, without stating as who was to be the payee, it was held that such an entry did not amount to a promissory note.5
Where an instrument contains an unconditional undertaking by the maker to pay a certain sum of money but the payee is not certain, the instrument is not a promissory note.6 The person to whom payment is to be made may be a certain person within the meaning of the section although he is misnamed or designated by description only. Thus, a promissory note payable to the manager of a bank is payable to a certain person within the meaning of s 4.7 Extrinsic evidence is admissible to identify the payee when he is misnamed or when he is designated by description only, but not to explain an uncertainty patent on the note.8
The expression ‘certain person’ in ss 4 and 5 of the Act means a person capable of being ascertained on the date on which the note is made or the bill is accepted.
An instrument made payable to the members of a firm for the time being was held not to be a promissory note, as the members could not be ascertained as on the date of execution.9
The absence of the name of the payee in a promissory note will not make the instrument invalid, when the payee is known with certainty at the time of its execution. When the payee is described in the note as son of P and a particular son of P is known to have lent the amount to the maker, the instrument cannot be held unenforceable. Section 92, proviso 6 of the Indian Evidence Act 1872 would apply to the case and evidence regarding the name of the payee is admissible, when the description is defective.10
A promissory note cannot be made payable to the maker himself; such a note is a nullity, the reason being that the same person is both the promisor and the promisee. Thus, a note in the form: ‘I promise to pay myself’ is not a promissory note. It is, however, valid if it is indorsed by the maker, because then it becomes payable to bearer, if indorsed in blank, or to the indorsee or order, if specially indorsed.11
A promissory note made by several persons and made payable to: ‘one and each of our order’ is valid if it is indorsed by one of the makers and on such a note, an action can lie against the indorser.12
(2)THE BEARER OF THE INSTRUMENT
The requirement as to certainty of the payee does not apply if the note is payable to bearer. However, under s 31 (2)of the Reserve Bank of India Act 1934, no person in India except the Reserve Bank of India or the Central Government as expressly authorized by the Act shall make or issue a promissory note payable to bearer.
Dhani means an owner and not bearer. A document, making a sum of money payable to a dhani on demand is not negotiable by mere delivery as an instrument payable to bearer.13
A promissory note would be payable to the order of the payee even if it is not expressed to be payable to his order, unless it is payable to the bearer or its negotiability is expressly prohibited.14
A promissory note need not necessarily state that it is payable to the payee’s order or to bearer.15 However, where an instrument did not express that it was payable either to the payee’s order or to bearer and was attested, it was held to be a bond, and not a promissory note.16
A promissory note, however, would not cease to be so merely because it is attested.17
Page 9 of 17Promissory note.
In determining whether an instrument is a promissory note, in some cases the test of negotiability has been applied. Thus, it has been held that even though an instrument contained an unconditional undertaking to pay money, it was not a promissory note if it was not negotiable.18 Thus, a document primarily intended to be a receipt or a bond and not intended to be negotiable in the ordinary mercantile sense was held not to be a promissory note within the meaning of the Act.19 Where the document did not state that the amount was payable to the promisee’ order or to the bearer, it was held to be a bond, and not a promissory note for the purpose of stamping.20
It would, however, appear that negotiability is not essential to the validity of a promissory note. All promissory notes are not negotiable.
Therefore, if an instrument satisfies the requirements of the definition contained in the section, it must be held to be a promissory note, irrespective of whether it is negotiable.21
(3)DEFINITION IN OTHER ACTS
A promissory note has also been defined in other legislation such as the Limitation Act 1963, Public Debt Act 1944, and the Stamp Act 1899. A definition in an Act is for the purpose of the Act containing it.22 However, definitions in the General Clauses Act 1897, apply to other Central Acts. In Laxman Krishanji Mustilwar v Ramesh Amarchand Agrawal ,23 it was held that the definition of promissory note in the Stamp Act for the purposes of stamp duty is wider than the definition given in s 4 of the Act but it is only to the extent that in order to fall within the extended meaning a document should be a promissory note in all respects except for the contingencies affecting the payment in the two cases envisaged in the proviso in the ordinarily mercantile sense. The extended meaning only extends to a document:
(i) which includes the promise to pay the sum named out of the particular fund and such amount may or may not be available with the fund; or
(ii) where promise to pay a sum depends upon happening of a condition or a contingency which may or may not happen.
When the payment is not dependent upon any condition envisaged above, the inclusive definition does not become operative.
(4)CONSIDERATION, PLACE, DATE, ETC
Though it is usual to mention in a note that it is made for value received, such a statement is not an essential feature of the note, and its omission will not render the instrument invalid.24 Even without that statement, consideration is presumed until the contrary is proved. The fact that sometimes the note recites the transaction, out of which, the obligation under it arises does not affect the character of the instrument.
It is also usual and proper to state in a note the place where it is made. However, omission to do so does not make the instrument invalid.
Again, a promissory note does not become invalid because it contains a promise to pay at a certain place. Such an instrument answers the definition of a promissory note as defined by the Act.25
Though it is usual to state the date on which a note is made, the date is not an essential requisite of a note, and want of date does not make it invalid. An undated instrument is deemed to have been dated on the date of its delivery.26 Under s 118(b) of the Act, until the contrary is proved, it will be presumed that every negotiable instrument bearing a date was made or drawn on that day.
It is, however, open to the holder of an instrument to show by parol evidence that the instrument was intended to operate from a future uncertain period, and not from the date of its delivery.27
An instrument is not invalid because it is ante-dated or post-dated or that it bears date on a Sunday.28 A post-dated promissory note is no less a promissory note because it can be negotiated, even during the period from its execution to the date, it bears on its face. There is no prohibition in the Act against post-dating, and a promissory
Page 10 of 17Promissory note.
note which is postdated is thus an effective negotiable instrument though it cannot be sued upon till that date. Post-dating of a promissory note does not denote per se that there is no consideration, because consideration can be paid at any time and need not necessarily be left to be paid on the date the note bears.29
In Mascarenhas v Mercantile Bank of India ,30 the Privy Council held that the debentures of the Bombay Improvement Trust were promissory notes. The plaintiff entrusted 41 debentures issued by the Trust and one debenture issued by the Bombay Municipality to the first defendant for collection of interest. The first defendant forged an indorsement in his own favour on the debentures indorsed them to the Alliance Bank (AB) and handed them over to the bank as security for debts owed by him. Subsequently, AB renewed the debentures into new ones in their own name. The first defendant then took a fresh loan from the Mercantile Bank of India (MBI) to pay AB and, on his instruction, AB indorsed the debentures in favour of, and delivered them over to, MBI, which retained them as security for the loan. The plaintiff came to know of the first defendant’s fraud, and sued to recover the debentures from MBI. The Privy Council, in dismissing the suit, held that the so-called debentures were promissory notes as defined by s 4 of the Act, and were, therefore, negotiable instruments under s 13 of the Act.
(5)STAMPING OF PROMISSORY NOTES AND BILLS OF EXCHANGE
Promissory notes are chargeable with stamp duty as specified, of the Indian Stamp Act 1899 Sch I, art 49. The duty depends upon the value of the note and whether it is payable on demand or at a future date. An unstamped promissory note is not admissible in evidence and no suit can be maintained thereon. However, once the note is admitted in evidence by a court, s 36 of the Stamp Act comes into operation, and it is not open either to that or a superior court to question that order.31
In terms of s 17 of the Stamp Act 1899, a promissory note should be stamped either before or at the time of its execution. Execution is defined to mean signing or affixing signature. It has been held that the stamp can be affixed and cancelled immediately after the signature; in such a case, the signing and stamping are continuous acts in the same transaction, or are practically simultaneous.32 This view was not accepted by Chagla J in Rohini Chandrakant Vijayakar v AI Fernandes .33 The decision of the Bombay High Court was, however dissented from in Kuruvilla v Varkey 34 and also in Devendrappa v K Basalingayya 35 in which refugee relief stamps were not available when the note was executed but were bought immediately thereafter and affixed alongside the revenue stamps thereon.
By virtue of art 372 of the Constitution of India a negotiable instrument executed or negotiated in the State of Jammu &; Kashmir should be stamped in accordance with the Jammu &; Kashmir Stamp Act 1977, and not the Indian Stamp Act 1899.36
Stamping of a promissory note (or a bill of exchange) need not be by using adhesive stamps. A note or bill could be executed on paper impressed with adequate stamps.37
Section 13 of the Indian Stamp Act 1899 requires that:
…[every instrument written upon paper stamped with impressed (or embossed) stamp shall be written in a manner that the stamp may appear on the face of the instrument and cannot be used for any other instrument.
Under s 15 of the Stamp Act 1899, an instrument written otherwise shall be deemed unstamped. Rule 7 of the Stamp Rules 1925 provides that where two or more sheets of paper on which stamps are engraved (or embossed) are used to make up the amount of duty chargeable in respect of any instrument, a portion of such instrument shall be written on each sheet so used.
Where a blank impressed stamp paper was attached to another impressed stamp paper on which a promissory note had been written, since the blank paper had not been cancelled (and the value of the stamp on the other one was not adequate), it was held that the promissory note was not duly stamped.38 Similarly, where a bill of exchange was written on one impressed stamp paper to which 16 other impressed stamp papers (which were blank except for the plaintiff bank’s rubber stamp and bill number) were attached to make up the value of the stamp fee required for the bill, the court held that the bill was to be treated as unstamped and was not admissible in evidence.39
In Alen Co-operative Bank Ltd v RH Windsor (India) Ltd ,40 a hundi was written entirely on one stamp paper to which were attached (to make up for the stamp duty) two more stamp papers bearing merely the maker’s signature. It was held that the hundi was to be treated as unstamped. In Union Bank of India v Ankur Corp ,41 a bill of exchange was written on one stamp paper. Three more stamp papers were attached thereto and the drawer and
Page 11 of 17Promissory note.
acceptor had signed them together with a notation that these were attached to the bill written on the first page. It was held that the bill was duly stamped.42
An adhesive stamp affixed to a promissory note should be cancelled in such a manner that it cannot be used again. Otherwise the note shall be deemed to be unstamped.43 The maker’s signature or initials with a date across the stamp would cancel the stamp effectively. The drawing of a single line across the stamp was held insufficient, and the note inadmissible in evidence.44
A promissory note which is made payable to a named payee (and not to his order or to bearer) and is attested attracts stamp duty as a bond under s 2(5)(b)of the Indian Stamp Act 1899.45
For the opposite view, some of the cases are RB Deshpande v BK Dave ,46 RT Bhandary v S Punja ,47 Khirodnath Gountia v Arjun Panda 48 and also Kadorilal v Sukhlal ,49 the decision in which was overruled by a Full Bench of the Madhya Pradesh High Court in Sant Singh v Madandas Panika ,50 where it was held that though an instrument satisfies the definition of a promissory note constrained in s 2(22)of the Indian Stamp Act 1899 read with s 4 of the Act if it is attested and is not expressly payable to order or bearer, it is also to be treated as a bond and is chargeable under s 6 of the Indian Stamp Act 1899 with the higher duty, ie, as a bond and not as a promissory note.
An improperly stamped promissory note, containing a statement of the amounts due on a previous note, cannot be admitted in evidence to prove the amount of liability and thus save limitation in respect of the previous note. In a suit on such an inadmissible note, an amendment to the pleading so as to fall back on the original cause of action cannot be permitted if the suit on the basis of the earlier note is time-barred, either on the date of suit or of the amendment petition, and no special circumstances exist.51
However, an acknowledgement made on the back of insufficiently stamped promissory note is admissible in evidence.52 In Saffia Khathoon v Kunhambu ,53 the Division Bench of Madras High Court held that although document (Ext A1) is inadmissible as a promissory note the endorsement subsequently made in the document by the defendant recording the factum of the payments made by him towards the suit debt are admissible in evidence since they do not form an integral part of the promissory note proper and such endorsement did not require to be stamped.
Similarly where an unstamped promissory note was taken in respect of a pre-existing debt and a part-payment was indorsed thereon, it was held that the indorsement was an acknowledgement of liability under s 18 of the Limitation Act 1963, and started a fresh period of limitation. There is a vital distinction between an acknowledgement under the Limitation Act 1963 and an acknowledgement under the Indian Stamp Act 1899,Sch I, art 1.54
Section 19 of the Stamp Act 1899 requires that the first holder in India of a promissory note made outside India shall, before he indorses, transfers or otherwise negotiates the same in India, affix thereto the proper stamp, and cancel the same. Where the plaintiff is the payee, there is no question of indorsement, transfer or negotiation of the note by the first holder in India, and hence the section is not attracted.55
(6)SUIT ON THE ORIGINAL CONSIDERATION
A question arises whether a creditor (who is given a negotiable instrument in respect of a debt by the debtor) can, in the event of non-repayment of the debt, sue the debtor on the debt, or whether his rights would be confined only to those he may have on the instrument itself.
The issue assumes particular importance if the instrument is inadmissible in evidence eg, as being unstamped or is time-barred, and the creditor cannot proceed thereon against the debtor. Generally, the delivery of a note or bill in respect of a debt operates as conditional payment only, unless the parties agree otherwise. Where it is a conditional payment, the debt is discharged when the instrument is paid. During the currency of the instrument, if and so long as the rights of the parties under the instrument subsist and are enforceable, the cause of action on the original consideration for money lent remains suspended. If the instrument is not paid at maturity, or rights under it are not enforceable, the original cause of action to recover the debt revives and the creditor can sue the debtor on that basis. However, this is subject to the qualification that the creditor has not indorsed or lost or parted with the instrument under such circumstances as to make the debtor liable upon it to a third party, or the creditor has done some act or omission of his in relation to the instrument, destroyed the debtor’s right of recourse against a prior
Page 12 of 17Promissory note.
party to it, or discharged him from liability, eg, where the creditor has not given proper notice of dishonour to the debtor who is an indorser.56
If the instrument has been given not as conditional payment but as collateral security, the lender is entitled to sue upon the original consideration independent of the security and without regard to any rights he may possess under the instrument.57
Where an instrument is executed in respect of an antecedent debt, there would be a strong presumption that it is taken only as a collateral security or conditional payment. Based on the ruling of a Division Bench of the Kerala High Court in Saffia Khathoon v Kunhambu ,58 it was held in PC Gopinathan Nair v Appu Pillai 59 that where a promissory note is executed by the debtor merely in acknowledgement of a loan he has already obtained a suit by the creditor on the original cause of action cannot be dismissed on the ground that the note is defective and inadmissible in evidence. The Division Bench had held that a creditor is not precluded from pursuing his ordinary legal remedy of enforcing loan repayment by a suit on the original cause of action. The Bench observed that the Indian Stamp Act 1899 is a fiscal measure to secure revenue for the state, and that its provisions are not intended to arm a litigant with a weapon of technicality to deny his contractual obligation, and defeat the just claim of an opponent.
Judicial opinion has differed in cases where the loan transaction and the delivery of the instrument, usually a promissory note, were simultaneous or contemporaneous or so close in point of time as to form part of one transaction. One extreme view has been that in such cases, the creditor cannot sue on the debt since it would not be correct to say that the transaction regarding advance of the loan was separate and distinct from the execution of the instrument.60
A test that has been applied by some courts in such cases is whether the instrument embodies all the terms of the contract of debt. In Sheikh Akbar v Sheikh Khan ,61 Garth CJ observed:
But when the original cause of action is the bill or note itself and does not exist independently of it as for instance, when in consideration of depositing money with B, B contracts by a promissory note to repay with interest at six months date, there is no cause of action for money lent otherwise than upon the note itself because the deposit is made upon the terms contained in the note and no other. In such a case, the note is the only contract between the parties, and if for want of proper stamp or some other reason, the note is not admissible in evidence, the creditor must lose his money.
It has been held that where the loan is advanced simultaneously with the execution of a promissory note which contains all the terms of the contract (and the parties agree that it should be the sole repository of evidence of the liability), the creditor can sue only on the note. If the note is not duly stamped, he cannot fall back on the original consideration. Oral evidence of the debt cannot be admitted under s 91 of the Indian Evidence Act 1872.62
A suit on the original cause of action would lie, provided the plaint alleges and the evidence shows that the promissory note did not incorporate all the terms of the loan contract, and that the note was executed as a conditional payment or collateral security, as was the majority view in L Sambaiva Rao v T Balakotiah .63 Also if the instrument embodies all the terms of the contract but is improperly stamped no suit on the debt will lie, being barred by s 91 of the Indian Evidence Act 1872. Nor can s 70 of the Indian Contract Act 1872 be invoked in such case on the theory of implied promise, money had and received, quasi-contract, unjust enrichment, or other equitable doctrine. While agreeing with the majority view, Kuppuswami J stated that, even where the borrower executes a promissory note in respect of a past debt, it may be the intention of the parties that the debt is discharged by the execution of the note, which alone should thereafter be treated as constituting the contract between the parties. In such a case, there is accord and satisfaction of the debt. The terms of the contract are then reduced to a document within the meaning of s 91 of the Indian Evidence Act 1872, and it is not permissible to prove the contract terms by any evidence except the note, and if the note is inadmissible in evidence, a suit must fail. This decision was relied on in B Venkataiah v VV Ramana Reddy ,64 where it was stated that if the borrowing and the execution of the note form part of an integral transaction there would be no separate and independent existence for the original cause of action which gets merged in the contract embodied in the note as there was accord and satisfaction of the debt.
In some other cases, where the granting of the loan and the execution of the note were simultaneous, the courts have proceeded on the basis that the note was given as collateral security only, and not in complete accord and satisfaction of the debt.65
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It has been held that in special circumstances, the plaintiff may be allowed to amend his pleading, so as to fall back on the original cause of action, where a suit on a promissory note given in respect of a debt is time-barred.66
Where a note executed in respect of an antecedent debt is inadmissible in evidence, the plaintiff can be permitted to fall back on the original cause of action, provided it is within the period of limitation.67
In PL CT SP Subramaniam Chettiar v Muthiah Chettiar ,68 the defendant executed a promissory note for the consolidated amount of principal and interest he owed to the plaintiff on two earlier notes on which indorsements were made to the effect that they were discharged by the execution of the third note. The third note was not adequately stamped and the plaintiff could not sue the defendant thereon. The plaintiff, therefore instituted a suit against the defendant on the two earlier notes, claiming that the indorsements thereon served as acknowledgements of the defendant’s liability and that the suit was in time, having been filed within three years from the date of the indorsements. Accepting this contention, the Madras High Court held that in the case of an insufficiently stamped promissory note, it is open to the promisee to rely on the original cause of action. The indorsements on the two old notes amounted to an acknowledgement of a subsisting liability and the substitution of a new security. Even where the transactions are contemporaneous, if the original cause of action is considered separate from and independent of the note, the creditor is not, where the note is inadmissible in evidence, barred from suing on the original cause of action by the fact that it arose out of the same transaction in the course of which the note was executed.69
In a suit on a promissory note, no personal decree can be granted against defendants who are not parties to the note and no privity of contract is established between them and the plaintiff.70
1 Jetha Parkha v Ramchandra (1892) 16 Bom 689.
2 Rangaswamy v Govindaswamy AIR 1961 Mad 434 [LNIND 1960 MAD 313].
3 Krishna Devi v Firm Tikayaram Lekhraj Batra (2002) 1 BC 354 [LNIND 2001 MP 203].
4 Hamdard Dawkhana (Wakf), Delhi In Re 1968 AIR Del 1.
5 Kadori Lal v Sukhlal AIR 1968 MP 4 [LNIND 1967 MP 30].
6 Laxman Krishanji Mustilwar v Ramesh Amarchand Agrawal (2002) 1 BC 406.
7 Jagjivandas v Gumanbhai AIR 1967 Guj 1 [LNIND 1965 GUJ 84].
8 Chhabildas Mangaldas v Luhar Kohan Arya AIR 1967 Guj 7 [LNIND 1965 GUJ 136]; Jagjivandas v Gumanbhai AIR 1967 Guj 1 [LNIND 1965 GUJ 84]; Jaikumar Shivlal Shah v Motilal Hirachand Gandhi AIR 1973 Bom 27 [LNIND 1971 BOM 55].
9 Bahadurunnisa Begum v Vasudev Naik AIR 1967 AP 123 [LNIND 1965 AP 271].
10 General Clauses Act 1897,s 3(65).
11 Brooks v Elkins (1836) 2 M&W 74; Hooper v Williams (1848) 2 Exch 20.
12 Marseilles Extension Rly and Land Co, Smallpage’s and Brandon’s Cases In Re (1885) 30 Ch D 598 13 Cashorne v Dutton (1727) 1 Sel NP (13th edn) p 329.
14 Hopkins v Abbot (1875) LR 19 Eq 222.
15 Sibree v Tipp (1846) 15 M&W 23.
16 Hari Prasad v Nathuni Sahu AIR 1962 Pat 165.
17 See the Negotiable Instruments Act 1882,s 1.
18 Home v Redfearn (1838) 4 Bing NC 433.
19 Moffat v Edwards (1841) Car & M 16; Fellette v Moore 4 Ex 410.
20 Sir Mohammed Akbar Khan v Attar Singh AIR 1936 PC 171; Claydon v Bradley [1987] 1 All ER 522, Claydon v Bradley [1987] 1 WLR 521 (CA).
21 Bachan Singh v Ram Avadh AIR 1949 All 713; Brij Kishore Rai v Lakhan Tewari AIR 1978 All 314.
22 Barju Das v Krishna Chandra Misra AIR 1953 Ori 104 [LNIND 1950 ORI 53].
23 Cladon v Bradley [1986] The Times, 15 December.
24 Surjit Singh v Ram Ratan Sharma AIR 1975 Gau 14.
25 Mohinder v Nagina (1932) ILR Lah 22.
26 Bal Mukund v Munnalal Ramjilal AIR 1970 Punj 516.
27 Laxmibai v Ganesh Raghunath (1901) ILR 25 Bom 373.
28 Tirupathi v Rama Reddi (1898) ILR 21 Mad 49; Maneckchand v Jamoona Das (1882) 8 Cal 645.
29 Muthu Gownder v Perumayammal AIR 1961 Mad 347 [LNIND 1960 MAD 103].
30 Shrinivas Pansari v Hari Prasad Mehra AIR 1983 Pat 321.
31 Laxmibai v Ganesh Raghunath (1901) ILR 25 Bom 373.
32 Kundan Mal v Nand Kishore AIR 1994 Raj 1 (where the document was held to be a receipt); Gordhan Singh v Suwalal AIR 1959 Raj 156; Nanga v Dhanna Lal AIR 1962 Raj 68 [LNIND 1961 RAJ 56].
33 Mohammed Akbar Khan (Sir) v Attar Singh AIR 1936 PC 171.
34 Chhabildas Mangaldas v Luhar Kohan Aria AIR 1967 Guj 7 [LNIND 1965 GUJ 136].
35 TA Umapathy v TA Masilamani AIR 1987 Mad 156 [LNIND 1986 MAD 225].
36 R Kannusamy v VVK Swamy &; Co AIR 1988 Mad 336 [LNIND 1988 MAD 249].
37 Chadwick v Allen (1725) 1 Stra 706.
38 Green v Davis (1825) 4 B & C 235.
39 Casborne v Dutton (1727) 1 Sel NP (13th edn) 329.
40 Yerruganti Chinna v Kota Egiri (1913) 5 Mad WN 1005.
41 Sushil Chandra v Wali Ullah AIR 1941 All 264.
42 Balmukund v Ambadas AIR 1946 Nag 81.
43 Thenappa Chettiar v Andiyappa Chettiar AIR 1971 Mad 290 [LNIND 1970 MAD 103].
44 Ramachandra v Sesha (1894) ILR 17 Mad 85.
45 Ramchandar v Juggotmonmohiney (1879) ILR 4 Cal 283, p 294; State Bank of Hyderabad v Ranganatha Rathi AIR 1966 AP 215 [LNIND 1964 AP 39].
46 Jivatlal v Lalbhai (1942) 44 Bom LR 495.
47 Annamalai v Velayuda (1916) ILR 39 Mad 129.
48 Ruff v Webb (1794) 1 Esp 129.
49 Sreenivasan v Subbarama Sastrikal AIR 1988 Ker 112 [LNIND 1987 KER 298].
50 B Krishnayya v Chaparala AIR 1977 NOC 42 (AP).
51 Bhagwandas v Chaganlal (1922) 46 Bom LR 411.
52 Balck v Pilcher (1909) 25 TLR 497.
53 (1794) 5 TR 482, p 485.
54 Hill v Halford (1801) 2 Bac 413.
55 Worley v Harrison (1835) 5 Neo & M 173.
56 Bharata Pisharodi v Vasudevan Nambudri (1907) ILR 27 Mad 1; Dhondbhai v Aunaram (1889) ILR 13 Bom 669.
57 Roberts v Peake (1757) 1 Burr 323; see also illust (g) to the section.
58 Bardesleyt v Baldwin (1741) 3 Stra 1151; Pearson v Garrett (1643) 4 Mod 242[see illust (f) to s 4].
59 Nathoobha v Himatlal (1921) 23 Bom LR 1231 [LNIND 1921 BOM 139].
60 Sakaran Namboodiri v Mathai Abraham AIR 1973 Ker 22 [LNIND 1972 KER 108].
98 Bolton v Richards (1795) 6 TR 139; Ex p Mason v (1815) 2 Rose 225; Martin v Chantry (1784) 2 Stra 1271.
99 Dickie v Singh 1974 SLT (Notes) 3 relying on the Privy Council decision in Sir Mohammed Akbar Khan v Attar Singh [1936] 2 All ER 545.
1 Syndic in Bankruptcy of Salim Nasrallah Khoury v Khayat [1943] AC 507 , Syndic in Bankruptcy of Salim Nasrallah Khoury v Khayat [1943] 2 All ER 406 (PC) [decided on the Palestine Bills of Exchange Ordinance 1929 (No 47 of 1929)]; and see John Burrows Ltd v Subsurface Surveyors Ltd [1968] SCR 607, John Burrows Ltd v Subsurface Surveyors Ltd 68 DLR (2d) 354 (Can SC); quoted in Halsbury’s Law of England.
4 Jagjivandas v Gumanbhai AIR 1967 Guj 1 [LNIND 1965 GUJ 84].
5 Emperor v Kallu Mal (1903) All WN 174; Lal Jethaji v Bhagu Gopal (1901) 3 Bom LR 699.
6 Ambalal Purshottamdas &; Co v Jawarlal (1955) ILR 1 Cal 441.
7 Mahant Damodar Das v Benares Bank Ltd (1920) 5 Pat LJ 536.
8 Willis v Barrett (1816) 2 Stark 29.
9 Yeo Eng Paw v Firm of Chetty 5 LBR 102.
10 Pomuswami Chettiar v Vellaimuthu Chettiar (1957) 1 MLJ 179.
11 Browne v De Winton (1848) 17 LTCP 281; Gay v Landal (1848) 17 LTCP 286 [see Bills of Exchange Act 1882,s 83(2)].
12 Absolon v Marks [1847] 11 QB 19 .
13 Jetha Parkha v Vithoba (1892) ILR 16 Bom 689, p 698.
14 AKH Haji v Appukutti AIR 1969 Ker 189 [LNIND 1968 KER 127]; Kochuthressia v Devadas AIR 1988 Ker 284 [see also expln (i) to s 13(1)].
15 Bahadurunnisa Begum v Vasudev Naik AIR 1967 AP 123 [LNIND 1965 AP 271]; P Ramana Reddy v K Rukmaniamma (1968) 1 Andh WR 221; P Vajramma v M Agaiah AIR 1979 AP 2; KL Lona v Dada Haji Ibrahim Hilari AIR 1981 Ker 86.
16 Kartey v Iftikhar Ahmed AIR 1981 All 386.
17 Raj Bahadur Singh v Mahadeo Prasad AIR 1981 All 58.
18 Nanga v Dhannalal AIR 1962 Raj 68 [LNIND 1961 RAJ 56](FB); Chunilal Tukki Mal v Mukant Lal Ramchandra AIR 1968 All 164 [LNIND 1967 ALL 8].
19 Laxman Krishanji Mustilwar v Ramesh Amarchand Agrawal (2002) 1 BC 406.
20 State Bank of Hyderabad v Ranganatha Rathi AIR 1966 AP 215 [LNIND 1964 AP 39]. See also notes on ‘Stamping of promissory notes’.
21 Chhabildas Mangaldas v Luhar Kohan Arya AIR 1967 Guj 7 [LNIND 1965 GUJ 136]; Jagjivandas v Gumanbhai AIR 1967 Guj 1 [LNIND 1965 GUJ 84]; Jaikumar Shivlal Shah v Motilal Hirachand Gandhi AIR 1973 Bom 27 [LNIND 1971 BOM 55].
22 Anant v Ratnagiri District Local Board (1952) 54 Bom LR 841 [LNIND 1952 BOM 42].
23 (2000(1 BC 406.
24 Hatch v Trayes (1840) 11 A&E.
25 Deva Ratna v Fakir Adam (1902) 4 Bom LR 428.
26 Giles v Bourne (1817) 6 M&S 573.
27 Davis v Jones (1856) 25 LJ CP 91.
28 Bills of Exchange Act,s 13(2); Pasmore v North (1811) 13 East 517; Usher v Dancy (1814) 4 Camp 97.
29 Seth Fulchand v Seth Laxminarayan AIR 1953 Nag 233.
30 (1932) 34 Bom LR 1.
31 Javer Chand v Pukhraj Surana AIR 1961 SC 1655 [LNIND 1961 SC 207], followed in Brij Kishore Rai v Lakhan Tewari AIR 1978 All 314.
32 Surij Mull v Hudson (1901) ILR 24 Mad 259.
33 AIR 1956 Bom 421.
34 (1969) ILR 2 Ker 630.
35 AIR 1979 Kant 21 [LNIND 1978 KANT 212].
36 Gulab Nabi Mathanji v Lal Md Bangree AIR 1975 J&K 50.
37 G Hanumanthappa v S Bala Rangaiah AIR 1987 Kant 285 [LNIND 1987 KANT 17].
38 Mohanlal Kanailal v Keshrimull Chordiya AIR 1914 Mad 358.
39 Central Bank of India v Light Gauge Metal Products (P) Ltd (1987) 61 Comp Cas 312.
42 Dena Bank v Gladstone Lyall &; Co Ltd (1985) 87 Bom LR 477.
43 See the Indian Stamp Act 1899,s 12.
44 Dhirajlal v Ranchhod (1978) 76 Bom LR 189.
45 Jaikumar v Motilal AIR 1973 Bom 27 [LNIND 1971 BOM 55].
46 AIR 1972 Mys 159.
47 AIR 1972 Mys 344.
48 AIR 1972 Orissa 95.
49 AIR 1968 MP 4 [LNIND 1967 MP 30].
50 AIR 1976 MP 144 [LNIND 1976 MP 67].
51 Y Veeraiah v Kawali Mining Corp AIR 1973 AP 170 [LNIND 1972 AP 6]; Nageswara Rao v Narayana Murthy AIR 1938 Mad 75 [LNIND 1937 MAD 224].
52 Janardhan v TA Aneefa Rawther (2005) 3 Bank CLR 126 (Ker).
53 1977 Ker LT 448 (Mad) (DB).
54 Chowdary Punamchand Hastimal Co v S Venkataswami AIR 1972 AP 282 [LNIND 1971 AP 85]; PL CT SP Subramaniam Chettiar v Muthaiah Chettiar AIR 1984 Mad 215 [LNIND 1983 MAD 35].
55 R Kannusamy v VVK Swamy &; Co AIR 1988 Mad 336 [LNIND 1988 MAD 249], relying on Rattanchand v Kharaitiram AIR 1955 Punj 88.
56 Sheikh Akbar v Sheikh Khan (1881) ILR 7 Cal 256; Chit Maung v Roshan NMA Kareem Comer &; Co AIR 1934 Rang 389 (FB).
57 Sarajoo Prasad v HT Rampayari (1950) ILR Pat 493.
58 (1977) KLT 448.
59 (1992) 75 Comp Cas 263.
60 Ramjas v Shahabuddin (1927) ILR Lah 89; Shrikishan v Bhanwarlal AIR 1974 Raj 96.
61 (1881) ILR 7 Cal 256.
62 Srinivasa Gowda v Siddiah AIR 1971 Mys 144.
63 AIR 1973 AP 342 [LNIND 1972 AP 177](FB).
64 AIR 1985 AP 26 [LNIND 1984 AP 111].
65 Chit Maung v Roshan NMA Kareem Comer &; Co AIR 1934 Rang 389 (FB); Perumal v Kamakshi AIR 1938 Mad 185 [LNIND 1937 MAD 82](FB); Dewan Chand v Jay Pee Finance Corpn AIR 1977 J&K 61.
66 Official Assignee v Kuppuswami Naidu AIR 1934 Mad 785 (FB).
67 Gangaram v Keshav Deo AIR 1960 Raj 10 [LNIND 1958 RAJ 34]; Janardhan v TA Aneefa Rawther (2005) 3 Bank CLR 126 (Ker).
68 AIR 1984 Mad 215 [LNIND 1983 MAD 35], relying on Pandit Saligram v Radhey Shiam AIR 1931 All 560 followed in V Kondamma v KK Venkataraydu (1938) 2 MLJ 846 [LNIND 1938 MAD 90].
69 Ram Sarup v Jasoda Kunwar (1912) ILR 34 All 158; Anwaruddin v Pathim Bai AIR Mad 379
70 PR Subramania v Lakshmi Ammal AIR 1974 SC 1930.
Bill of exchangeKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
5. Bill of exchange.- 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.
A promise or order to pay is not ‘conditional’, within the meaning of this section and s 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
The sum payable may be certain, within the meaning of this section and s 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be a ‘certain person’, within the meaning of this section and s 4, although he is misnamed or designated by description only.71
(1)Requisites Of Bill Of Exchange
The definition of a bill of exchange under the Act is fairly exhaustive and almost covers all the aspects related to it at one place. The English Act also gives almost identical definition.72 A bill of exchange requires three parties:
(i) the drawer, ie, the person who is the maker of the bill and who gives the order;
(ii) the drawee, ie, the person who is directed to pay the bill and who on affixing his signature becomes the acceptor; and
(iii) the payee, ie the person to whom or to whose order the amount of the instrument is payable, unless the bill is payable to bearer.
It is, however, not necessary that three separate persons should answer the description of drawer, drawee, and payee. One person may fill any two of these positions. Thus, one person may become the drawer and payee;73 likewise one person may become the drawee and payee if he is acting in two different capacities.74 Lastly, the drawer may also be the drawee. In this case, as also in the case of the drawee being a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note.75 The section requires three parties, drawer, drawee, and payee to be pointed out in the bill with reasonable certainty. A demand draft drawn by one office of a bank upon another office may be treated as a bill of exchange. A bill can be drawn by more than one drawer, in which case they are jointly liable. Likewise, a bill may be drawn on more than one drawee, but a bill cannot be drawn with a liability in the alternative. A bill of exchange is sometimes called a draft. An analysis of the definition shows the following essential requisites of a bill of exchange:
(i) A Bill of Exchange Must be in Writing
A bill of exchange may be written in any language, and any form of words may be used, provided the requirements of this section are complied with.76
(ii) A Bill of Exchange Must Contain an Order to Pay
When a bill of exchange is drawn, the presumption is that there are funds in the hands of the person to whom the order is given, which are payable in any case to the person giving the order. The essence of a bill of exchange is that the drawer orders the drawee to pay money to the payee. As a bill of exchange is an order, it is necessary that it must, in its terms, be imperative and not perceptive. The use of any particular form or words is not essential and any words would do if there is a demand. To frame a bill, therefore, in such a manner that it might be treated as a mere request would cause inconvenience and uncertainty. However, the insertion of a term of politeness or a courteous expression like ‘please pay affixed to the order’ will not invalidate an instrument purporting to be a bill of exchange. Thus, an instrument running ‘Mr AB will much oblige Mr CD by paying to the order of P’ was held good as a bill.77
Excessive terms of politeness may lead to the construction that the communication contained in the bill was not an order. Thus, where a document was drawn in the form: ‘Mr Little, please do let the bearer have seven pounds and place into my account, and you will oblige…’, was held not to be a demand made by a party having a right to call on the other to pay. The fair meaning to put on such an instrument was stated to be, ‘…you will oblige me by doing it’.78 The direction to the drawee, however, need not be expressed by the word ‘pay’, but any other word conveying the idea of payment, eg credit in cash, will be sufficient.79 A mere request to pay to an account was held not amounting to an order.80
In pursuance of an agreement to lend money, A gave his creditors some ‘chits’ for certain sums, addressed to B and required him to pay the amounts mentioned therein. B did so and sued A for the amount so advanced. It was held that chits were neither bills of exchange, nor cheques as the agreement did not make B a banker.81
(iii) The Order Contained in the Bill Should be Unconditional
It is the essence of a bill that it should be payable at all events, hence this requisite must appear on its face with reasonable certainty. A bill of exchange cannot be drawn so as to be payable conditionally. The drawer’s order to the drawee must be unconditional, and should not make the payment of the bill dependent on some contingency. Where an instrument is payable on a contingency, it does not cease to be invalid by the happening of the event before the expiry of the period fixed for the performance of the obligation, for the instrument must be valid ab initio, and carry its validity on its face.82 A conditional bill of exchange is invalid. The addition of the words as per agreement does not make a note conditional. 83
The following instruments were held not valid bills of exchange, ie, instruments containing an order to pay:
(i) ‘.. .ninety days after sight or when realized…’.84
(ii) ‘…sixty days after the arrival of the ship ‘Victory’ at Mumbai…’.85
(iii) ‘When I am in prosperous circumstances…’.86
(iv) ‘…on condition that a receipt form at the too thereof is duly signed…’.87
(v) ‘When I marry…’.88
(vi) ‘Debt that may come into existence at a future date…’.89
(vii) ‘Rs 10,000 on the sale of 3 bales of cotton…’.90
(viii) ‘if we would have means to pay it…’.91
(iv) Bills Payable Out of a Particular Fund
On the same principle, a bill or note expressed to be payable out of a particular fund is conditional and invalid, because it is uncertain whether the fund will be in existence or prove sufficient when the bill becomes payable. Thus, a bill containing an order to pay ‘out of money due from A as soon as you receive it’ or ‘out of money remaining in your hands belonging to X Company’, is invalid.92 Similarly, an order to pay ‘out of the moneys now due or hereafter to become due to me under the will of my late father and before making any payment to me thereout’ is not a valid bill,93 nor is the promise to pay out of the proceeds of a sale a valid note.94
However, an unqualified order to pay, coupled with an indication of the particular fund, out of which the drawee is to reimburse himself, or of a particular account to be debited with the amount, is not conditional and is therefore valid.95 Thus, a bill containing an order to pay ‘against cotton per Victory or being a portion of a value as under
Page 3 of 5Bill of exchange
deposited in security for the payment hereof or against credit No 20, and place it to account as advised per Co,’ constitutes a valid bill.96
(v) A Bill of Exchange Must be Signed by the Drawer
A bill is not valid unless the drawer signs it and if the drawer has not signed it, no action can be maintained against the acceptor or any other party who has affixed his signature thereto. If the drawer is unable to write his name, he can sign by a mark in lieu of a signature.97 Thus, if a bill is accepted by the drawee without the drawer’s signature and negotiated with a third party, the instrument is not a bill of exchange.98 However, the signature may be added at any time after the issue of the bill but, until it is so added, the instrument remains inchoate and ineffectual. A document in the form of a bill signed by the acceptor but not by the drawer is not a bill, but may be valid as an acknowledgement of debt.99
(vi) The Drawee Must be Certain
The next requisite is that the instrument must order a person to pay the amount of the bill. The person to whom the bill is addressed is called the ‘drawee’, and he must be named or otherwise indicated in the bill with reasonable certainty. In the interest of all parties, it seems absolutely indispensable that the drawee must be indicated in the bill with reasonable certainty, so that the payee knows the person to whom he should present the instrument for acceptance and payment. Likewise, the person who accepts and pays a bill on account of the drawer should know with reasonable certainty whether it is addressed to him. Thus, where an instrument is drawn in the form of a bill, and is addressed to no one in particular, it is not a valid bill, even though a person writes his acceptance on it. However, such an instrument may be treated as a promise to pay, the acceptor being liable as the maker of a note.1
However, where an instrument was drawn in the form of a bill, not containing the name of the drawee, but expressed to be payable at a certain place, and was accepted by a person residing at that place, it was held to be a valid bill and hence the acceptor was liable to pay the amount. It was held that, by his acceptance, the acceptor acknowledged that he was the person to whom the bill was directed.2
A bill cannot be addressed to two or more drawees in the alternative, because it would create difficulties as to recourse if the bill were dishonoured.
(vii) The Sum Payable Must be Certain
The sum payable is certain even though it is required to be paid with interest, or at the indicated rate of exchange or by installment with the proviso that on the default in payment of instalment, the whole amount shall become due and payable.3 If at the time of the issue of a cheque the amount is not specified and payee is uncertain, then the cheque is not bill of exchange and does not become a valid negotiable instrument.4
In England, where a bill or note is expressed to be with interest, but no rate is prescribed, a court would probably allow the appropriate commercial rate.5 An instrument payable with lawful interest is thus not valid for uncertainty.6
The sum may also be expressed to be payable by stated instalments with or without a provision that upon default in payment of any installment, the whole shall become due,7 but the dates of the instalments must be stated.8
The sum may also be expressed to be payable according to an indicated rate of exchange or according to a rate of exchange to be ascertained as directed by the instrument.9
A bill to pay the proceeds of the sale of a consignment of goods even when valued by the drawer at a definite sum is a good bill.10
(viii) The Instrument Must Contain an Order to Pay Money and Money Only
The medium of payment should be the legal tender, ie, money and nothing else. An instrument containing order to pay money along with some other thing or merely some other thing is not a valid bill. An instrument ordering the delivery up of houses and a wharf in addition to the payment of a sum of money is not a valid bill.11
(ix) The Payee Must be Certain
A bill must state with certainty the person to whom payment is to be made. A bill of exchange ought to specify to
Page 4 of 5Bill of exchange
whom the same is payable, for in no other way can the drawee, if he accepts it, know to whom he may properly pay it, so as to discharge himself from all further liability.12
Where a bill is payable to bearer, the payee is indicated with certainty. Bills are rarely drawn payable to bearer, but cheques are commonly so drawn. A bill cannot be drawn payable to bearer on demand.13
Where a bill is not payable to bearer, the payee must be named or otherwise indicated therein with reasonable certainty. A bill of exchange may be made payable to two or more payees jointly or it may be made payable in the alternative to one of two, or one or some of several payees.14 A bill may be drawn payable to the order of the drawee, but such a bill cannot be enforced until the drawee has indorsed it away.15
Where in a bill the drawee or payee is misnamed or misdescribed, extrinsic evidence is admissible to identify him.16
(2)Bills Of Exchange And Promissory Notes Compared
For most purposes, the rules that apply to bills of exchange are, in general, applicable to promissory notes. However, there are certain points of difference between them. These are:
(i) The liability of the maker of a promissory note is primary and absolute, but the liability of the drawer of a bill of exchange is secondary and conditional.17
(ii) The maker of a promissory note corresponds, generally, to the acceptor of a bill of exchange (s 32 of the Act). Hence, unless a promissory note is expressed to be payable at a certain place, presentment is not necessary to make him liable, and notice of dishonour is not required.
(iii) The position of the maker of a note, however, differs from the acceptor’s, in that a note cannot be made conditionally, while a bill may be accepted conditionally. The reason for this distinction is that the acceptor of a bill is not the originator of the bill and his contract is supplementary, being superimposed on that of the drawer, while the maker of the note originates the instrument.
(iv) A promissory note indorsed by the payee corresponds with an accepted bill payable to the drawer’s order, the payee of the promissory note having the same rights and responsibilities as the drawer of an accepted bill.
(v) The maker of a promissory note stands in immediate relation with the payee, whereas the drawer of an accepted bill of exchange stands in immediate relation with the acceptor and not the payee.
(vi) The following provisions relating to bills do not apply to notes, namely; presentment for acceptance, acceptance, acceptance supra protest, and bills in sets.
(vii) Foreign bills must be protested for dishonour, when such protest is required by the law of the place where they are drawn.18
71 See the Bills of Exchange Act 1882,ss 3, 6(1), 7(1), 9(1)and11.
72 Section 3-A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.
87 Bavins &; Sims v L &; SW Bank Ltd [1900] 1 QB 270 ; Capital and Counties Bank v Gordon [1903] AC 240 , p 252. See, however, Nathan v Ogdens Ltd (1905) 93 LT 553 a bill with almost similar words was held valid.
88 Pearson v Garett (1693) 4 Mod 242.
89 Banbury v Lesset (1744) 2 Stark 1211.
90 Hill v Halford (1801) 2 B&P 413.
91 Robert v Peake (1757) I Burr 323.
92 Jenney v Herele (1723) 2 Ld Raym 1361; Dankes v Deloraine (1770) 3 Willes 207.
93 Fisher v Calvert (1879) 27 WR 301.
94 Hill v Halford (1801) 2 Bos & P 413.
95 Macleod v Snee (1727) 2 Stra 762; Re Boyse, Crofton v Crofton, Canonge’s Claim (1886) 33 Ch D 612 .
96 Griffin v Weatherby [1868] LR 3 QB 753; Haussouiller v Hartsinek (1798) 7 TR 733; Macleod v Snee (1726) 2 LD Raym 1481; Guaranty Trust Co of New York v Hannay &; Co [1918] 1 KB 43 , 45, Guaranty Trust Co of New York v Hannay &; Co [1918] 2 KB 623 ; Bayse In Re (1886) 33 Ch D 612 , p 621.
97 George v Surrey (1830) M&M 516; Baker v Dening (1838) 8 A&E 94. See the General Clauses Act 1897,s 3(52).
98 Mccall v Taylor 34 LJ CP 365; Stoessiger v SE Rly Co (1854) 3 E&B 549; Goldmid v Hampton (1858) 5 CBNS 94.
99 Lawson’s Executors v Watson 1907 SC 1353.
1 Fielder v Marshall 30 LJCP 158; Peto v Reynolds (1854) 9 Ex 410 ; see also 11 Ex 418.
2 Gray v Milner (1819) 2 Taunt 739.
3 Carlon v Kenealy (1843) 12 M&W 139.
4 Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker), Capital Syndicate v Jameela (2003) 3 Bank CLR 434 (Ker)
5 Halsbury’s Laws of England referring to Practice Direction (Claims for Interest) [1983] 1 All ER 934, [1983] 1 WLR 377 .
6 Warrington v Early (1853) 23 LJQB 47.
7 Carlon v Kenealy (1843) 12 M&W 139.
8 Moffat v Edwards (1841) Car & M 16.
9 Hodgson &; Co and Wigglesworth &; Co Ltd In Re [1920] WN 198.
10 Jones v Simpson (1823) 2 B&C 318; See also notes on ‘Certain sum’ under s 4.
11 Martin v Chauntry (1747) 2 Stra 1271.
12 Storey on Bills,s 14.
13 Reserve Bank of India Act 1934,s 31.
14 See s 13 of the Act.
15 Holdsworth v Hunter (1830) 10 B&C 449.
16 Willis v Barret (1816) 2 Stark 29; Jacobs v Benson (1855) 20 Maine R 132.
17 See ss 30 and 32 of the Act
18 For specimens of bills of exchange see appendix II.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
6 Cheque
19 [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.]20
Before the amendment, the definition read as ‘a ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.’
(1)BROADER DEFINITION AND SCOPE OF CHEQUE
The definition of cheque has been broadened to include the electronic image of a truncated cheque, and a cheque in the electronic form. The Information Technology Act introduced in the year 2002 recognises electronic transfers and digital signatures. The present amendment in the definition of cheque was also required to bring the Act in tune with the Information Technology Act 2002. Despite the amendment, the original basic definition of the cheque has been retained and the definition has only been enlarged to include cheques in the above form as well.
A cheque is a bill of exchange drawn on a specified banker and is payable only on demand. The necessary parties to a cheque are the same as those to a bill of exchange, save that the drawee must be a banker. The banker does not become acceptor of the cheque, but there is an implied contract between the banker and his customer that he will honour cheques drawn upon him by his customer up to the amount of the funds of his customer which he has in his hands or, where there is an agreement to let the customer overdraw, up to the limits of the amount of the overdraft agreed on. The banker’s liability is to the drawer (his customer) only; the mere dishonour of a cheque gives no right of action to anyone other than the drawer.21
As a cheque is a species of bill of exchange, the definition implies that it must be drawn in accordance with the requirements of s 5 of the Act. No particular form of words is required and an instrument would be a cheque if it conforms to the requisites of a bill of exchange. Accordingly, a cheque must be signed by the drawer, and must give an unconditional order to a specified banker for payment on demand of a certain sum of money to or to the order of a specified person or to the bearer of the instrument.
All cheques are bills of exchange, but all bills of exchange are not cheques. A demand draft drawn by one office of a bank on another office of the same bank has been held not to be a cheque. However, such a draft is treated like a cheque for certain purposes (s 131A of the Act).
It has been held in an English case that an instrument in the form of a cheque drawn on a non-existent bank could be treated as a cheque by the holder according to the terms of the Bills of Exchange Act 1882, s 5(2), which provides that a bill drawn on a fictitious person can be treated by the holder at this option as a bill of exchange or a promissory note.22
Though cheques are bills of exchange, being payable on demand, they do not require acceptance. The drawing of a cheque does not create, in favour of the payee, an assignment of the drawer’s money in the hands of the drawee-banker so as to entitle the payee to enforce payment of the cheque as against the banker. In England, a practice developed some decades ago among bankers of marking or certifying cheques as good for payment.23 The Privy Council held in Bank of Baroda Ltd v Punjab National Bank Ltd 24 that certification is not acceptance and might be construed as a representation of the genuineness of the cheque and of the drawer’s signature and of the current sufficiency of the drawer’s account to meet the cheque. Marking is now discouraged, instead banks are advised to issue their own pay orders or drafts in exchange for the cheques sought to be marked.
A cheque is not invalid by reason that it is ante-dated or post-dated. A post-dated cheque is only a bill of exchange when it is written or drawn and becomes a cheque on or after the date it bears.25
A cheque may bear the date of a sunday or a holiday.
An instrument drawn in the form of a cheque but made payable to cash or order is not a cheque or a bill of exchange as the payee is not certain.26
(2)CHEQUES AND BILLS OF EXCHANGE COMPARED
Cheques and bills of exchange are in many respects governed by the same rules and principles, as they have many points in common.27 As a general rule, the provisions applicable to bills of exchange payable on demand apply to cheques as well. However, there are a few points of difference between bills of exchange and cheques that require special mention and they are as follows:
(i) A bill of exchange must be accepted before the acceptor can be made liable upon it. A cheque requires no acceptance and is intended for immediate payment. While it cannot be said that a cheque can never be accepted, it is only done in very unusual and special circumstances, and would require strong and unmistakable words. Thus, certification of a cheque does not constitute an acceptance within the meaning of the Act.28
(ii) A bill of exchange is normally entitled to three days of grace, unless it is payable on demand. A cheque is payable immediately on demand without any days of grace.29
(iii) The drawee of a cheque is always a banker, whereas the drawee of a bill of exchange may be anyone including a banker.30
(iv) A bill must be duly presented for payment or else the drawer will normally be discharged. The drawer of a cheque is not discharged by the holder’s delay in presenting it for payment, unless the drawer has been injured because of the delay.
(v) In order to charge the drawer, of a bill of exchange that has been dishonoured by non-payment, notice of dishonour should be sent to him, except in certain circumstances. When a cheque is dishonoured, notice of dishonour to the drawer may not be necessary in a large number of cases, as the want of his funds in the hands of the banker is sufficient notice.
(vi) Cheques may be crossed, but not bills.
(vii) Statutory protection is given to the drawee-banker with regard to payment of cheques in certain circumstances.31 No such protection is available to the drawee or acceptor of an ordinary bill of exchange.
(viii) Subject to certain conditions, statutory protection is available to the collecting banker against liability for conversion of crossed cheques. Such protection is not available while collecting bills.
The differences between a bill of exchange and a cheque has been pointed out by Parke CB in Ramchurn Mullick v Lachmeechand Radakissen ,32 as follows:
Page 3 of 4Cheque
A banker’s cheque… is a peculiar sort of instrument in many respects resembling a bill of exchange but in some entirely different. A cheque does not require acceptance; in the ordinary course it is never accepted; it is not intended for circulation, it is given for immediate payment; it is not entitled to days of grace; and though it is, strictly speaking, an order upon a debtor by a creditor to pay a third person the whole or part of a debt, yet, in the ordinary understanding of persons, it is not so considered. It is more like an appropriation of what is treated as ready money in the hands of the banker, and in giving the order to appropriate it to a creditor, the person giving the cheque must be considered as the person primarily liable to pay, who orders his debt to be paid at a particular place, and as being much in the same position as the maker of a promissory note, or the acceptor of a bill of exchange, payable at a particular place and not elsewhere, who has no right to insist on immediate presentment at that place.
(3)PAYMENT BY CHEQUE
Payment by cheque is generally conditional, depending upon its payment when presented to the drawee-bank. If the cheque is paid, payment relates back, for the purpose of limitation, to the date of delivery of the cheque to the creditor.33 In K Saraswathy v PSS Somasundaram Chettiar ,34 a deposit made by cheque into a court on the last day of the six-month period allowed therefore was held to be a valid payment although the cheque was presented for payment and paid later. There was nothing to show that the cheque would not have been honoured, had it been presented for payment on the day of its delivery to the court. If the cheque is dishonoured on proper presentment to the drawee-bank, there is no binding payment.
Where a cheque given in payment of insurance premium was returned unpaid on presentment by the insurance company, the cover note that had been issued by it to the drawer upon receipt of the cheque was held to be ineffective.35 The result might have been different if the insurance company had failed to present the cheque for payment.36
When a cheque is sent by post, payment relates back to the time of dispatch.37 In the case of a post-dated cheque, the date of payment would be the date it bears.38
It has been held that the delivery of a cheque in part repayment of a debt would not give a fresh start of limitation if the cheque is dishonoured on proper presentation. The giving of the cheque does not amount to an acknowledgement of liability.39 Where a cheque given in partial repayment of a loan is not drawn or indorsed by the debtor, it does not go to start a fresh period of limitation.40
Where a debtor sends his creditor a cheque for an amount smaller than the debt, and the latter accepts and enchases the cheque, the mere acceptance and encashment does not raise a conclusive presumption that it was accepted in discharge of the whole debt. It is a question of fact if it was so accepted.41
A cheque deposited with a court under O XX, r 14 of the Code of Civil Procedure 1908, was held a valid tender as it was equivalent to cash payment unless dishonored on proper presentment.42
19 Substituted by Amendment Act 2002.
20 See Bills of Exchange Act 1882, s 73.
21 Halsbury’s Laws of England.
22 Aziz v Knightsbridge Gaming &;Catering Supplies Ltd , The Times, 6 July 1982.
23 Robson v Bennet (1810) 2 Taunt 388; Goodwin v Roberts (1875) LR 10 Ex 251.
24 [1944] 2 All ER 83; Sita Ram v Bombay Bullion Association AIR 1965 SC 1628 [LNIND 1964 SC 332].
25 Whistler v Forster (1863) 32 LJCP 161; Anil Kumar Sawhney v Gulshan Rai (1994) 79 Comp Cas 150 (SC), (1993) 4 SCC 424 [LNIND 1993 SC 853], (1993) IV CCR 433 (SC); Shri Ishwar Alloy Steels Ltd v Jayaswals Neco Ltd (2001) 1 RCR (Cri) 834 (SC); Ashok Yeshwant Badave v Surendra Madhavrao Nighojakar (2001) 3 SCC 726 [LNIND 2001 SC 680], Ashok Yeshwant Badave v Surendra Madhavrao Nighojakar (2001) I CCR 358 (SC), Ashok Yeshwant Badave v Surendra Madhavrao Nighojakar (2001) II SLT 669, Ashok Yeshwant Badave v Surendra Madhavrao Nighojakar (2001) II BC 1 (SC), Ashok Yeshwant Badave v Surendra Madhavrao Nighojakar AIR 2001 SC 1315 [LNIND 2001 SC 680], Ashok Yeshwant Badave v Surendra Madhavrao Nighojakar (2001) 2 RCR (Cri) 165 (SC); Goaplast Pvt Ltd v Shri Chico Vrisula D’Souza (2003) 1 JCC 99 (NI) (SC), Goaplast Pvt Ltd v Shri Chico Vrisula D’Souza (2003) 3 JCC (NI)
305 (SC), Goaplast Pvt Ltd v Shri Chico Vrisula D’Souza AIR 2003 SC 2035 [LNIND 2003 SC 301], Goaplast Pvt Ltd v Shri Chico Vrisula D’Souza (2003) Cr LJ 1723, Goaplast Pvt Ltd v Shri Chico Vrisula D’Souza (2003) I CCR 410 (SC), Goaplast Pvt Ltd v Shri Chico Vrisula D’Souza (2003) IV CCR 403 (SC), Goaplast Pvt Ltd v Shri Chico Vrisula D’Souza (2003) 2 Bank CLR 240 (SC); Sheelam Raji Reddy v Samudrala Bixmaiah (2003) 2 JCC (NI) 203 (AP); ATV Projects India Ltd v Nagarjuna Finance Ltd (2002) 1 ALD (Crl) 364; Wg Cdr RR Dass (Retd) v Satya Bhama Lal (2003) I CCR 340 (Del).
26 Cole v Milsome [1951] 1 All ER 311; Orbit Mining &;Trading Co Ltd v Westminster Bank Ltd [1962] 3 All ER 565.
27 M’Lean v Clydesdale Banking Co (1883) 9 App Cas 95 , p 107; Sutters v Briggs [1922] 1 AC 1 , p 12.
28 Bank of Baroda Ltd v Punjab National Bank Ltd [1944] 2 All ER 83.
29 Ram Saroop v Hardeo AIR 1928 All 68.
30 M’Lean v Clydesdale Banking Co (1883) 9 App Cas 95 .
31 See ss 85 and 128 of the Act.
32 (1854) 9 Moo PC 46, pp 54 and 69.
33 Kirloskar Brotheres Ltd v CIT AIR 1952 Bom 356.
34 (1990) 67 Comp Cas 67; relying on Commr of Income Tax v Ogale Glass Works Ltd (1954) 24 Comp Cas 520 both being Supreme Court decisions.
35 United India Insurance Co Ltd v Ratansingh AIR 1993 MP 197 [LNIND 1992 MP 14].
36 Oriental Insurance Co Ltd v K Gowramma (1989) 1 SCC 200.
37 Beevers v Mansion , The Times, July 19 1978.
38 Jivanlal Acharya v Rameshwarlal Agarwalla AIR 1967 SC 1118 [LNIND 1966 SC 162]; see, however the dissenting judgment of RS Bachawat J.
39 Northern Indian Finance Corpn Pvt Ltd v RL Soni (1973) 4 Comp Cas 495,relying on Chintaman Dhundiraj v SNMD Sansthan AIR 1956 Bom 553 [LNIND 1956 BOM 82]; Arjunlal Dhanji Rathod v Dayaram Premji Padhiar AIR 1971 Pat 278.
40 A Ramavel v Pandyan Automobiles (P) Ltd AIR 1973 Mad 359 [LNIND 1972 MAD 161].
41 Basudeo Ram Sarup v Dil Sukh Rai AIR 1922 All 461; Union of India v Gangaram Bhagwandas AIR 1977 MP 215 [LNIND 1977 MP 56].
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
7 ‘Drawer, drawee.’
The maker of a bill of exchange or cheque is called the ‘drawer’, the person thereby directed to pay is called the ‘drawee’.
‘ drawee in case of need.’-When in the bill or in any indorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a ‘drawee in case of need’.
‘ acceptor.’-After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the ‘acceptor’.
‘acceptor for honour.’-43 [When a bill of exchange has been noted or protested for non-acceptance or for better security], and any person accepts it supra protest for honour of the drawer or of any one of the indorsers, such person is called the ‘acceptor for honour’.
‘payee.’-The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the payee.44
(1)DRAWEE IN CASE OF NEED
Besides the parties necessary to a bill of exchange another person may be introduced at the option of the drawer called the drawee in case of need (in English law ‘referee in case of need’, and amongst merchants ‘case of need’). The drawer in that case inserts in the bill the name of a person who may be resorted to ‘in case of need’, ie, in the event of the bill being dishonoured by non-acceptance or non-payment.
Under s 115 of the Act, where a drawee in case of need is mentioned, the bill is not considered to be dishonoured until it has been dishonoured by such drawee in case of need. The effect of this is to make it obligatory on the part of the holder to present the bill to the drawee in case of need if the bill is dishonoured by the drawee.
Under s 15 of the Bills of Exchange Act 1882, it is the option of the holder to resort to the drawee in case of need or not as he may think fit.
(2)ACCEPTANCE
The acceptance of a bill is an indication by the drawee of his assent to the order of the drawer. The essentials of a valid acceptance are, that it must be written on the bill and signed by the drawee. The acceptance has to be the drawee, and cannot be by a stranger. If a stranger writes an acceptance on it, he is still not liable as an acceptor though he may be liable as an indorser.45
Any appropriate words may be used by the drawee to convey his assen t to the drawer’s order. An oral acceptance, however, is not sufficient in law.46 The usual form in which the drawee accepts the instrument is by writing the word ‘accepted’ across the face of the bill and signing his name underneath. The mere signature of the drawee without
the addition of the words accepted is a valid acceptance, what is material is the true intent of the drawee when he signs the bill.47
Under s 32 of the Act, the acceptance by the drawee of the instrument, without an acknowledgement of the liability, is sufficient for fixing the liability. As the law prescribes no particular form for acceptance, there can be no difficulty in construing and acknowledging that as an acceptance so long as it satisfies the requirements of s 7 of the Act, ie, it must appear on the bill and must be signed by the drawee.48
Where the drawee writes on a bill ‘accepted’, but does not sign it, it is not an acceptance.
It is not necessary that the acceptance should be on the face of the bill. An acceptance written on the back of a bill has been held to be sufficient in law.49 The essential thing, however, is that it must be written on the bill. Otherwise, it does not create any liability as acceptor on the part of the person signing it. In Ardeshir v Khushaldas ,50 the plaintiff sued the defendant to recover the amount due on certain bills drawn on the defendant and indorsed to the plaintiff as the defendant had failed to pay them. In one of the bills, the defendant’s acceptance was signed on the original bill while in others, it was merely on copies of the bills. The court held that, under s 7 of the Act, acceptance could be signed anywhere on the bill. However, the defendant’s assent was signed only upon copies of the bills and thus, a material requirement of the law had not been satisfied with the result that there was no valid acceptance.
The drawee of a bill is not liable on the bill in the absence of an acceptance, even though he may be in possession of the funds of the drawer. Even admission of possession of funds is not sufficient to bind him. If the drawee of a bill refuses to accept it, the payee or any holder cannot sue him on the bill, either.51
In State of Orissa v Punjab National Bank ,52 the plaintiff bank had extended credit facilities to a client on the strength of bills drawn on the state government in respect of the client’s supplies to the government. The bills were not paid and the bank sued the government and obtained a decree from the trial court. However a Division Bench of the high court set aside the decree on the ground that the government had not accepted the bills and was, therefore not, liable to the bank.
An instrument purporting to be a promissory note, in which there is no mention of a drawee, may become a bill of exchange if acceptance is indorsed thereon by a third party. Thus, a third person who indorses an acceptance admits to be a drawee and becomes liable under it, even though he is not named as a drawee. However, the acceptance by him should not be inconsistent with the reference on the bill of exchange. The acceptor having signified his acceptance is estopped from contending that he is not the drawee.53
Though a drawer cannot make conditional order to pay the bill, an acceptance may be either absolute or qualified. An acceptance by the drawee to perform his promise by means other than by the payment of money is invalid. For instance, a bill is drawn by A on B for Rs 5,000. B accepts it as payable in bills or payable in goods. This is not a valid acceptance.54
An acceptance is not complete and binding upon the drawee until the drawee has delivered over the accepted bill to the holder, or has given notice of such acceptance to the holder, or some person on his behalf. Thus, where a drawee, having once written his acceptance with the intention of accepting a bill afterwards changes his mind, and before it is communicated to the holder of the bill, it is delivered back to him and he obliterates his acceptance, he is not bound as an acceptor.55
(3)PAYEE
The term ‘payee’ does not include the term ‘indorsee’ or ‘indorser’. From ss 9, 15, and 16, it is clear that the term, payee is used in a restricted sense, ie, the person referred to in the instrument by the drawer, to whom or to whose order the money is directed to be paid.
The use of the word person, which is in singular form in the definition of the payee indicates that two persons cannot be joint payees. Thus, where the cheque is drawn by M/s Credential Finance Ltd in favour of M/s Indusind bank Ltd A/c Credential Finance Ltd, the bank does not become the payee and cannot maintain a complaint. Such a cheque was a specially crossed cheque with directions to the bank to send the same for encashment and thereafter to credit the proceeds.56
Page 3 of 3‘Drawer, drawee.’
43 Substituted by Act 2 of 1885 s 2 for ‘When acceptance is refused and the bill is protested for non-acceptance’.
44 See ss 15, 17, 18 and 65 of the Bills of Exchange Act 1882.
45 Jackson v Hudson (1810) 2 Camp 447.
46 Gurdas Mal v Khem Chand AIR 1930 Lah 471.
47 Manickchand v Chartered Bank AIR 1961 Cal 653 [LNIND 1960 CAL 201]; Union Bank of India v Swastika Motors AIR 1983 Del 240 [LNIND 1982 DEL 177].
48 Jagjivan v Ranchhoddas AIR 1054 SC 544 relied on in Manickchand v Chartered Bank AIR 1961 Cal 653 [LNIND 1960 CAL 201]. For specimen forms of acceptance see appendix II.
49 Young v Clover (1857) 33 Jur NS 637 relied on in Manickchand v Chartered Bank AIR 1961 Cal 653 [LNIND 1960 CAL 201].
50 (1908) 10 Bom LR 268 [LNIND 1907 BOM 199].
51 Goodwin v Robarts (1875) LR 10 Ex 351.
52 (1991) 71 Comp Cas 220.
53 Jogeshchandra v Mahammud (1950) ILR 57 Cal 695; Lloyd v Oliver 18 QB 417.
54 Russell v Phillips (1850) 14 DB 891.
55 Cox v Troy (1822) 5 B &Ald 474; Chapman v Cottrell (1865) 24 LT Ex 186.
56 Credential Finance Ltd v State of Maharashtra (2001) 105 Comp Cas 864, Credential Finance Ltd v State of Maharashtra (2001) 1 BC 157.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
8 ‘Holder’
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 or recover the amount due thereon from the parties thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.57
The definition contained in this section is obscure and the word entitled has caused difficulties in interpretation.58 The definition in the Bills of Exchange Act 1882 is simpler and considerably different in substance and states: ‘Holder means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof’.
Under the Act, before a person can claim to be the holder of a negotiable instrument, he should:
(a) be entitled in his own name to the possession of the instrument; and
(b) have the right to receive or recover the amount due thereon from the parties thereto.
(1)ENTITLED TO POSSESSIONWhile possession of the instrument is essential under the Bills of Exchange Act 1882, it is not so under the Indian Act. All that is required by the section is that the holder must be entitled in his own name to the possession of the instrument. A person may be entitled to possession of the instrument although he does not have actual possession. For instance, where a bill payable to order is, without indorsement, entrusted by the payee to his agent, the agent does not become the holder and the payee is entitled in his own name to the possession of the bill.
A person claiming to be the holder of an instrument should be the owner thereof in law, irrespective of his position in equity. The definition seems to suggest that the term holder means only a de jure holder, and does not necessarily apply to a de facto holder.
A person may, by operation of law, become the holder of a negotiable instrument although he is not the bearer, payee or indorsee thereof. Thus, the heir or legal representative of a deceased payee can claim as the holder.
An indorsee f or collection is not a holder, as he does not acquire any interest in the instrument.59 However, in English law, such an indorsee is a holder.
The assignee of a promissory note or a bill of exchange is not a holder, unless the instrument is indorsed in his favour or is payable to bearer, and is in his possession.60
(2)RIGHT TO RECEIVE OR RECOVER AMOUNT DUEUnder the section, a holder must have the right to receive or recover the amount due on the instrument from the parties thereto. The definition also implies that he has a right to sue on the instrument. The term holder, therefore, does not include a person who does not have the right to recover the amount due thereon from the parties thereto, though he is in possession of the instrument.61 Therefore, to qualify as a holder, a person should have derived title to the instrument in a lawful manner. A person who takes an instrument from a person, who forges an indorsement
or from a thief or from a finder of an instrument having no claim to it or a payee or indorsee, who is prohibited by a court order from receiving the amount due on the instrument is not a holder.
There is considerable difference in judicial opinion as to whether the beneficial owner can maintain a suit on a negotiable instrument, if he is not the holder. Several decisions support the proposition that only a holder can bring a suit on a negotiable instrument, and that no person can sue on a negotiable instrument unless his name appears thereon as the payee or indorsee, or unless the instrument is made payable to bearer and he is in possession, thereof.
Accordingly, a plaintiff who is a benamidar or a trustee or guardian, and has taken the instrument in his own name, is entitled to sue upon it.62 Therefore, in a suit on a negotiable instrument by the payee or indorsee, it is not open to the defendant to plead that such payee or indorsee is a mere benamidar.63
According to one view, the beneficial owner of an instrument cannot bring a suit on it, if he is not the holder.64
A minor cannot sue on a promissory note, taken in the name of his adoptive mother.65
The fact that the holder is admittedly a benamidar and is impleaded in the suit does not remedy the situation. It is also immaterial that the consideration proceeded from the beneficial owner and not from the holder.66 Where the plaintiffs alleged that the suit promissory note had been executed in respect of a loan advanced by them to the maker, and that the payee of the note was merely their agent, it was held that they were not entitled to sue on the note.67
For instance, A, a debtor of B, executed a promissory note in favour of C in discharge of B’s debt to C. It was held that C could sue A on the note and A could not avoid liability by pleading that he had only executed the note on behalf of B and that he had later repaid his debt to B.68
(3)SUIT BY SOMEONE OTHER THAN THE HOLDERSome judges have expressed the view that s 78 of the Act does not preclude any one other than the holder from suing on a negotiable instrument and that a suit by the real owner is maintainable, if he is in a position to obtain a good discharge of liability for the person liable thereon.69 This view was indorsed in Bhagirath v Gulab Kanwar ,70 where it was held that a true owner could maintain a suit on a negotiable instrument if the holder is impleaded in the suit as a co-plaintiff or a defendant.
Four promissory notes were executed in favour of A, the karta of a joint Hindu family consisting of himself and his two brothers, B and C. On partition the notes came to the share of B who filed a suit on them. They were not indorsed in his favour. The court held that he could maintain the suit. The right to file such a suit, irrespective of any indorsement in his favour was recognized, on the basis of the vesting of survivorship of money in the person who in the absence of the holder can give a valid discharge to the maker.71
Where at a partition of a firm, a note executed in favour of the firm was allotted to a partner without any indorsement, it was held that the partner could sue on the note.72
Where a note was in favour of a person as a partner of a firm, it was held that the firm can sue on the note.73 Where a note was in favour of a partner of a firm without specifying that he would hold it on behalf of the firm, the firm was held not capable of suing on the note, even if the money of the firm had been advanced against it.74
Where a promissory note is drawn in favour of a joint Hindu family firm, all the individual members who comprise that firm can bring a suit on the note.75
Coparceners governed by the Mitakshara law, carrying on a joint family business can be described as the holders of a promissory note executed in the family’s collective or business name.76 In Coparceners governed v Lahori Ram ,77 two notes were made in favour of K and his two minor sons. K could bring a suit on the notes in his own name since he was the karta of a joint family consisting of himself and the two sons and he could give a valid discharge of the notes.
On the death of the holder the holder of the succession certificate can sue on the instrument.78 The heir of a deceased holder can sue on the basis of the instrument to recover the amount due thereon. The crux of the matter is whether the plaintiff receiving payment on the basis of the instrument can give a valid discharge.79 When the
Page 3 of 4‘Holder’
holder of a negotiable instrument dies, his right passes to his heirs by devolution and all of them must join in a suit to enforce the deceased holder’s right. If any one of them does not join as plaintiff, he should be impleaded as a defendant.80 Where, however, on the death of the payee of a note, his son brought a suit, not as the payee’s heir or legal representative, but as the surviving coparcener, the suit was held not maintainable.81 The daughter of the deceased payee of a promissory note could not sue its maker on the note since she did not qualify as a holder thereof. If she was the sole heir of the payee, or if the property in the note had been bequeathed to her, she would have had a valid claim against the maker.82
In Kerala Arecanut Stores v Ramkishore Sons ,83 it was held that an unregistered firm was not prevented by s 69(2)of the Indian Partnership Act 1932, from suing as the indorsee the drawers of certain cheques which had been dishonoured. The court came to the conclusion on the basis on the fact that the right of action of a holder in due course on negotiable instrument is not a contractual but a statutory right conferred by the Act. In such case, the firm was an indorsee and not the payee.
(4)ASSIGNMENT OF NEGOTIABLE INSTRUMENTSNegotiable instruments can be assigned under s 130 of the Transfer of Property Act 1882, ie, transfer of actionable claims. The assignee of a promissory note can, sue the maker for recovering the amount due on the note by virtue of his rights under that Act. The assignee, however, takes the instrument, subject to the liabilities and equities to which the assignor was subject at the time of the assignment.
An assignment of a promissory note at a partition to a member of a joint family does not amount to a transfer by act of parties, but by operation of law; no document in support of the assignment is, therefore, required under s 130 of the Transfer of Property Act 1882.84
57 See the Bills of Exchange Act 1882,s 2.
58 The Law Commission, in its Eleventh Report has also suggested amendment of the definition to remove the word ‘entitled’.
59 Irinjalakuda Bank Ltd v Poruthussery Panchayat (1970) 40 Comp Cas 767.
60 Umbu v Gopalan 1961 Ker LJ 25.
61 Lachmichand v Modanlal AIR 1947 All 52.
62 Bojianna v Venkatramayya (1898) ILR 21 Mad 30; Sarat Chunder v Kedar Nath (1898) 2 CWN 286; Ramanuja v Sadagopa (1905) ILR 28 Mad 205.
63 Subba Narayana v Ramaswami (1907) ILR 30 Mad 88; VK Velappu v MJ Varu (1987) 61 Comp Cas 368.
64 Bacha Prasad v Janaki AIR 1957 Pat 380.
65 Ramanuja v Sadagopa (1905) 28 Mad 205.
66 Subbaraya v Abirami AIR 1965 Mad 157 [LNIND 1963 MAD 285]; Harikishore v Gura Mia (1933) ILR 58 Cal 752; Virappa v Katti (1934) 36 Bom LR 807.
67 VB Kalingarayar v Rajam AIR 1978 Mad 192 [LNIND 1977 MAD 40].
68 Joseph Zacharia v Joseph Kuriakose AIR 1992 Ker 103 [LNIND 1991 KER 433].
69 Lachmichand v Modanlal AIR 1947 All 52; Sewa Ram v Hotilal AIR 1931 All 108.
70 AIR 1956 Raj 174 [LNIND 1956 RAJ 210].
71 Rai Ram Kishore v Ram Prasad (1952) 2 All 178 (FB).
72 Assuram v Niranjandass (1963) ILR 13 Raj 963.
73 Davvuru Jayarama Reddy v Revathi Mica Co (1972) 1 Andh WR 7.
74 Lingam v Vijayagopal (1969) 2 Andh WR 421; M Kasi Viswanadham v C Radhakrishna Rao AIR 1973 Andh Pra 99.
75 Madhubai Damel v Vadilal (1939) 41 Bom LR 219.
76 Zujya Pascol Damel v Manmohandas (1940) 42 Bom LR 248.
‘Holder in due course’Khergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
9 ‘Holder in due course’
‘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 the payee or indorsee thereof, if85 [payable to order], before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.86
A person claiming to be a ‘holder in due course’ must show:
(i) That, for consideration he became the possessor of a negotiable instrument when it is payable to bearer or the payee or indorsee thereof when it is payable to order.87
(ii) That he became the holder of the instrument before the amount mentioned in it became payable.
(iii) That he became the holder of the instrument, without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.88
(1)CONSIDERATION
It is essential that a person who claims to be a holder in due course must show that he acquired the instrument for valuable and lawful consideration. Valuable consideration consists in either some right, profit, or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given to, or suffered or undertaken by the other.89 The consideration must be a valuable consideration, which can be considered so under the law. It can be either positive in that, it requires doing of something or negative in that, it requires forbearance.90
The consideration must have passed at the desire of the promisor.91 In Rajah of Venkatgiri v Sri Krishnayya ,92 the plaintiff’s father had given a letter to the defendant’s natural father undertaking that he would furnish funds for a litigation challenging the defendant’s adoption. Pursuant to this undertaking, the plaintiff’s father advanced monies to the defendant from time to time for the expenses of the litigation and after the father’s death, the plaintiff also continued to make the payment. Subsequently, the defendant, at the plaintiff’s request, executed a promissory note, the suit promissory note for the total amount advanced for the litigation. The suit promissory note also stipulated that, if the litigation was decided against the defendant in the Privy Council, the plaintiff would not enforce the note. The litigation ended in favour of the defendant and thereafter, the plaintiff sued the defendant on the note. The defendant denied his liability and contended that the promissory note was void for want of consideration. The Privy Council, agreeing with the Indian judiciary, upheld the defendant’s contention. The Privy Council also observed that, the advances of money were not made at the desire of the defendant, as required by the definition of consideration in s 2(d)of the Indian Contract Act 1872, and therefore the note was without consideration.
It is also necessary that the consideration should be lawful, ie, it should not be forbidden by law, fraudulent, immoral or opposed to public policy and should not cause any injury to the person or property of another.93 Thus, a debt due on a wager is not valid consideration, and a person who acquires a bill or note in consideration for such a debt is not a holder in due course.94 Under the Indian law, an agreement in which the consideration or object is illegal, immoral or against public policy, is not a contract; and money due or paid under such an agreement cannot be recovered by a suit.
Monies due on a promissory note, executed in consideration for the balance of the security deposit for the lease of a house taken for immoral purposes, cannot be recovered by suit.95
Consideration for a note or bill can, however, operate as such only once, and when it has so operated for once, it is spent and cannot be used for another and subsequent promise. A single consideration cannot support an indefinite series of subsequent and independent promises or contracts.96
Consideration for a negotiable instrument, however, may appear in various ways. Thus, a person who discounts a bill is a holder for value and if he satisfies the other requirements of the section, he will be a holder in due course.97 If a bill is discounted with a ban k and is indorsed and delivered over to it, the bank becomes an indorsee for value.98
A bank purchasing a cheque indorsed in blank by crediting the current account of the payee becomes a holder in due course of the cheque, and does not act as a collecting agent.99
Where the holder of a bill or note has a lien upon it, he is a holder for consideration to the extent of the advance for which he has a lien.1
Where a promissory note is executed in respect of a loan, it cannot be said that the note is not for consideration merely because the loan is granted subsequent to the execution of the note.2
Under, of the Indian Contract Act 1872 s 2(d), past consideration is a good consideration and will support a negotiable instrument. An antecedent debt or liability is sufficient to constitute a valuable consideration for a negotiable instrument.3
Where a bill of exchange payable after date is transferred before maturity in discharge of a pre-existing debt, the creditor can became a holder in due course of the bill.4
Consideration, being necessary to support the title of a holder in due course, it follows that a donee of a negotiable instrument is not a holder in due course and he cannot maintain an action against the donor on the instrument.5 The reason for this being, if the donor is not a holder in due course, the donee merely succeeds to the rights of his transferor. However, if the donor is a holder in due course, by virtue of the rule contained in s 53 of the Act viz, that a holder without value of a negotiable instrument who derives his title from a holder in due course has the rights thereon of that holder in due course, the donee ipso facto acquires all the rights of the holder in due course.
In Sakharam v Gulabchand ,6 the plaintiff an indorsee of a hundi drawn by the defendant in favour of one M sued the indorser. The lower court dismissed the suit on the ground that no consideration had passed between the defendant and M. The plaintiff applied to the high court under its extraordinary jurisdiction. The court held that the plaintiff’s suit as an indorsee was not necessarily barred because of the fact that no consideration had passed between the defendant and M. An indorsee from the (payee) of a hundi must be presumed, until the contrary is proved, to have been a holder in due course, ie, a holder for consideration form the payee within the meaning of s 9 by reason of s 118(g) of the Act. He is, unless the contrary is proved, unaffected by failure of consideration as between the drawer and the payee.
Though valuable consideration is necessary for the validity of a bill or note, the court will not go into the question of the adequacy of such consideration.7 However, where the bona fides of the transaction is impeached, the extent of the consideration given is a factor that the court will consider in determining the question of bona fides.8
The question whether the consideration for a negotiable instrument is adequate cannot be subject matter of controversy in the suit when once it is admitted that the negotiable instrument has been executed by the defendant and there was some consideration for it.9
It is further necessary that in return for a consideration, the holder must become (i) the possessor of the instrument if it is payable to bearer; or (ii) the payee or indorsee of the instrument, if it is payable to order. Also, in the latter case, his title must be completed by indorsement and delivery of the instrument to him, as no contract on a negotiable instrument is complete without delivery.10
In India Saree Museum v P Kapurchand ,11 it was held that a person need not be an indorser to become a holder in due course. It is not clear from the judgment whether the cheques in question were payable to bearer or had been indorsed in blank so the plaintiff could claim as a holder in due course.
In Madhya Bharat Khadi Sangh v Bal Kishen Kapur ,12 a distinction was drawn between an instrument payable to
Page 3 of 8‘Holder in due course’
bearer and one payable to order as regards consideration. It was held that under s 9 where the instrument is payable to order, it is not necessary for a person claiming as a holder in due course to show that he took it for consideration; the payee or indorsee thereof becomes the holder in due course. However, where the instrument is payable to bearer, the possessor can claim as a holder in due course only if he has come in possession of the instrument for consideration. It is submitted that this decision does not seem to lay down the law correctly.
(2)BEFORE THE AMOUNT BECAME PAYABLE
The second essential aspect is the time of acquisition of the negotiable instrument by the person who claims to be a holder in due course. The section says that the holder must have become the possessor of the instrument before the amount mentioned in it became payable. Therefore, a person who takes a bill or note on the day on which it becomes payable cannot claim the rights of a holder in due course, because he takes it after it becomes payable, as the bill or note can be discharged by payment at any time on that day.
There is some difficulty in applying the words ‘before the amount mentioned in it became payable’ to cheques and demand bills since they are payable immediately. The words ‘before it was overdue’ appearing in s 29(1)of the Bills of Exchange Act 1882 are preferable.
The fact that a promissory note payable on demand has been outstanding for a long period at the time of negotiation to the holder does not necessarily debar him from claiming as a holder in due course, since according to custom and practice, a promissory note payable on demand is treated as a continuing security.13 In Gopalan v Lakshminarasamma ,14 it was held that a demand promissory note is not payable until demand is made. There the maker of a demand promissory note left the note in the hands of the payee after making payment thereon. The payment was not recorded on the note. After receipt of such payment the payee indorsed the note to another person who had no knowledge of the fact of payment. In a suit by the indorsee against the payee and the maker it was held that under ss 9, 22 and 60 of the Act, the indorsee was entitled to recover from both the payee and the maker.
In Asirvatham v Palaniraju ,15 a promissory note payable on demand and executed on 6 April 1960 was negotiated to the plaintiff on 10 September 1964. The court held that the note was not overdue when the plaintiff took it and he could proceed as a holder in due course.
A person who takes a negotiable instrument after the date of maturity cannot be a holder in due course and the rights of such a holder are coextensive only with those of his immediate transferor. In Sumani Ferro Alloys Ltd v Super Forging Steel Sales (P) Ltd ,16 the drawer of certain trade bills discounted them with a bank. Upon their dishonour the drawee claiming that the drawer had committed a breach of the underlying sale contract the bank indorsed and returned them to the drawer. It was held that the drawer company was not a holder in due course of the bills since they had been dishonoured when the bank returned them. The court did not seem to have considered the applicability of s 53 of the Act to the case.
Several English decisions have established the principle that, as between the immediate parties to a bill of exchange, the fact that the defendant may have a counterclaim for unliquidated damages arising out of the same transaction is no defence against an action on a bill of exchange. Also, there is no ground on which he can be granted a stay of execution of the judgment in an action for proceeds of the bill.17 There can be a holder in due course of a post-dated cheque.
(3)WITHOUT HAVING SUFFICIENT CAUSE TO BELIEVE THAT ANY DEFECT EXISTED IN THE TITLE OF THE PERSON FROM WHOM HE DERIVED HIS TITLE
(i) English Law
Under English law, the only question to be considered is whether the holder took the instrument in good faith and, once it is proved that he did so, he is entitled to all the rights of a holder in due course notwithstanding that he was careless, that he made no enquiry, and that he was informed of facts which would have led a reasonable man to make further inquiry, provided, however, that he had no notice of any defect in the transferor’s title.18 It is sufficient if he took the instrument honestly, and however gross his negligence may be, if he stops short of fraud, he has a good title.19
Page 4 of 8‘Holder in due course’
Section 90 of the Bills of Exchange Act 1882 states: ‘…a thing is deemed to be done in good faith within the meaning of this Act, where it is in fact done honestly, whether it is done negligently or not.’
Accordingly, no man shall be deemed to be a bona fide holder of a negotiable instrument, if at the time of taking it, he suspected that some wrong was perpetrated by the person with whom he was dealing, but did not make reasonable inquiries to get the suspicion cleared. It is not necessary that a holder should have actual knowledge of what the particular wrong was, and if he, suspecting that there is something wrong, avoids inquiry, lest he should come to know of any defect in the title, he cannot be deemed to be acting honestly.20
However, if as a matter of fact, there is no evidence of mala fides or bad faith, then it is immaterial whether at the time of taking the instrument, he was negligent. Thus, in Raphael v Bank of England 21 it was held that when a person takes a negotiable instrument bona fide he is entitled to recover on it even though he may have had, at the time, he means to knowledge of facts which he neglected to avail himself of.
(ii) Indian Law
As regards the Indian law, prior to the passing of the Act, it was held by the Privy Council, relying upon English decisions that the defective title of the transferor would not attach to the transferee merely because of the latter’s negligence.22
However, under the Act, the words used in s 9 are ‘…without having sufficient cause to believe…’ Therefore, the legislature seems to have intended to make due care and caution on the part of the holder, a test of his bona fides, and that mere good faith on his part would not suffice. Accordingly, it seems negligence on the part of a holder at the time of taking a negotiable instrument, would disentitle him to the rights of a holder in due course. There will be sufficient cause to believe in the existence of defects if the holder was in fact negligent or careless, though he was acting honestly and in good faith. Thus, a transferee, neglecting to avail himself of any means at his disposal to detect the defects in the title of the transferor, cannot claim to be a holder in due course. Under the Indian law, it is not enough to show that the holder acquired the instrument honestly, if in fact, he was negligent or careless.
In this respect, the Act seems to have followed the old English rule laid down by Lord Tenterden in Gill v Cubitt ,23 according to which due care and caution were made the tests of bona fides. The Indian law is stricter and requires a higher degree of diligence from the person who claims to be a holder in due course than in England where it is sufficient for such a person to show that he took the instrument in good faith.
In Raghavji v Narandas ,24 the Mumbai High Court, however cited the later English decisions as applicable to India but without discussing the question in the light of s 9, and held that mere negligence would not invalidate the title of a person taking a negotiable instrument in good faith for value.
The Supreme Court of India has held25 that the decision in Raghavji’s case does not lay down the correct law. After reviewing the case law and leading authorities on the subject, the court held that the Indian definition of ‘holder in due course’ (based on Gill v Cubitt ) imposes a more stringent condition than the English definition. The Indian definition requires that he should act in good faith and with reasonable caution. The court agreed with the Allahabad High Court’s decision in Durga Shah Mohan Lal Bankers v Governor-General-in-Council 26 that mere failure of the plaintiff to prove bona fides or absence of negligence on his part would not negative his claim as a holder in due course. However the Supreme Court added that if in the circumstances of a given case, there was patent gross negligence on his part, it could negate his claim for he could not negligently disregard a ‘red flag’ which aroused suspicion regarding the title. In this case, a bank purchased two cheques indorsed to it by the payee. Upon their dishonour, the bank claimed the amounts from the drawer, who denied liability on the ground that the payee had failed to deliver the goods contracted for. The court rejected the plea, and
Page 5 of 8‘Holder in due course’
held that the bank need not have inquired if the goods had been supplied, and even if the payee had failed to supply, there was no sufficient cause for the bank to doubt his title to the cheques.
Relying on the above-mentioned Supreme Court ruling in Praveen Metal Agencies v M Balasubramanyam ,27 the Karnataka High Court upheld the contention of the plaintiff who claimed as a holder in due course of two cheques issued in business transactions and the court saw no red flag that should have put the plaintiff on inquiry. The defendant contended that he had left signed blank cheques with his employee, who exceeding his authority, had completed and issued them to a third party, who later colluded with the plaintiff in bringing the suit against the defendant. The court rejected the defence, and held that the plaintiff had taken the cheques for valuable consideration under the payee’s indorsements. The court held that the plaintiff was not bound to enquire about the genuineness of the transactions between the drawer and the payee.
There are many circumstances due to which an honest holder may have sufficient cause to believe that there is something wrong with the instrument he is taking. For example, if there is an irregularity patent upon the face of the instrument, it puts the holder on his guard, and if in spite of such irregularity he takes it, he does so, at his own peril. As the instrument itself conveys a warning to him, the rule of caveat emptor applies. Thus, if a person takes a blank acceptance, or a bill which is not complete and regular on the face of it, eg, a bill without the signature of the drawer; or a bill which has been torn up and the pieces pasted together, the tears appearing to show an intention to cancel it; or a bill on which the payee’s indorsement is altered and the alternation is apparent on the face of it; in all these cases he takes the instrument at his own risk.28 However, the fact that a cheque is post-dated does not make it irregular so as to preclude a bona fide purchaser of the instrument from claiming the rights of a holder in due course.29
Another circumstance that ought to put an honest holder on his guard is inadequacy of consideration. There is no criterion more useful for the purpose of determining the bona fides of a person who takes a negotiable instrument than the value he gives for it. As a general rule, courts do not inquire into the adequacy of consideration given bona fide. The fact that a holder gives full value for the bill raises a strong presumption in favour of his good faith. On the other hand, inadequacy of consideration may be evidence of bad faith or fraud on the part of the holder, and may be an important factor in considering whether he had cause to believe that a defect existed in the bill he was purchasing.30 Though, neither adequacy nor inadequacy of consideration by itself is conclusive of a holder’s good faith, or lack of it, sometimes inadequacy may leave no doubt that the bill was not taken in good faith, and sometimes adequacy will alone be sufficient to establish good faith. Therefore, the extent of the consideration may be of vital importance in determining the question of bona fides. Thus, where a person offers to take up a bill for a considerable under-value, or for a consideration which is out of proportion with the face value of the bill, the presumption is that he knew that his transferor was not acting honourably or had not come by all the bill honestly, and if he takes up such a bill without sufficient inquiry, he does so at his own peril, and he may not become a holder in due course.
(4)NOTICE OF DEFECTS
If, at the time when the holder acquires his title as such, he has sufficient notice that a defect exists in the title of his transferor, he is not a holder in due course. Notice means knowledge of the facts or a suspicion that something is wrong combined with a wilful disregard of the means of knowledge. Notice of defects may be either actual or constructive. Proof of such notice may be given by evidence that the transferee received actual notice, or that he was made aware of facts from which knowledge of such defect may reasonably be inferred.31 All circumstances in connection with the transaction, whereby the holder became the owner of the instrument, have a bearing on the question whether he had sufficient cause to believe that any defects existed in the title of his transferor. The ordinary rules of law as to principal and agent apply, and as regards parties having notice, notice to the principal is notice to the agent, and vice versa.32
Where the indorsee of fourteen post-dated cheques aggregating a very large sum had known that they were issued without the possibility of any business transaction between the parties concerned, the court held that the circumstances should have put him on inquiry about the transferor’s title.33
Page 6 of 8‘Holder in due course’
In Mehrunnisa Begum v Sheik Chand Bi ,34 a prize money-winning subscriber to a chit fund executed a promissory note in favour of the chit fund company as collateral security for the due payment of future monthly instalments payable by him to the company. Two sureties signed the note. It was transferred to the plaintiff, another subscriber with an indorsement purportedly made by the chairman of the company. In an action by the plaintiff against the maker of the note and the sureties it was held that the plaintiff was not a holder in due course, as it could not be said that she did not have sufficient cause to believe that a defect existed in the title of the chit fund company from which she derived title. As a subscriber, she should have known that the note had been executed as collateral security. The indorsement by the company did not, therefore, transfer any title to her. The learned judge also held that the plaintiff did not establish that the company had authority to transfer promissory notes. From the facts noted in the judgment, it would appear that the company might not have been able to claim the full amount of the note from the maker because of certain subsequent payments made by him and certain credits due to him from the company. However, this cannot be equated, it is submitted, with a defect in the company’s title to the note. Moreover, under s 43 of the Act, a holder for value could sue the transferor for consideration or any prior party to the instrument.
The time when notice affects the title of a holder who takes a negotiable instrument, is when he takes the instrument, for it is then that his relation to the bill is formed; notice received subsequent to his perfecting his title will not affect his title or his right to sue upon it. Further, the defect which disqualifies a person from claiming the rights of a holder in due course, must be a defect in the title of his immediate transferor, and, accordingly, notice of defect in the title of any prior party does not affect the title of the holder. Thus, if a holder knew when he took the instrument of any fraud practised by any party prior to his transferor, he would not be affected by it.
(5)HOLDER IN DUE COURSE OF AN INCHOATE DOCUMENT
In Tarachand Kevalram v Sikri Brothers ,35 the court held that it is only a person who comes into possession of an instrument after having paid consideration for it and being a bona fide transferee that can be holder in due course within the meaning of s 9. Section 9 implies and contemplates that there must be a negotiation or a transfer to the holder in due course by some one who has the authority to transfer the negotiable instrument. The transfer and the negotiation must be of an inchoate instrument which is not a negotiable instrument under the Act. From the point of view of the proviso to the section it may also be said that in the case of inchoate document, it would be difficult to hold that the possessor of it is a bona fide transferee or in possession of the negotiable instrument.
(6)IRREGULAR INDORSEMENT
If cheque is not indorsed in favour of purchaser, he does not become holder in due course.36
Where a bill was drawn in favour of AB &; Co but was indorsed AB, without the addition of the words ‘&; Co’, it was held that the indorsement was irregular and that the indorsee was not a holder in due course, though he might be a holder for value. Titles and descriptions can often be omitted without impairing the regularity of the indorsement, but the word ‘company’ is one of considerable legal significance and its omission makes an indorsement irregular.37
(7)FORGED INDORSEMENT
It is an established rule that forgery conveys no title. Hence, there can be no holder in due course under a forged indorsement. However, the forged indorsement should be one essential to pass title. Thus, if a bill is payable to A or order, A indorses it to B and C forges B’s indorsement and transfers it to D, D is not a holder in due course. A similar result would follow if B’s indorsement is genuine, but A’s indorsement is forged. The position would be different if the bill was drawn payable to bearer. If, in the first example, B was for some reason, estopped from setting up the forgery, D would have, as against him, the rights of a holder in due course.
85 Substituted by Act 8 of 1919 for ‘payable to, or to the order of, a payee’.
86 See s 29(1)of the Bills of Exchange Act 1882.
Page 7 of 8‘Holder in due course’
87 Punjab National Bank v Himgiri (2004) 1 JCC 1 (P&H), Punjab National Bank v Himgiri (2004) II BC 12 (P&;H) (DB); See however, s 118(a) regarding the statutory presumption of consideration.
88 M Ethirajulu v Rangam Adinarayana (2005) 2 JCC (NI) 166 (AP), M Ethirajulu v Rangam Adinarayana (2006) 2 Bank CLR 123 (AP).
89 Currie v Misa (1875) LR 10 Ex 153, p 162 ; See also Indian Contract Act 1872,s 2(d).
90 Chidambram v Ranga AIR 1966 SC 193 [LNIND 1965 SC 161].
91 Indian Contract Act 1872,s 2(d).
92 AIR 1948 PC 150.
93 See Indian Contract Act 1872,s 23.
94 Trikam Damodar v Lala Amirchand 8 BHCR AC 131.
95 Kalikumari v Manomohinee (1916) 43 Cal 445.
96 Ramaswami Pandia v Anthappa Chettiar (1907) 16 MLJ 422.
97 Ex p Schofield v (1879) 2 Ch D 337 CA.
98 Babu Goridut v Ebrahim (1921) 14 Bur LR 25.
99 LN Beriwala v Bharat Bank Ltd (1951) ILR Pat 708.
1 Collins v Martin (1797) IB & P 648; Mutha Krishna v Veeraraghava (1915) 38 Mad 297; as to consideration for negotiable instruments, see ss 43, 44 and 45.
2 SD Burman v K Malokar AIR 1976 Gau 103.
3 Poirier v Morris (1853) E&D 89; SD Burman v K Malokar AIR 1976 Gau 103; JMS Pinto v AC Rodrigues AIR 1976 Goa 8; see also the Supreme Court decision in Indian Bank v K Nataraja Pillai (1994) 79 Comp Cas 674.
4 Daulatram v Nagindas (1913) 15 Bom 333.
5 Milnes v Dawson (1850) 5 Ex 948 ; Holliday v Atkinson (1826) 5 B&C 501.
6 (1914) 16 Bom LR 743 [LNIND 1914 BOM 110].
7 Indian Contract Act 1872,s 25, expln II; Muthu Kurapppa v Habib AIR 1955 Mad 43 [LNIND 1954 MAD 150].
8 Jones v Gordon (1877) 2 App Cas 616 , p 631.
9 NR Thiagarajan v OV Rengaswamy Reddiar (2000) 1 BC 136 [LNIND 1999 MAD 1022].
10 Chapman v Cottrel (1865) 34 LJ Ex 186; Smith v Miendry (1860) 29 LJQB 172.
11 (1992) 73 Comp Cas 375.
12 AIR 1979 All 253.
13 Ramanadan Chettiar v Gundu Aiyyar AIR 1928 Mad 1238 [LNIND 1928 MAD 148] per Thiruvenkatachariar J.
19 Swan v North British Australasian Co (1863) 2 H&C 184; Gomersall In Re (1857) 1 Ch D 137 .
20 Jones v Gordon (1877) 2 App Cas 616 , p 628.
21 (1855) 17 CB 161.
22 Bank of Bengal v Fagan (1851-54) 5 MIA 27, p 38.
23 (1824) 3 B&C 466.
24 (1906) 8 Bom LR 921 [LNIND 1906 BOM 111].
25 U Ponnappa Moothan &; Sons v Catholic Syrian Bank Ltd AIR 1991 SC 441 [LNIND 1990 SC 552], U Ponnappa Moothan &; Sons v Catholic Syrian Bank Ltd (1991) 1 SCC 113 [LNIND 1990 SC 552].
Payment in due courseKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
10 Payment in due course ‘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 the amount therein mentioned.38
(1)PAYMENT IN DUE COURSE, REQUISITES
Payment, in order to operate as a discharge of a negotiable instrument, must satisfy the following conditions:
(i) The Payment Should be in Accordance with the Apparent Tenor the Instrument
Apparent tenor means ‘in accordance with what appears on the face of the instrument,’ ie, the intention of the parties. It is, therefore necessary that payment should be made at or after maturity. A payment before maturity is not a payment according to the apparent tenor of the instrument, and is therefore not a payment in due course. Thus, if a bill payable at a future date is paid before its maturity, the payment is not in accordance with the apparent tenor of the instrument and consequently is not a payment in due course. A payment before maturity may discharge the immediate parties to the transaction, but its effect on third parties is otherwise, for a payment in due course is a payment at maturity, and not by anticipation. Thus, if an instrument is paid before maturity and is subsequently indorsed over, it is valid in the hands of a bona fide indorsee.39
A payment by the drawee or acceptor before maturity merely operates as a purchase of the instrument and he is not precluded from re-issuing it.40 Payment must be made by or on behalf of the drawee or acceptor.
A payment in due course should be made in money only, for the instrument is expressed to be payable in money only. The holder is entitled to be paid in money only and no other form of payment can be substituted except with his consent, in which case, any mode of payment may be adopted, eg, payment by cheque or another bill.
(ii) The Person to Whom Payment is Made Should be in Possession of the Instrument
A payment cannot be a payment in due course, if made without requiring production of the instrument. It is necessary that payment should be made to a person who is in a position to give a valid discharge. Therefore, payment must be made to the holder or some person authorised to receive payment on his behalf. Where the instrument is payable to a particular person or order, and is not indorsed by him, payment to any person in actual possession of such an instrument will not amount to a payment in due course. An instrument is payable to bearer or is indorsed in blank, payment to the person in possession of the instrument, in the absence of suspicious circumstances, is a payment in due course.
The next issue is as to who can make the payment. Any party to a bill can make the payment, and such party acquires the right of the holder, from whom he took the instrument, against all parties prior to him. No stranger has a right to pay a bill or note payable by another, so as to acquire the right of a holder. A stranger may, however, pay supra protest and for honour of some party to the bill or note. A payment by a stranger has been held to be valid satisfaction of the bill if it is made on account of the
acceptor, and the acceptor either presently agree to it or subsequently adopts it.41
(iii) The Payment Should be Made in Good Faith and Without Negligence, and Under Circumstances that do Not Afford a Reasonable Ground for Believing that the Person to Whom it is Made is Not Entitled to Receive the Amount
If the circumstances are suspicious, the person making the payment must make inquiries, and if he pays and neglects to make inquiries, such payment is not a payment in due course. Thus, where a bill payable to bearer is stolen, and the thief presents it to the acceptor at maturity, and the acceptor pays it to him in good faith, without having reason to believe that the presenter is the thief, it is a payment in due course and the acceptor is discharged. However, payment of an instrument in effect payable to the bearer is not in due course, if the person paying knows or has reason to believe that the instrument is a stolen one and the person demanding payment is not entitled to receive the payment. A payment by the acceptor of a bill, after receiving orders from the drawer to stop payment, is not a payment in due course.42
As regards a Shah Jog hundi, payment made without inquiring about the respectability of the person presenting it for payment, is not a payment in due course.43 Further, before making a payment on a negotiable instrument, the person making such payment should ensure that the person presenting it for payment is the person entitled to receive such payment thereon. Thus, if the drawee of a hundi negligently makes payment to a wrong person, such payment is not a payment in due course, and the drawee will remain liable to pay the lawful owner for the full amount of the hundi again.44
Payment made on a cheque with a forgery of the drawer’s signature cannot be regarded as payment in due course.45
38 See ss 59(1)and90 of the Bills of Exchange Act 1882.
39 Burbridge v Manners (1812) 3 Camp 193.
40 Morley v Culverwell (1840) 7 M&W 174.
41 Babshaw v Bush (1851) 11 CB 191; Cook v Lister (1863) 32 LJCP 121.
42 Lalla Mal v Keshav Dass (1904) 26 All 495.
43 Ganesh Das v Lachmi Narayan (1916) 18 Bom 570; Bhuputram v Hari Prio (1901) 5 CWN 313.
44 Rai Bahadur Sahu v Charles (1904) 8 CWN 841.
45 Allahabad Bank Ltd v Kul Bhushan AIR 1961 Punj 571, relying on Abbu Chettiar v Hyderabad State Bank AIR 1954 Mad 1001 [LNIND 1954 MAD 30].
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
11 Inland instrument A promissory note, bill of exchange or cheque drawn or made in46 [India] and made payable in, or drawn upon any person resident in,47 [India] shall be deemed to be an inland instrument.48
(1)REQUISITES OF INLAND INSTRUMENTS
The liabilities of the drawer of the bill of exchange and the maker of the promissory note are to be determined by the law of the place where the instrument is drawn or made.49 The same is applicable to the issues about the form of the instrument and its negotiability is determined based on the place where they are drawn or made. Thus, the determination whether the instrument is an inland as laid down in s 11 is very important. If the instrument is covered under s 11, then the Act applies to it. The requisites of an inland instrument are:
(a) that it must be drawn and made payable in India; or
(b) that it must be drawn in India upon some person resident in India, though it may be made payable in a foreign country.
As a promissory note is not drawn upon any person, it is necessary that an inland note should be both made and payable in India. An inland instrument does not cease to be such because it is indorsed in a foreign country and is in circulation there.50
In AG Kidston & Co v Seth Bros ,51 it was held that a bill of exchange drawn upon a resident of India is an inland bill irrespective of the place where it was drawn. This decision it is submitted does not appear correct, but was followed in C Somayya v EV Chinniah Konar ,52 where the parties to a promissory note were Indians temporarily residing in Singapore and the note was executed there and affixed with Indian stamps.
Examples of inland bills:
(i) A bill drawn in Calcutta on a merchant in Mumbai but indorsed in Paris.
(ii) A bill drawn in Mumbai on a merchant in Chennai and accepted payable in America.
(iii) A bill drawn in Chennai upon a merchant in Brussels and accepted payable in Mumbai.
46 Substituted by Act 36 of 1957,s 3 and Sch II, for ‘a State’.
47 Ibid.
48 See ss 4 and 83(4)of the Bills of Exchange Act 1882.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
12 Foreign instrument Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument.53
(1)FOREIGN INSTRUMENT
Foreign bills of exchange are:
(a) Bills drawn outside India and made payable in or drawn upon any person resident in any country outside India.
(b) Bills drawn outside India and made payable in, or drawn upon any person resident in, India.
(c) Bills drawn in India upon persons resident outside India and made payable outside India.
The special point to note about foreign bills is that they must be protested for dishonour if such protest is required by the law of the place where they are drawn. However, protest in the case of inland bills is optional.
The mere fact that a bill is negotiable in the country of its issue will not make them negotiable in another country, unless the same is negotiable by the usage of that country.54
53 See ss 4 and 83(4)of the Bills of Exchange Act 1882.
54 Picker v London &; County Banking Co 18 QBD 515; see ss 100 and 104.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
13 Negotiable instrument
55[(1) A ‘negotiable instrument’ means a promissory note, bill of exchange or cheque payable either to order or to bearer.
Explanation (i).- A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation (ii).- A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last indorsement is an indorsement in blank.
Explanation (iii).- Where a promissory note, bill of exchange or cheque, either originally or by indorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.]
56[(2) A ‘negotiable instrument’ may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees.]57
(1)NEGOTIABLE INSTRUMENT
Bills of exchange, promissory notes, and cheques are the most common examples of what are called negotiable instruments. It is a fundamental principle of English law that no person can acquire a title to a personal chattel from a person who is not the rightful owner, ie, a person cannot give a better title than he himself has; nemo dat quod non hobet. The only exception to this general rule arises by virtue of a statute or custom prevailing among merchants. Bills, notes and cheques are made negotiable by law merchant. A negotiable instrument can also be defined as follows:
A negotiable instrument is one the property in which is acquired by anyone who takes it bona fide, and for value, notwithstanding any defect of title in the person from whom he took it; from which it follows that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of the instrument.58
A negotiable instrument differs from ordinary chattels in the following three important aspects:
(a) The property in it, ie, the complete right of ownership, passes by delivery and not merely the possession, ie, the right to retain it as against anyone except the true owner.
(b) The holder in due course is not in any way affected by any defect of title of his transferor or of any prior party.
(c) The holder in due course can sue upon it in his own name.
In order to be valid, a bill, note or cheque need not be ‘negotiable’, because, under the Act non-negotiable notes, bills or cheques fall within the definition contained in ss 4 and 5, and are subject to all provisions of the Act except those which relate to instruments which are negotiable. According to the Act, an instrument to be negotiable must be payable in any one of the following five forms:
Prior to the passing of the Negotiable Instruments (Amendment) Act 8 of 1919, it was held in India that a bill or note drawn payable to a specified person, without words authorising transfer, as not negotiable.59 Therefore, in India, an instrument drawn payable to a specified person, eg, ‘pay AB’, would not be negotiable. Under the old law, therefore, in order to make an instrument negotiable, it was necessary to add the words ‘…or order’ or ‘…or bearer’, to the name of the payee. Even so, the mercantile community as well as banks dealt with cheques payable without the addition of the words ‘or order’ or ‘or bearer’ as payable to the named payee or his order.
The Bombay High Court in Dossabhai v Virchand 60 confirmed on appeal) held that a cheque having the word ‘bearer’ struck out without substitution of the word ‘order’ is not negotiable within the meaning of the Act and that the custom off trade which existed in the Bombay market, whereby such a cheque was regarded as an order cheque and negotiable, extended the definition of the phrase negotiable instrument contained in s 13 of the Act and, therefore, no legal recognition could be given to it. This decision caused a great deal of confusion in commercial circles.
This brings the law in conformity with the prevailing custom, and to set right the difficulty created by the decision of the Bombay High Court, the Negotiable Instruments (Amendment) Act was passed in 1919. The amendment is incorporated in explanation (i) of the Act. Thus, where an instrument is made payable to a particular person and does not contain any words prohibiting transfer or indicating an intention that it should not be transferable, it should be deemed to be an instrument, payable to ‘order’ and negotiable. The result of the amendment is that, the word order or bearer is no longer necessary to render a bill, note or cheque negotiable. Also the mere scoring off of the words ‘.. .or bearer’ appearing on a cheque does not take away its negotiability. To deprive it of negotiability, there should be an express prohibition of transfer or an indication that the cheque is not negotiable.61 For instance:
(i) A bill or cheque is drawn in the form ‘Pay C one hundred rupees’. This, in legal effect, is a bill or cheque payable to C or order and is a negotiable instrument.62
(ii) A note is made in the form ‘I promise to pay Rs 500 to B only’. The note is not negotiable.
When a bill, note or cheque contains words prohibiting transfer or indicating an intention to make it non-transferable, it is valid as between the parties thereto, though it is not a negotiable instrument.
(ii) Meaning of ‘Payable to Bearer’
The word ‘bearer’ is not defined by the Act, but it refers to the person in possession of a bill or note payable to bearer. By virtue of explanation (ii) of the Act, a bill, note or cheque is payable to bearer, when expressed to be so payable or when the only or last indorsement on it, is an indorsement in blank. Where a payee indorses in blank, a cheque payable to order, the cheque becomes payable to bearer within the meaning of explanation (ii). For instance:
(i) A promissory note in the form ‘…three months after date I promise to pay bearer’ is payable to bearer.
(ii) A bill payable ‘…to AB or bearer’ is payable to bearer.
(iii) A bill is made payable to ‘William Smith or order’. William Smith indorses it in blank and negotiates it. The bill is payable to bearer.
(iii) Meaning of ‘Payable to Order’
Explanation (iii) of the Act is declaratory.63 It lays down that a bill ‘payable to the order of X’ is in legal
Page 3 of 4Negotiable instrument
effect payable to X or order, so that X can demand payment without giving a responsible indorsement, but if X orders it to be paid to any other person, he must indorse it. X, of course, is bond to give a receipt to the same extent as any other person who receives payment of money.
(2)NEGOTIABLE INSTRUMENT BY USAGE OR CUSTOM
Negotiability is a creation of mercantile custom, which therefore became part of the law merchant. The test of negotiability is thus stated by Blackburn J:
It may, therefore, be laid down as a safe rule that where an instrument is by the custom of trade transferable like cash, by delivery, and is also capable of being sued upon by the person holding it pro tempore, then it is entitled to the name of a ‘negotiable instrument’ and the property in it passes to a bona fide transferee for value, though the transfer may not have taken place in market overt.64
The character of negotiability has been acquired by certain documents by custom. Thus, in England, exchequer bills, dividend warrants, circular notes, share warrants, scrip certificates, debenture bonds of companies, and bonds of foreign and colonial governments have been held to be negotiable by custom.65 In the case of foreign instruments, however, the mere fact that they are negotiable in the country in which they were issued will not make them negotiable in England, unless they are negotiable by the usage of England.66 It is presumed, therefore, that the list of negotiable instruments is not closed.
The Act mentions three kinds of negotiable instruments only, namely, bills, notes and cheques. However, the fact that instruments other than these are not referred to in s 13 does not imply that there cannot be negotiable instruments other than those enumerated in the section. Usage may endow other instruments with incidents of negotiability, and the Indian legislature has indicated that courts in India may follow the practice of English courts in extending the character of negotiability to other instruments. Section 137 of the Transfer of Property Act 1882 recognizes the negotiability of instruments ‘by law or custom’. Thus, in India, government promissory notes,Shah Jog hundis,67 and delivery orders for goods have been held to be negotiable by usage or custom.68
A customer may authorize his banker to make payment from his account by instruments which are not cheques. These may be valid orders, but they will not have the characteristics of negotiable instruments.69
It is well settled that a bill of lading is negotiable although it is not a negotiable instrument in the strict sense of the term. There is conflicting judicial opinion on the question whether a railway receipt is negotiable.70
A share certificate is not a negotiable instrument.71 A commercial letter of credit is not negotiable, but the benefit of the credit is negotiable. The credit itself may be assigned or transferred with the beneficiary’s consent. The benefit under a letter of credit has been held to be a chose in action.72
(3)Government Promissory Notes
Government promissory notes come within the definition of the section, and considering the provisions of s 6 of the Indian Securities Act 1886, it appears that the Act is intended to apply to government promissory notes.73 They can be transferred by indorsement, and need not be assigned as ordinary choses in action.
55 Substituted by Act 8 of 1919,s 3 for sub-s (1).
56 Added by Act 5 of 1914, s 2.
57 See ss 7(2)and8 of the Bills of Exchange Act 1882.
58 Willis, The Law of Negotiable Securities, p 6.
59 Jetha Parkha v Ramchandra 16 Bom 689.
60 (1919) 21 Bom LR 1 [LNIND 1918 BOM 157].
61 Muthoottu Chitty Fund v VC Lukose (1992) 73 Comp Cas 414; M George &; Bros v KC Cherian (1990) 68 Comp Cas 188.
62 AK Hameed Haji v Appukutty AIR 1969 Ker 189 [LNIND 1968 KER 127]; Jagjivandas Bhikhabai v Gumanbhai Narottamdas AIR 1967 Guj 1 [LNIND 1965 GUJ 84] where the maker of note undertook to pay ‘.. .whenever you demand’.
63 Smith v M’Clure (1804) 5 East 476; Harvey v Cane (1876) 34 LTNS 64.
64 Crouch v The Crdit Foncier Co (1873) LR 8 QB 374, p 381.
65 Brandao v Barnett (1846) 12 CI & F 787; Gorgier v Mieville (1824) 3 B&C 45; London Joint Stock Bank v Simmons [1892] AC 201 ; Bechuanaland Exploration Co v London Trading Bank [1898] 2 QB 658 ; Goodwin v Robarts LR 10 Ex 337.
66 Picker v London and County Banking Co [1887] 18 QBD 515 .
67 Means a hundi which is payable only to a respectable holder; it is a negotiable instrument which does not fall within the technical definition as defined in the Act.
68 Bank of Bengal v Meleod (1851-1854) 5 MIA 1; Kanniyalal v Balaram 31 MTT 248; Anglo-India Jute Mills Co v Omada Mull (1928) 38 Cal 127; Ameerchand &; Co v Ramdas (1914) 16 Bom LR 525 [LNIND 1914 BOM 61].
69 James Mc Loughlin, Introduction to Negotiable Instruments, 1975 edition, p 130; relied upon in Vinod Baid v SGK Oriental Degree College (2003) 3 Bank CLR 601 (AP).
70 Ibrahim Isaphai v Union of India AIR 1996 Guj 6; Morvi Mercantile Bank Ltd v Union of India (1965) 35 Comp Cas 629.
71 Praga Tools Corpn Ltd v Patny AIR 1968 AP 320 [LNIND 1966 AP 273].
72 Trans Trust SPRL v Danubian Trading Co Ltd [1952] 1 All ER 9709; Joseph Pyke &; Son v Kedarnath AIR 1959 Cal 329; United Bank of India v Nederlandsche Standard Bank AIR 1962 Cal 325 [LNIND 1961 CAL 94].
73 Hunsraj v Ruttonji 24 Bom 65; Bank of Bengal v Mcleod (1851-1854) 5 MIA 1.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
14 Negotiation When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.74
(1)TRANSFER OF A NEGOTIABLE INSTRUMENT
A negotiable instrument may be transferred from one person to another in two ways:
(1) By negotiation under the Act (ss 14, 46, 47, 48).
(2) By assignment of the instrument as an ordinary chose in action under the Transfer of Property Act 1882,ch VIII, s 130.
(i) Transfer by Negotiation
Transfer by negotiation is the only mode of transfer recognized by the Act. An instrument is considered to be negotiated from one person to another when the transferee is constituted the holder. The holder of an instrument is one who is entitled in his own name to the possession of the instrument and to recover the amount due thereon from the parties thereto. It has been held that the delivery of cheque to the original payee is not negotiation.75
To constitute the transferee the holder of the instrument, the provisions of the Act with regard to the mode of transfer must be followed. These provisions are found in ss 47 and 48 of the Act. The transfer of a negotiable instrument payable to bearer can be effected by mere delivery, but if it is payable to order it can only be negotiated by indorsement and delivery.76
Thus, a promissory note payable to the order of the payee can be negotiated by indorsement and delivery, and if such note be assigned without indorsement the assignee cannot sue on the note as such.77 Similarly, a promissory note payable to order cannot, without indorsement, be negotiated by the mere execution of a deed of assignment.78
(ii) Transfer as Chose in Action
Bills, notes and cheques are chooses in action, and such have been held to be assignable without indorsement. The Act leaves untouched the principles of the general law which apply to the transfer of chooses in action. Thus, notes, bills and cheques may be assigned by instruments in writing and without any indorsement. However, by such an assignment, the assignee only acquires the rights of his assignor and no more.79 The essential difference between transfer by negotiation and transfer as a chose in action lies in the fact that in the latter case, the assignee does not acquire the rights of a holder in due course, but only the right, title and interest of his assignor; whereas in the former case, the transferee may become a holder in due course.80
Every transfer of instrument which is not expressly prohibited by words appearing on its face may be negotiated. When inspite of such words a bill is indorsed, the indorser is liable to the indorsee on his indorsement, for he is virtually the drawer of a new bill.81
A non-negotiable bill, note or cheque, cannot be assigned by mere indorsement or by mere delivery,
but if its transferability is not expressly prohibited by its terms, it may be assigned as a chose in action or an actionable claim by a separate instrument in writing under the provisions of the Transfer of Property Act 1882. An assignee of such an instrument claiming under a mere indorsement cannot maintain a suit upon it.82 An oral assignment of a promissory note is not a valid assignment under s 130 of the Transfer of Property Act 1882.83
A promissory note was allotted, in partition proceedings, to the share of the payee’s father. The payee did not indorse it in favour of his father. The father brought a suit on the note, impleading the son as a defendant. It was held that there was no assignment of the note by operation of law.84
If a person hands over a negotiable instrument to an agent for safe custody, it is not negotiation as defined by the section. There must be a transfer, and the transfer should be such as to constitute the transferee a holder under s 8 of the Act.85
In a case relating to a negotiable instrument drawn in India, to which the Act applied, it was held that though the word issue is not defined in the Act, (s 2 of the Bills of Exchange Act 1882, defines issue as the first delivery of a bill or note, complete in form, to a person who takes it as a holder) the definition of negotiation in the section makes the payee a holder by negotiation and, therefore, a cheque delivered to the payee was issued and that he was a holder.86
(2)DIFFERENCES BETWEEN ASSIGNABILITY AND NEGOTIABILITY
The differences are as follows:
(i) Consideration is presumed to have been given for a negotiable instrument until the contrary is proved. In the case of assignment of ordinary choses in action, consideration must be proved as in the case of any ordinary contract.
(ii) Notice of transfer of negotiable instruments is not necessary, whereas notice of the assignment of choses in action must be given by the assignee to the debtor.
(iii) The assignee of a chose in action takes it subject to the defences and equities between the assignor and the original debtor, even though he took the assignment in good faith and for value. However, the holder in due course of a negotiable instrument takes it free from any defect in the title of his transferor, and thus at times, may acquire a better title.
74 Bills of Exchange Act 1882,s 31(1).
75 RE Jones Ltd v Waring and Gillow Ltd [1926] AC 670 pp 680 687 695 (HL).
76 See the Negotiable Instruments Act 1882,ss 46, 47, 48.
77 Arunachalla Reddi v Subba Reddi (1907) 17 MLJ 393.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
15 Indorsement When the maker or the holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as the negotiable instrument, he is said to indorse the same, and is called the ‘indorser’.87
(1)INDORSEMENT
Section 15 contemplates that a promissory note, bill of exchange or a cheque can be negotiated or transferred by making an endorsement either on the instrument or on a separate paper annexed thereto.88
Indorsement ordinarily means anything written or printed upon the back of a deed or writing. The indorsement of a bill of exchange, promissory note, or cheque means the writing of a person’s name, usually on the back of the instrument, for the purpose of negotiation. No particular form of words is necessary for an indorsement.89 The indorsement must be written on the instrument and must be signed by the indorser. The simple signature of the indorser without any additional words is sufficient. However, in order that the signature may operate as a transfer of the instrument, the signature must be on the instrument or on a slip of paper annexed to it.
For an indorsement to bind the payee or holder of a promissory note, it must be made either by the payee or the holder himself or by a duly authorised agent acting in his name under s 27 of the Act.90
An indorsement on the face of an instrument is valid.91 The signature, placed on the back of a negotiable instrument of a person, who is neither the maker not the holder thereof, does not amount to an indorsement within the meaning of the section.92
Where the words made over or the word assign are used, the intention of the parties has to be looked into, ie, whether the parties wanted to have an indorsement of the promissory note, and not an assignment thereof. If an indorsement contains words equivalent to a direction to pay, though these may not be the actual words connecting the directions, it would amount to a direction to pay and would be an indorsement.93
An express promise in writing to indorse a bill is not an indorsement.94 Similarly, the assignment of a note by a separate writing is not an indorsement.95
Where A gave a bankrupt person, (before his bankruptcy) cash for a bill, but the bankrupt refused to indorse it, thinking it better without his name, and afterwards, on dishonour of the bill, proved the amount under the commission, the Lord Chancellor ordered the debt to be expunged, observing that this was a sale of the bill.96
It is not necessary to use any particular form of words. Thus, where a promissory note bore on it the words ‘I have received this day from you the sum of Rs X due for the principal and interest and assigned this note to you with power to recover the amount due under it by showing the same,’ it was held to be a valid indorsement.97
If a payee intending to complete a bill already indorsed by a third person, places his indorsement inadvertently below the indorsement already on the bill, his inadvertence does not nullify the intention of the parties or alter the rights which they would have had otherwise. Similarly, in completing the bill, the drawer may inadvertently place his own indorsement below that of the third person. In this case, the order in which indorsements appear is disregarded and the drawer is entitled to enforce the bill in accordance with the intention of the parties.98
As there is no legal limit to the number of indorsements that may be written on an instrument, it may happen that there is no room left to write them all on the back of the instrument. In such a case, a slip of paper is annexed to it on which all the extra indorsements may be written. The slip of paper is called an ‘allonge’. It becomes a part of the
The indorsement of a promissory note, bill of exchange or cheque is completed only by delivery, actual or constructive, made by the indorser, or by his duly constituted agent, with the intention of passing the property therein.1 Until delivery of the instrument, the contract of the indorser on the bill or note is incomplete and may be revoked at any time.2 In the words of Maule J:
The liability of an indorser to his immediate indorsee arises out of the contract between them; and this contract in no case consists exclusively in the writing popularly called an indorsement, which is indeed necessary for the contract in question; but that contract arises out of the written indorsement itself, the delivery of the bill to the indorsee and the intention with which the delivery was made an accepted as evinced by words, spoken or written by the parties, and the circumstances, such as the usage of the place, the course of dealing between the parties and their respective situation, under which the dealing took place.3
(3)WHO MAY INDORSE
The answer to this question can be found in s 15 read with ss 8 and 51. Under s 15, indorsement can be made by the holder of a negotiable instrument or the maker signing it otherwise than as such maker. Section 51 provides that every sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payees or indorsees of a negotiable instrument may indorse and negotiate it.
A payee or indorsee may indorse an instrument only if he is the holder. For an indorsement to bind the payee or the holder of a promissory note, it must be made either by the payee or the holder himself or by a duly authorized agent acting in his name.4
By virtue of s 8, the payee of an instrument can be the holder, and so he may indorse it. The present section, while it mentions indorsements by the maker or holder of a negotiable instrument, does not provide for indorsements by the drawer of a bill when it is drawn payable to drawer’s order. In such a case, the drawer being in lawful possession of the instrument may indorse it.5
If a bill or note is made payable to the drawer’s or the maker’s order, in order to negotiate the instrument, the drawer or the maker should indorse it. However, in indorsing such an instrument, the maker is acting neither as the maker nor as a holder, but in a different capacity. He merely indorses the instrument as a person in lawful possession of the instrument.6 The payee of a promissory note may indorse it in his own favour, or two joint payees may indorse it in favour of either of them.7
Under English law, a person who signs a negotiable instrument incurs the liabilities of an indorser to a holder in due course, even if he is a stranger to it.8 A third person, signing a bill, usually places his signature upon the back of it. Hence, he is said to back the bill (and he is called the backer) and his signature is commonly called an indorsement. The object of backing a bill is to increase its value by reason of the additional credit derived from the signature of the third person. This presupposes that the third person, by his signature, has made himself liable upon the bill. This is the case where the bill has been discounted and the bill is in the hands of a holder in due course. The third person comes under an obligation to all subsequent holders in a way precisely similar to that of the drawer. The indorsement, however, does not impose the same obligation in the case of prior parties.9
The backer of the instrument would be liable to the parties, if that is the intention of the parties to the transaction.10
(i) C undertakes to guarantee a debt from B to A. B signs a blank acceptance, and C adds his signature as indorser. The document is handed to A, who fills it up as a bill payable to the drawer’s order, inserting his own name as drawer. C, though an indorser, is liable to A, the drawer of the bill.11
(ii) A sells goods to B, and draws on him a bill payable to his own order. Before the goods are delivered C indorses the bill to guarantee B. B accepts the bill, and C hands back the bill to A. A completes the bill by making it payable to himself. If the bill is dishonoured, A can recover from C, the indorser, although he can only so recover on a variation of the written agreement, since an indorser is not liable to the drawer or payee, but vice versa.12
Page 3 of 3Indorsement
Under the section, a stranger cannot indorse a negotiable instrument. If, however, a person who is neither the maker nor the holder of an instrument backs it with his signature, he neither becomes an indorser, nor incurs the liabilities of such a person. However, such a person may be held liable as a surety, if he intends to guarantee payment. If an instrument is indorsed by a stranger, no suit can be maintained thereon by him as the indorsement is not by a holder.13
When, in a bill payable to order the payee or indorsee is wrongly designated, or his name is mis-spelt, he may indorse the bill as therein described, adding if he thinks fit, his proper signature.14 Mrs W Brown is legally a misnomer of the wife of W Brown, and if her name is Sarah, her proper signature ought to be Sarah Brown.
87 See ss 2, 32(1)and56 of the Bills of Exchange Act 1882.
88 M Ethirajulu v Rangam Adinarayana &; ors (2005) 2 JCC (NI) 166 (AP), M Ethirajulu v Rangam Adinarayana &; ors (2006) 2 Bank CLR 123 (AP).
89 Sivarama Krishna v Moideen (1910) ILR 33 Mad 34.
90 Rai Ram Kishore v Ram Prasad Mishir AIR 1952 All 245 [LNIND 1951 ALL 187]; Punjab National Bank v Britannia Industries Ltd (2001) 2 BC 707 [LNIND 2001 CAL 89] DB.
91 Young v Clover (1857) 3 Tar NSQB 637; Ex p Yates v (1858) 2 De G&J 191; Ramanlal v Haran Chandra 3 BLR OCJ 130.
92 Thakursey v Kishen Das (1922) 67 IC 282.
93 Murugan v Ramaswami AIR 1955 Mad 53 [LNIND 1954 MAD 153].
94 Harrop v Fisher (1861) 10 CBNS 204; Rose v Sims (1830) IB & Ad 521.
95 Barrington In Re (1804) Scho & Lef 122.
96 Ex p Shuttleworth v (1797) 3 Ves 368.
97 Sivaramakrishna v Moideen (1910) 33 Mad 34.
98 National Sales Corpn v Bernadi [1931] 2 KB 188 .
99 Manmohinee v Secretary of State for India 13 BLR 359, p 373.
1 Denton v Peters (1870) LR 5 QB 475.
2 Brind v Hampshire (1836) 1 M&W 365, p 373.
3 Castrinque v Buttingieg (1865) 10 Moo 95, p 108 (PC).
4 Ram Kishore v Ram Prasad AIR 1952 All 245 [LNIND 1951 ALL 187](FB).
5 See explanation to s 51.
6 Ibid
7 Muhammad v Rango Rao (1901) 24 Mad 654.
8 See Bills of Exchange Act 1882,s 56.
9 Steele v Mckinley (1880) 5 App Cas 772 , p 782.
10 Mcdonald (Gerald) &; Co v Nash &; Co [1924] AC 625 .
11 Gooch In Re [1921] 2 KB 593 .
12 Mcdonald (Gerald) &; Co v Nash &; Co [1924] AC 625 .
13 K Naidu v Muttiah Chetty (1918) 45 IC 186.
14 Willis v Barret (1816) 2 Stark 26; Leonard v Wilson (1834) 2 Cr & M 489.
Indorsement ‘in blank’ and ‘in full’, ‘Indorsee’Khergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
16 Indorsement ‘in blank’ and ‘in full’, ‘Indorsee’
15[
(1) If the indorser signs his name only the indorsement is said to be ‘in blank’ and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be ‘in full’, and the person so specified is called the ‘indorsee’ of the instrument.
(2) The provisions of this Act relating to a payee shall apply with the necessary modifications to an indorsee.]16
(1)INDORSEMENT IN BLANK AND FULLAn indorsement in blank, also known as a general indorsement, specifies no indorsee. It consists of the bare signature of the indorser, and a bill so indorsed becomes payable to bearer. A bill is payable to the order of Jonathan Jones. Jonathan Jones signs on the back of the bill thus: ‘Jonathan Jones’. This is an indorsement in blank. In such a case, so long as the indorsement continues in blank, the property in the instrument is payable to bearer. For, there is no difference between a note indorsed in blank and one payable to bearer. They both go by delivery and possession proves property in both cases.17
An indorsement in full, also known as a ‘special indorsement’ specifies, in addition to the signature of the indorser, the person to whom or to whose order, the instrument is payable. Thus, an indorsement, ‘Pay Jonathan Jones or order or Pay to Jones’ followed in each case by the signature of the indorser, is an indorsement in full. No specific form of words is necessary for an indorsement in full, and it is sufficient if the words contain a direction of the nature contemplated by the section.
An indorsement in blank can be converted by the transferee into an indorsement in full in his favour.18
Although it was stated on the back of certain promissory notes that they were assigned to a certain person or order, it was held that the writing amounted to an indorsements under the section. It has been held that there could be an assignment of a debt, but not of a promissory note.19
15 Section 16 renumbered as sub-s (1) and sub-s (2) added by Act 5 of 1914, s 3.
16 See of the Bills of Exchange Act 1882 s 34.
17 Peacock v Rhodes (1781) 2 Doug 633.
18 D Sethuramalingeswara Rao v P Pichaiah (1993) 78 Comp Cas 616
19 Mulji Mehta &; Sons v C Mohan Krishna AIR 1997 AP 153 [LNIND 1996 AP 643]. See, however notes to s 14.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
17 Ambiguous instruments
Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be thenceforward treated accordingly.20
(1)AMBIGUOUS INSTRUMENTS
The cases in which an instrument may be treated as ambiguous are given in s 5 as follows:
Where in a bill drawer and drawee are the same person, or where the drawee is a fictitious person or a person is not having capacity to contract, the holder may treat the instrument, at his option, either as a bill of exchange or as a promissory note.21
The section is intended to meet a situation where the parties, being unaware of the technicalities contained in ss 4 and 5, have used such words in framing the instrument that it becomes a serious issue of contention as to whether it is a promissory note or a bill of exchange. The section does not apply to a situation where there is no ambiguity, and it can be held that the instrument is either a promissory note or a bill of exchange.22 For instance:
(i) A addresses an instrument in the form of a promissory note to B, who accepts it. The holder may, at his option, treat it as a note or bill.23
(ii) A bill is drawn by an agent acting within the scope of his authority upon his principal. The holder may, at his option, treat it as a note or bill because the drawer and the drawee are one and the same person.
(iii) X draws a bill on Y and negotiates it away. Y is fictitious drawee. The holder may treat the bill as a note made by X.24
(iv) A firm carries on business in Mumbai and Calcutta. The Mumbai house draws a bill on the Calcutta house. The holder may treat it as a note made by the Mumbai house payable in Calcutta.25
(v) The directors of a joint stock company draw a bill in the name of the company and addressed to the cashier. The holder may treat it as a note by the company.26
(vi) An instrument in the form of a bill of exchange not addressed to any one, may be construed as a promissory note.27
(vii) An instrument on which the word hundi is written need not necessarily be a bill of exchange.
A document was in the following form:
‘Sixty days after date, we promise to pay AB or order the sum of Rs 1,000 only for value received.’
Across the document were the word ‘accepted’ and the signature of the maker XY. The document was held to be a promissory note.28
A bank draft issued by one office of a bank upon another may be treated by the holder as a bill of exchange under the section.29
Once the holder of an ambiguous instrument makes his election either way, he must abide by it, and cannot afterwards fall back on a defence that it is the other kind of instrument.30 In the event of the drawer’s insolvency,
only one proof is allowed against the estate, and there cannot be two proofs by reason of the forms of the instrument.31
An ambiguous instrument should be distinguished from an inchoate instrument. In the case of an ambiguous instrument, the holder, having made his election to treat the instrument as a note or bill can institute a suit on it, and he is not precluded from doing so because of the ambiguous character of the instrument. An inchoate instrument only operates as an authority to the holder to fill in the instrument, but until that is done the holder cannot maintain an action upon it. Also in the case of an ambiguous instrument, the court puts a construction most favourable to its validity, and construes it as a bill or note.32 However, an instrument in the form of a bill, containing the name neither of payee nor of drawer, is an inchoate instrument, though it is addressed to a person and is accepted by him. Such an instrument cannot be treated as an ambiguous instrument within the meaning of the section.33
20 See s 5(2)of the Bills of Exchange Act 1882.
21 Bills of Exchange Act 1882.
22 Shiv Kumar Gupta v Permanand Ramgopal AIR 1973 Del 135.
23 Block v Bell (1831) Moo & R 149; Eddis v Bury (1827) 6 B&C 433.
24 Smith v Bellamy (1817) 2 Stark 233.
25 Miller v Thompson (1841) 11 LJCP 21.
26 Allen v Sea Fire Life Assurance Co (1850) 9 CB 574.
27 Fielder v Marshall (1861) 330 LJCP 158; Peto v Reynolds (1854) 9 Ex 410 .
28 Harsukdas v Dhirendra Nath (1941) ILR 2 Cal 107; relied on in Shiv Kumar Gupta v Permanand Ramgopal AIR 1973 Del 135.
29 State Bank of India v Jyoti Ranjan Mazumdar AIR 1970 Cal 503 [LNIND 1970 CAL 83].
30 Sulleman v New Oriental Bank Corpn Ltd (1913) ILR 15 Bom 267.
Where amount is stated differently in figures and wordsKhergamvala: Negotiable Instruments Act
Khergamvala
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18 Where amount is stated differently in figures and words
If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid.34
(1)FIGURES AND WORDS CONTRADICTORY
In bills and notes, the amount is written in figures in the margin at the top of the instrument, and in words, in the body of the instrument. However, the figures at the top, called marginal figures, do not form part of the bill. The object of adding the marginal figures is that the amount of the instrument might strike the eye immediately, and may in fact form a summary of the contents.35 The section states that when there is a discrepancy between the amount stated in figures and in words, the amount stated in words shall prevail, and no extrinsic evidence can be adduced to explain the ambiguity.36 For example:
• A bill is drawn ‘Pay to X or order the sum of one thousand rupees’. In the margin, the amount stated is Rs 100. This is a bill for Rs 1,000.
• A bill is drawn for five hundred rupees. In the margin, it is superscribed Rs 550. This is a bill for Rs 500 only.
If the amount is expressed in figures in the body of the instrument and in words in the margin and there is a discrepancy between the two, having regard to the words of the section, it seems that the amount stated in words shall prevail over that stated in figures. However, Byles states: ‘whether written in words or figures, the amount in the body of the bill is the amount to prevail. The superscription is a mere index or summary of the contents.’37
Where there is an ambiguity as regards the words in the body of the instrument, the figures in the margin and the stamp may be looked at in construing these words.38 Again, if there is an obvious omission in the body of the instrument, the marginal figures may be referred to explain them. Thus, where a bill ran ‘Pay fifty…’ and the marginal figures stated GBP 50, it was held to be a valid bill for GBP 50.39
An instrument is not rendered invalid by obvious or intelligible mistakes or omission in the written words, where the intention is quite clear.40 Thus, where a promissory note bearing a 6p stamp, with the figures GBP 50 in the margin was made, but no amount was stated in the body, it was held that as between the parties, it was a good note for GBP 50, there being evidence to show that they had so regarded it.41
In practice, bankers generally return cheques containing a discrepancy between the amount in words and that in figures, with the reason words and figures differ. Sometimes, such cheques are paid if the discrepancy is very small.
34 See s 9(2)of the Bills of Exchange Act 1882.
35 Garrard v Lewis [1882] 10 QBD 30 .
36 Saunderson v Pipe (1839) 5 Bing NC 425.
37 Byles on Bills twenty first edn, p 97, note (r).
Page 2 of 2Where amount is stated differently in figures and words
39 R v Elliot (1777) 1 Leach CC 175.
40 Phipps v Tanner (1833) 5 C&P 488; R v Post (1806) R&R 101.
41 Henry v Addy (1910) 2 IR 688.
End of Document
Instruments payable on demandKhergamvala: Negotiable Instruments Act
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Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
19 Instruments payable on demand
A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand.42
(1)INSTRUMENTS PAYABLE ON DEMAND
The section must be read with s 21 the first sentence of which seems to form a part of this section. The following instruments are payable on demand:
(a) A promissory note or bill of exchange is payable on demand:
(b) When it is expressed to be payable ‘on demand’, or ‘at sight’ or ‘on presentment’ (s 21).
(ii) When no time for payment is specified in it (s 19).
(b) A cheque is always payable on demand and it cannot be expressed to be payable otherwise than on demand (ss 6, 19).
A promissory note, wherein there is neither an undertaking to pay on demand nor many time fixed for payment, is payable on demand and attracts stamp duty under art to the Indian Stamp Act 1899 49(a) of Sch I.43
If a hundi is made payable to a respectable person, this will not prevent it from being a hundi payable on demand even though the payer may be required to make inquiries about the respectability of the payee.44 A hundi payable on demand is payable on the date of execution.45
42 See of the Bills of Exchange Act 1882 s 10(1)(b).
43 KR Krishnan v P Shanmugam (1995) 82 Comp Cas 608.
44 Shah Jayantilal v Thakore Bharat Singh (1965) ILR Guj 1199.
45 Suraj Ram Khurana v Hari Rattan (1973) 75 PLR (D) 88.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
20 Inchoate stamped instruments
When one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in46 [India], and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount:
Provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder.
(1)INCHOATE INSTRUMENTS
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. 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.47 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 paper as a negotiable instrument, and thereafter, the signatory becomes liable in the capacity in which he signed.48 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.49
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.50 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.51
The capacity in which a person signs an inchoate instrument may be determined by the mode and place in which he puts his signature.52 An instrument may be wholly blank or it may be wanting in one or more requisites of a complete bill, ie, it may be blank as to date, amount, drawer, payee, etc. 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.53
Where the holder is given authority to complete an instrument by filling in a certain amount, and in fact he fills up a higher amount, the signer will not be bound by it, except to a holder in due course.54
Where the plaintiff filed in court only stamped promissory notes with the payee’s name left blank, he was allowed to fill in the payee’s name under the provisions of the section and re-present them in court.55
Section 20 is itself an authority to the holder of the signed instrument to fill up the blanks and to negotiate instrument. Once execution of an instrument is admitted, the presumption under s 118(a) would arise that it is
supported by consideration.56 But where plaintiff fails to prove the signature of defendant on the pro-note, s 20 has no application.57
A Division Bench of the Kerala High Court has held in CT Joseph v IV Phillip ,58 that s 20 is not applicable to cheques since it is not required to be stamped.
(2)DELIVERY AND STAMP NECESSARY
The section further requires as a condition of liability that the signer as a maker, drawer, indorser, or acceptor should deliver the instrument to another. There must be negotiation of the instrument, ie a transfer from one person to another, in order to render the signatory of the document liable upon it. In the absence of delivery, the signer is not liable. Thus, where a man signed a blank acceptance, with a stamp upon it, and kept it in his desk, from where it was stolen, completed and negotiated as a bill, it was held that he was not even liable to a holder in due course.59
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 bill.60 Though it is not clear whether the same rule prevails in India, it is submitted that the same should be the rule in India, as the present section gives the authority to fill the instrument only to a holder.61
Further, in order that the statutory estoppel provided for by the section may arise, it is necessary that the paper signed and delivered must be stamped in accordance with the law relating to negotiable instruments in force in India at the time it is so signed and delivered. If the paper is unstamped, the signatory is not estopped from showing that the instrument was filled without his authority.62 If the paper is void for want of stamp, then the signer will not be liable. Inchoate cheques would appear to be covered by the section though they are not stamped since cheques do not attract stamp duty.
A holder in due course is entitled to fill up the blanks, negotiate the instrument and can recover any amount specified thereunder, but he can recover anything exceeding the amount covered by the stamp.63
In terms of s 20(2)of the Bills of Exchange Act 1882, in order that an inchoate instrument, when completed, may be enforceable against any person who became a party prior to its completion, it must be filled up within a reasonable time. There is no similar requirement in the Indian Act. It was, however, held that completion of an incomplete promissory note nearly two years and nine months after filing a suit on the note was no ‘within a reasonable time after the plaintiff received it.64
(3)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.
A person, who signs and delivers a blank or an incomplete instrument, gives prima facie authority to the holder thereof, to make or complete a negotiable instrument for any amount not exceeding that covered by the stamp. If the authority to fill the amount has been clearly stated, as between the parties to the instrument, when completed, there is no liability attaching to the person who signed it if the authority is exceeded, because the proviso to the section says that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder. However, if the instrument is completed and negotiated to a holder in due course, he is entitled to enforce payment of the full amount even though the authority has been exceeded, and even though the signatory might have given secret instructions to the holder that it should be filled in for a smaller amount.65
In the same manner, a person who signs an instrument cannot escape liability by showing that the person to whom the instrument was delivered had, in violation of the confidence reposed in him, used the instrument for purposes other than those for which he was authorised to use it.66
Page 3 of 4Inchoate stamped instruments
The estoppel created by the section against the signatory of an incomplete instrument is only for the benefit of a holder in due course. Thus, if a holder has exceeded the authority given in filling an inchoate instrument, the signatory is not estopped by the section from asserting, as against a holder, other than a holder in due course, that the instrument has not been filled in accordance with the authority given.67
A person cannot claim the rights of a holder unless he can show that he took the instrument in perfect condition and in terms of a complete contract. As to a bona fide holder, the question as to the effect of acceptance or endorsement having been written on a blank piece of paper can be of no importance, unless he can be fastened with the notice of the imperfection. If the holder has notice of the imperfection, he can be in no better position than the person who took it in blank as to any right against the acceptor or indorsee who gave it in blank.68
(4)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 s 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 s 9.69
Section 9 seems to imply and contemplate a negotiation or a transfer to the holder in due course by someone who had the authority to transfer or negotiate the negotiable instrument. The transfer and the negotiation must be of a negotiable instrument, not the transfer of an inchoate document that is not a negotiable instrument under the Act. From the point of view of the proviso contained in s 20, it may also be said that, in the case of an inchoate document, it would be difficult to hold that the possessor of it was either a bona fide transferee or possessor of a negotiable instrument.70 While concurring with the above decisions, Abdul Hadi J in Kadarkarai Reddiar v Arumugam Nadar 71 held that the plaintiff could not hold the defendant liable on a document executed as a blank promissory note and delivered to the plaintiff who later completed it for an amount larger than what the defendant admitted to have owed him. The learned judge expressed the view that s 20 does not imply that the person to whom an inchoate promissory note is delivered acquires, by the very act of his filling up the blanks, the right of a promisee under the note and that such a person, not being a holder in due course, cannot render the maker liable on the note within the meaning of the second part of s 20. With due respect, it is submitted that although under s 20, only a holder in due course can hold the maker liable for the amount shown in the instrument to be payable, albeit it is in excess of what the maker intended to pay, it does not follow that a holder other than a holder in due course (such as the plaintiff in this case) cannot hold the maker liable even for the amount intended by the maker to be paid, otherwise, such an instrument may prove to be worthless in the hands of even a holder, who has completed it as authorised by the maker.
For example:
(i) A bill is drawn ‘payable to… or order.’ Any holder for value may write his own name as payee in the blank and sue upon the instrument.72
(ii) A owes B Rs 1,000 and gives him a blank acceptance for Rs 1,000. B may fill in his own name as drawer and payee and recover the amount from A.73
(iii) A signs as acceptor on a stamped bill with the amount left blank. In the margins is superscribed Rs 100. This is fraudulently altered to Rs 1,000 and the bill is, in words, filled in for a thousand rupees. The bill gets into the hands of a holder in due course. The latter can recover rupees one thousand from A.74
(iv) A gives a blank acceptance to a money-lender, who fills it up as a bill drawn payable to drawer’s order and inserts a fictitious signature as that of drawer and indorser. The bill is negotiated to H, a holder in due course. H can recover upon it.75
(v) A signs, as maker, a blank stamped paper and gives it to B, and authorises him to fill it as a note for Rs 500, to secure an advance which C is to make to B. B fraudulently fills it up as a note for Rs 2,000, payable to C, who has in good faith advanced Rs 2,000. A is estopped from setting up B’s fraud, and C is entitled to recover Rs 2,000 from A.76
(vi) A, the acceptor of a bill, is asked to renew it. A accordingly signs his name on the back of a blank stamped bill form. This is an authority to fill it up as a bill, making A liable as an indorser, and not as an acceptor.77
Page 4 of 4Inchoate stamped instruments
In all the above examples, it is assumed that the instruments were sufficiently stamped.
46 Substituted by s 3, Act 3 of 1951 and Schedule for ‘the States’. See also the Bills of Exchange Act 1882,s 20.
47 Daniel, s 142.
48 Punjab and Sind Bank v Ram Prakash Jagdish Chander (1991) 70 Comp Cas 20.
49 PK Narayana Kaimal v State Bank of Bikaner &; Jaipur (2005) IV BC 104 Chennai DRAT (DRT/DRAT).
50 Crutchley v Clarence (1813) 2 M&S 99; Schultz v Astley (1836) 2 Bing NC 544.
51 Montague v Perkins (1853) 22 LJCP 187; Ex p Hayward (1871) LR 6 Ch 546; Sesharal Bajna v VC Subramanian AIR 1983 Mad 368 [LNIND 1983 MAD 314].
52 Foster v Mackinnon (1869) LR 4 CP 704, p 712.
53 Schultz v Astley (1836) 2 Bing NC 544; Russel v Langstaffe (1780) 2 Doug 514.
54 Swan v North British Austalasian Co (1863) 2 H&C 175, p 184; Lloyds Bank Ltd v Cooke [1907] 1 KB 794 .
55 Irulandi v Syed Ibrahim AIR 1962 Mad 326.
56 Mohammed Ali v Abdul Sinab (2001) 2 BC 188; P Talamalai Chetty v Rathinasamy AIR 1998 Mad 23 [LNIND 1997 MAD 124].
57 S Ramasamy Gurukal v KC Mahalinga Gurukal (2003) 3 Bank CLR 404 (Mad).
58 (2001) 2 BC 498.
59 Baxendale v Bennett [1878] 3 QBD 525 ; Awde v Dixon (1875) 6 Ex 869 .
60 Smith v Prosser [1907] 2 KB 735 .
61 Punjab National Bank Ltd v Mercantile Bank of India Ltd (1911) 13 Bom LR 835 [LNIND 1911 BOM 41].
62 Smith v Prosser [1907] 2 KB 735 .
63 Naicker v Sigamani (2002) 1 MLJ 830 [LNIND 2002 MAD 135] (Mad); see also Chidambaram v PT Ponnusamy (1997) 1 LW 843 (Mad); P Talamali Chetty v Rathinasamy (1977) 2 MLJ 147 (Mad).
64 Sesharal Bajna v VC Subramanian AIR 1983 Mad 368 [LNIND 1983 MAD 314].
65 Baxendale v Bennett (1878) 3 QBD 525 ; London &; SW Bank v Wentworth (1880) LR 5 EX D 96.
66 Schultz v Astley (1936) 2 Bing NC 544.
67 Hogarth v Latham &; Co [1878] QBD 643.
68 Hatch v Searles (1854) 2 Sm & G 147, p 153.
69 NR Thiagarajan v OV Rengaswamy Reddiar (2000) 1 BC 136 [LNIND 1999 MAD 1022].
70 Tarachand v Sikri Brothers (1953) 55 Bom LR 231; relied on in S Ramajya Thevar v Balasundaram (1982) I MLJ 431.
71 AIR 1992 Mad 346 [LNIND 1992 MAD 16].
72 Crutchley v Mann (1814) 5 Taunt 529.
73 Carter v White (1882) 20 Ch D 225 .
74 Garrard v Lewis [1882] 10 QBD 30 .
75 Schultz v Astley (1836) 2 Bing NC 544.
76 Lloyds Bank Ltd v Cooke [1970] 1 KB 794 .
77 Belfast Banking Co v Keown (1898) 33 Ir LTR 95.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
21 ‘At sight’, ‘On presentment’, ‘After sight’
In a promissory note or bill of exchange the expressions ‘at sight’ and ‘on presentment’ means on demand. The expression ‘after sight’ means, in a promissory note, after presentment for sight, in a bill of exchange after acceptance, or noting for non-acceptance, or protest for non-acceptance.78
(1)‘AT SIGHT,’ ‘ON PRESENTMENT’, AND ‘ON DEMAND’
Though the expressions ‘at sight’ and ‘on presentment’ mean on demand, yet instruments containing these expressions bear a different significance from those that are expressed to be payable on demand. Instruments expressed to be payable on demand need not necessarily be presented for payment, whereas instruments payable at sight or on presentment must be presented before payment can be demanded on them. Again, though at sight means on demand yet for the purpose of limitation, a bill payable ‘at sight’ is regarded as different from a bill payable on demand. In the former case, the period of limitation is three years from the date when the bill is presented and in the latter case, the time is three years from the date of the bill or note.
(2)‘AFTER SIGHT’, ‘AFTER DATE’
The expression ‘after sight’ cannot be put in a bill or note by itself, without stating the period after sight at the expiration of which, it would become payable. Notes and bills may be expressed to be payable at a certain period after sight or after date or after the occurrence of a specified event, which is certain to happen, though the time of its happening may be uncertain. Thus, a note or a bill may be made payable fifty days after sight or six months after date or sixty days after the death of A. The expression ‘after sight’ is used differently in bills and notes. If a note, it means that payment is not to be demanded till it has been exhibited to the maker, because a note is incapable of acceptance; whereas in a bill, it means that the sight must appear in a legal way, ie, after acceptance, if the bill has been accepted, or after noting for non-acceptance or protest for non-acceptance.79
78 See ss 10(1)(a)and11(12)of the Bills of Exchange Act 1882.
79 Homes v Kerrison (1810) 2 Taunt 323; Compbell v French (1795) 6 TR 200, p 212.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
22 ‘Maturity’
The maturity of a promissory note or bill or exchange is the date at which it falls due.
Days of grace.-Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable.80
Sections 22 to 25 lay down rules for determining the time at which negotiable instruments fall due. Negotiable instruments payable on demand become due and payable at once, while instruments payable at sight or presentment become payable on the instrument being presented. Instrument payable at a certain date after sight or presentment become payable after such period.
(1)DAYS OF GRACE
Days of grace are days of indulgence, originally granted to the acceptor for the payment of his bill of exchange. It was originally a gratuitous favour, but the custom of merchants has rendered it a matter of legal right. All instruments other than those expressed to be, or in effect, payable on demand, are entitled to days of grace. The following, therefore, are not entitled to days of grace: a cheque, a bill or note payable at sight, on presentment or on demand, or one in which no time for payment is specified. However, days of grace are allowed on all bills and notes that are expressed to be payable on a specified day, or at a certain period after date, after sight, or at a certain period after the happening of a certain event.81 These days are allowed to these instruments after the day on which they are expressed to be payable. Thus, a bill, not expressed to be payable on demand, at sight or on presentment, is at maturity on the third day after the day on which it is expressed to be payable. For example:
(i) A bill dated 30 November is made payable three months ‘after date’. It falls due on 3 March.
(ii) A note dated 1 January is payable one month ‘after date.’ It falls due on 4 February.
(iii) A bill dated 1 January is payable thirty days ‘after date.’ It falls due on 3 February.
(iv) A hundi payable on 28 January falls due on 31 January.82
(v) A hundi drawn on 7 May and payable after sixty-one days falls due on 10 July.83
Where an instrument is payable in instalments, it must be presented for payment on the third day after the day fixed for the payment of each instalment. Days of grace are allowed for each instalment.84 The use of the word punctually in a note payable in installments does not take away the days of grace to which the maker is entitled.85 Days of grace from such an integral part of the contract on a negotiable instrument, in that where days of grace are allowed on an instrument, the instrument must be presented for payment only on the last day of grace. An earlier presentment is premature and void in order to charge the prior parties.86 Days of grace were abolished in England in 1971.87 Earlier, it had been held that a cause of action does not arise until the day next after the last day of grace, and that when a bill was dishonoured by non-payment by the acceptor on the last day of grace, the holder was entitled to give notice of dishonour at once to persons whom he chose to hold liable; but he had no cause of action on the bill against the acceptor or any other party until the day had expired.88 It was, however, competent for the parties to a negotiable instrument to disallow, by contract, days of grace by any language to that effect, such as, without grace, no grace etc. Under English law, express provision had been made to this effect by s 14(1)of the Bills of Exchange Act 1882. In India, though the present section is not clear on the point, it seems open to parties to enter into such a contract that the provisions of s 22 of the Act relating to days of grace would not apply to them.89
Calculating maturity of bill or note payable so many months after date or sight.
Khergamvala: Negotiable Instruments Act
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23 Calculating maturity of bill or note payable so many months after date or sight.
In calculating the date at which a promissory note or bill of exchange, made payable a stated number of months after date or after sight, or after a certain event, is at maturity, the period stated shall be held to terminate on the day of the month which corresponds with the day on which the instrument is dated, or presented for acceptance or sight, or noted for non-acceptance, or protested for non-acceptance, or the event happens, or, where the instrument is a bill of exchange made payable a stated number of months after sight and has been accepted for honour, with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month.
Illustrations
(a) A negotiable instrument, dated 29 January 1878, is made payable at one month after date. The instrument is at maturity on the third day after the 28 February 1878.
(b) A negotiable instrument, dated 30 August 1878, is made payable three months after date. The instrument is at maturity on the 3 December 1878.
(c) A promissory note or bill of exchange dated 31 August 1878, is made payable three months after date. The instrument is at maturity on the 3 December 1878.90
(1)MATURITY OF BILLS AND NOTES PAYABLE AFTER SIGHTThe section reproduces the English law as it was on the subject with one small difference. The English rule with regard to bills of exchange made payable a stated number of months after sight, which have been accepted for honour, was that the period stated should be held to terminate on the day of the month which corresponds to the day on which the bill was accepted for honour.91 This rule has been changed by of the Bills of Exchange Act 1882 s 65(5), which now provides for calculating maturity from the date of noting for non-acceptance, and not from the date of acceptance of honour. As stated by Chalmers:92 ‘This sub-section brings the law into line with mercantile understanding, and gets rid of an inconvenient ruling that maturity has to be calculated from the date of acceptance of honour’.
The Indian law still retains the old English rule. In the case of bills not accepted for honour, the period of payment terminates on the day of the month that corresponds to the date of the instrument, or the day on which it is presented for acceptance, or noted for non-acceptance, as the case may be.
Where a note or a bill is expressed to be payable at a certain period after sight, or after a certain event, the period of payment terminates on the date of the month that corresponds to the date of the instrument, or with the day of acceptance if the bill is accepted, or presented for sight, or noted or protested for non-acceptance.
Where a bill of exchange is expressed to be payable at a stated period after sight, and has been accepted for honour, the rule is that the period stated should terminate on the day of the month that corresponds with the day on which it was accepted for honour. The last sentence of the section in effect means that the term ‘month’ in the bill or note means a calendar month, and not a lunar month.
Under of the Limitation Act 1963 s 24, all instruments should be deemed to be made with reference to the
Page 2 of 2Calculating maturity of bill or note payable so many months after date or sight.
Gregorian calendar for the purpose of the Limitation Act.
(2)USANCESContinental bills are sometimes drawn at usances. A usance is the time that is fixed by the custom of countries, for payment of bills drawn in one country and made payable in another. The length of a usance varies in different countries. In commercial parlance, the term ‘usance bill’ is used to denote a bill payable at a future date.
90 See of the Bills of Exchange Act 1882 ss 14(2) to (4)and65(5).
91 Williams v Germaine (1827) 7 B&C 468, p 471
92 Chalmer’s Bills of Exchange, thirteenth edn, p 231.
End of Document
Calculating maturity of bill or note payable so many days after date or sightKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 2 > Of Notes, Bills and Cheques
24 Calculating maturity of bill or note payable so many days after date or sight
In calculating the date at which a promissory note or bill of exchange made payable a certain number of days after date or after sight or after a certain event is at maturity, the day of the date, or presentment for acceptance or sight, or of protest for non-acceptance, or on which the event happens, shall be excluded.93
The rule stated in this section is that where a bill or note is payable after date or after sight, or after the happening of a specified event, the time of payment is determined by excluding the day from which the time begins to run. Where a bill drawn payable at a fixed period after date is not dated, the date of its maturity is calculated by computing the time from the date on which it was made.94
93 See of the Bills of Exchange Act 1882 ss 14(2)and (3).
When day of maturity is a holidayKhergamvala: Negotiable Instruments Act
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25 When day of maturity is a holiday When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day.
Explanation.-The expression ‘public holiday’ includes Sundays,95 [* * *] and any other day declared by the96 [Central Government], by notification in the Official Gazette, to be a public holiday.97
Under this section, all holidays are placed on the same footing, and unlike the English law, no distinction is observed between bank holidays and other holidays.98 The section lays down a rule that has to be uniformly applied whenever the day of maturity falls on a public holiday, and enacts that if the day on which the instrument is payable is a public holiday, it is payable the next preceding business day. The rule is not satisfactory and the instead of proceeding business day, the instrument should fall due on the succeeding business day.99
The powers which were given to the local government under the explanation to declare holidays have been taken away from them and vested now in the Union Government as a result of listing ‘Bills, Notes and Cheques’ as a Union subject.
95 The words ‘New Years day, Christmas day, if either of such days fall on a Sunday, the next following Monday; Good Friday;’ omitted by, Act 37 of 1955 (wef 1-4-1956)s 3.
96 Substituted by the AO 1937, for ‘Local Government.’
97 See of the Bills of Exchange Act 1882 s 14(1).
98 Section 14. If the last day falls on a bank holiday, the instrument is due and payable on the next succeeding business day
99 The Law Commission has also recommended this in its Eleventh Report.
Capacity to make, etc promissory notes, etcKhergamvala: Negotiable Instruments Act
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Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
26 Capacity to make, etc promissory notes, etc
Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.
Minor.- A minor may draw, indorse, deliver and negotiate such instruments so as to bind all parties except himself.
Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered.1
(1)CONTRACTUAL CAPACITY
The section lays down the rule that the capacity of a person to incur liability as a party to a bill, note or cheque, is co-extensive with his capacity to contract. As a party to a bill, note, or cheque by doing any of the stipulated acts undertakes certain liabilities, it is necessary that he should be competent to contract. If a party, who purports to do any one of these acts, is legally incompetent to do so, the contract is void as against him. However, the incapacity of one or more of the parties to a negotiable instrument in no way diminishes the liability of the other competent parties thereto. The section declares that a person’s capacity to contract shall be regulated by his personal law, ie, the law to which he is subject.
(2)THE LAW TO WHICH HE IS SUBJECT
Section 11 of the Indian Contract Act 1872 lays down that every person is competent to contract, who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.2
(3)MINOR
It is provided by the Indian Majority Act 1875 that for all persons domiciled in India, the period of minority should last until the completion of the eighteenth year and in the case of persons who have had guardians appointed to them by a court of justice, or have been brought under the court of wards, until the completion of the twenty-first year.3
Under s 11 of the Indian Contract Act 1872, a minor’s contract is absolutely void, and is incapable of ratification after he attains majority.4 Contracts on bills of exchange and promissory notes, being generally considered to be injurious to a minor’s interests, do not normally bind a minor and minors are incapable of making themselves liable as makers, drawers, acceptors or indorsers on negotiable instruments.5
Under the section, if a minor makes, draws or indorses a note or bill, the holder would be entitled to enforce the instrument and receive payment on it against all parties except the minor. The minor himself cannot incur any liability on the instrument by reason of such making, drawing or endorsing, and the instrument is wholly void as against him. Thus, a minor acts as a channel to convey title and liability, but not to originate it.
Where there are several persons jointly mentioned in a bill or note as drawers, makers, acceptors or indorsers, and
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one of them is a minor, though the minor cannot be sued, the other parties on that ground are not discharged from liability. The holder can sue the adult parties without joining the minor.6 Though the section does not deal with the case of acceptance of a bill or the making of a note by a minor, by accepting a bill or making a note, a minor cannot bind himself. Such a bill or note is not enforceable against the minor but is enforceable against the other adult parties. Where a minor and her father jointly executed a promissory note, it was held that the father was liable thereon.7 A person who accepts a bill when he is of full age is liable on it, though it was drawn when he was a minor.8 A person is not precluded under the section from denying the validity of the note on the ground that he was a minor on the date of the note, since the general provision in s 120 is subject to the specific rule in s 26.9 However, it seems that though a minor cannot incur liabilities on a bill or note, he can acquire rights under it, and if he becomes the holder of a bill or note, he is perfectly entitled to sue upon the instrument all the prior parties thereto.10 A promissory note payable on demand and executed in favour of a minor is not void so as to disentitle him to sue on it.11 However, such a suit must be instituted in the name of the minor by his next friend.12
A minor cannot bind himself by a bill or note given by him for necessaries supplied to him.13 Though the minor will not be personally liable on such a note or bill, the person who has supplied the necessaries is entitled to reimbursement from the property of the minor.14 Even where a minor executes a note or bill on the representation that he is of full age, it is not enforceable against him as the contract is void.15 Accordingly, where a minor obtains a loan on a promissory note by falsely representing his age, he can neither be made to pay the amount of the loan as damages for fraud, nor be compelled in equity to repay the money.16 Again, a promissory note given by a person on attaining majority, in renewal of a note executed by him while he was a minor, is also void in law for want of consideration.17 When a minor, within three months of turning 21, accepted a bill payable six months after date and ratified the transaction on his attaining majority, it was held that he was not liable on his acceptance.18
(4)LUNATICS, PERSONS OF UNSOUND MIND, DRUNKEN PERSONS
It may be stated as a general principle that want of capacity, arising from any source, renders a contract void. Accordingly, contracts of lunatics, persons of unsound mind and drunken persons are on the same footing as agreements of minors, and are void. Bills and notes drawn or made by such persons are void as against them, though the other parties remain liable. A promissory note or a bill of exchange executed by a lunatic or a person of unsound mind is void against him, if that person were incapable of understanding it at the time of executing it and forming a rational judgment on its effect on his interests.19 However, a person of unsound mind may bind himself by a negotiable instrument entered into by him during a lucid interval. According to English law, unsoundness of mind is not a valid defence, unless it is proved that the plaintiff had knowledge of the fact.20 The effect of drunkenness is the same, and a negotiable instrument executed by a drunken person will be void against him, if he shows that it was made at such time, when by reason of drunkenness, he did not know what it was about.21
(5)OTHER DISQUALIFIED PERSONS
Where a person suffers from some disqualification due to any law to which he is subject, he cannot enter into a valid contract.22 A person may not be competent to contract due to the application of any local law, to which he is subject. The provision covers not only a law, which the person is permanently subject to, but also a law, which for the time being is applicable to that person. Thus, an insolvent is subject to laws of insolvency and can only contract to the extent and under the Insolvency Act.
(6)COMPANIES
Though the section says that a person having capacity to contract may bind himself by becoming a party to a note or bill, the proviso to the section declares that a corporation forms an exception to this general rule. The law for the time being in force with reference to corporations, regulates the capacity of a corporation to make, draw, accept and indorse a bill or note. Although a corporation possesses capacity to contract, it cannot, under the section, so bind itself, unless it is empowered in this behalf by the law for the time being in force. The power to bind itself by notes, bills and cheques is not necessarily implied in the general power possessed by a corporation to enter into a contract. A corporation, being an artificial creation of law, possesses only such rights which the charter of its creation confers upon it, either expressly or as incidental to its very existence.23 The contractual capacity of a corporation or company depends generally upon the purposes for which it is formed, as set forth in the charter of incorporation or memorandum of association by which it is constituted.
Page 3 of 4Capacity to make, etc promissory notes, etc
If a corporation exceeds its powers in this behalf, and executes a negotiable instrument, the act is ultra vires the corporation, and absolutely void and incapable of ratification even by the unanimous assent of all its members. On such a note or bill, even a bona fide holder for value cannot make the corporation liable.24 However, it is not necessary that such a power be expressly stated in the charter or memorandum of association. Such a power can be implied, as necessary and incidental to the company’s main objects as disclosed in the charter or memorandum of association. Thus, a corporation or a company formed for the purpose of carrying on trade has the capacity to draw or indorse notes and bills. The courts will presume that a business corporation or company has the power to do those acts without which, it cannot subsist as a corporation or a company carrying on business according to a charter or memorandum.25 A non-trading corporation or company cannot exercise such powers, unless such powers are expressly given by its charter or memorandum of association.26
The section does not purport to make any provision of substantive or procedural law. The latter part of the section merely establishes that a company cannot claim authority to issue a cheque under its first part. The law with regard to a company’s power to issue negotiable instruments is to be found in the relevant provisions of the Companies Act 1956.27
Section 47 of the Companies Act 1956, states that a bill of exchange,hundi or promissory note shall be deemed to have been made, accepted, drawn or indorsed on behalf of a company if made accepted, drawn, or indorsed in the name of, or on behalf of, or on account of the company by any person acting under its authority, express or implied. Where an instrument is apparently drawn on behalf of a company, the onus is upon the company to show that the instrument is not binding on it.28
Where a promissory note was executed in Tamil by Ramanatha Reddiar, proprietor of Sri Rajagopal Bus Transport, and the money was utilised for the purchase of a bus for Sri Rajagopal Transports Private Ltd of which, Ramanatha Reddiar was the managing director, in a suit on the note, it was held that the company was liable since the intention was made clear in the note.29
Section 147 of the Companies Act 1956 Section 147 of the Companies Act 1956 requires every company to have its name mentioned in legible characters in all bills of exchange,hundis, promissory notes, indorsements, cheques and orders for money or goods purported to be signed by or on behalf of the company and the company shall be punishable with fine for non-compliance with the statutory requirement. Further, if an officer of a company, or any person on its behalf signs, or authorises to be signed, any bill of exchange, cheque, etc wherein the company’s name is not so mentioned, such officer or person shall also be punishable with fine and shall be personally liable to the holder of the instrument for the amount thereof, unless it is duly paid by the company.
Similar provisions are contained in of the Companies Act 1985 ss 108 and 349 of the Companies Act 1985 of England. English courts have taken a strict view in this regard and have held company officials personally liable on dishonoured cheques, which had not described correctly the names of the drawer-companies concerned as in British Airways Board v Parish 30 where ‘Ltd’ had been omitted from the company’s name, and Barber &; Nicholls Ltd v R&;G Associates 31 where ‘London’ had been omitted from the company’s name on cheque drawn on the respective company’s account.
1 Bills of Exchange Act 1882,s 22.
2 Indian Contract Act 1872,s 11.
3 As regards persons not so domiciled, see Rollo v Smith 1 BLR 10.
4 Mohori Bibi v Dharmodas Ghose (1926) 30 Cal 539; Dattaram v Vinayak (1904) ILR 28 Bom 181.
5 Ma Hint v Hashim (1920) 38 Mad LJ 353.
6 Burgess v Merill (1812) 4 Taunt 468; Boyle v Webster [1852] 17 QB 950 .
Page 4 of 4Capacity to make, etc promissory notes, etc
10 Warwick v Bruce (1813) 2 M&S 205.
11 Sathrurasu v Bassappa (1913) 24 Mad LJ 363.
12 Code of Civil Procedure 1908,O 32, r 1.
13 Soltykoff, ex p Margrett In Re [1891] 1 QB 413 .
14 Williams v Harrison (1689) Carthey Rep 160 ; see also the Indian Contract Act 1872,s 68.
15 Kanhai Lal v Babu Ram (1911) 8 All LJ 1058; Dharasingh v Gayanchand (1918) 16 All LJ 441.
16 R Leslie Ltd v Sheill [1914] 3 KB 607 ; Mohamed v Yeoh Ooi (1918) 43 IA 256.
17 Indra v Anthiappa (1906) 16 Mad LJ 422.
18 Ex p Kibble v (1875) LR 10 Ch App 373.
19 Indian Contract Act 1872,s 12.
20 Imperial Loan Co v Stone [1892] 1 QB 599 .
21 Molton v Camroux (1849) 4 Ex 17 .
22 Indian Contract Act 1872,s 11.
23 British South African Co v De Beers Consolidated Mines [1910] 1 Ch 354 .
24 Broughton v Manchester Water Works Co (1819) 3 B & Ald 1.
25 Mayor of Ludlou v Charlton (1840) 6 M&W 815; South of Ireland Colliery Co v Waddle (1867) LR 4 CP 617; Shamnuggar Jute Factory Co v Ram Narain (1887) 14 Cal 189.
26 Bateman v Midlands Railway Co (1886) LR 1 CP 499, p 505; Wheatley v Smithers [1907] 2 KB 684 ; Harmer v Steele (1845) 4 Ex; Rickets v Bennett (1847) 4 CB 595, p 699.
27 Oriol Industries Ltd v Bombay Mercantile Bank Ltd AIR 1961 SC 993 [LNIND 1961 SC 37], p 996.
28 Kishan v Mondal Bros &; Co Ltd 1967 Cal 75.
29 P Rangaswami Reddiar v R Krishnaswami Reddiar (1973) 43 Comp Cas 232.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
27 Agency
Every person capable of binding himself or of being bound, as mentioned in section 26, may so bind himself or be bound by a duly authorized agent acting in his name.
A general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or endorsing bills of exchange so as to bind his principal.
An authority to draw bills of exchange does not of itself import an authority to indorse.32
(1)PRINCIPAL AND AGENT
The section deals with authority and power of a person to bind another by acting on his behalf. It provides that every person capable of binding himself or being bound by the making, drawing, acceptance, indorsements, delivery and negotiation of a promissory note, bill of exchange or cheque, may so bind himself or be bound by a duly authorised agent acting in his name.
An agent who signs a negotiable instrument for his principal may do so in one of two ways:
(i) the agent may simply sign the principal’s name, for it is immaterial whose hand actually signs the principal’s name, if in fact, there exists an authority to put it there;
(ii) the agent may sign by procuration, stating on the face of the instrument that he signs as agent.
It is a general principal of commercial law that the name of the person or firm sought to be charged upon a negotiable instrument as a principal party must be clearly stated on the face or on the back of the instrument. By doing so, the responsibility is made plain and can be instantly recognised as the document passes from hand to hand. The principal’s name must be so disclosed on the instrument that on a fair interpretation of it, it becomes quite apparent that his name is the name really liable upon the instrument.33 The effect of the section is that the principal could only be made liable through his agent on a negotiable instrument when the agent acts in the principal’s name, ie, when he signs as agent, and that an undisclosed principal cannot be sued on a negotiable instrument.
It is essential that at the time of putting his signature to the instrument, the agent must have authority, express or implied, to enter into the particular contract on behalf of his principal, who shall be legally competent to contract. The authority of an agent to make, draw, accept or indorse notes and bills depends upon the general law of agency, and is a question of fact. The utmost care and caution are required in dealing with persons who profess to act as agents on behalf of their principals. A prudent man will always call for proof that the alleged authority has been given.
The authority given may either be general or special. In case the authority given is general, then all acts falling within the scope of the general authority bind the principal. However, if the authority given is merely a special one, the principal can only be bound by the acts done within such authority.
A signature by procuration operates as a notice that the agent has only a limited authority to sign, and that the principal will only be bound, if the agent so signing, was acting within the actual limits of his authority. Hence, a person who takes a bill signed per procurationem must take it with the greatest caution, and should satisfy himself
that the authority alleged to exist really exists.34 Where a person signs a note or bill on behalf of another without the other’s authority, or in excess of the authority conferred upon him, the signature is wholly inoperative, and the principal will not be liable in the absence of ratification or estoppel.35 The person, who takes such a note or bill acquires no title to it. If an agent indorses a bill without authority on behalf of his principal, the indorsement does not convey title to the person taking it. If an agent indorses without authority a bill on behalf of his principal, the indorsement does not convey title to the person taking it.36 An authority to sign and negotiate notes and bills must be expressed in clear and unequivocal terms.
The section provides that a general authority to transact business, and to receive and discharge debts, does not confer upon an agent, the power of accepting or endorsing bills of exchange so as to bind his principal.37 An authority to draw bills of exchange does not itself import an authority to indorse. An authority to indorse does not import an authority to accept a bill. Special authorities given to an agent to make, draw, accept or indorse notes or bills are construed strictly. Where there is a special authority to accept or indorse, the authority may be limited to the acceptance or indorsement of bills drawn by particular persons, or for a particular purpose or in a particular form.38
On a plain reading of ss 27 and 28, it is clear that a general authority to transact business and to discharge debts does not confer upon an agent, the power of endorsing bills of exchange so as to bind the principal.39 Nor can an agent escape personal liability, unless he indicates that he signs as an agent and does not intend to incur personal liability.40
(2)PARTNERS
The law, which regulates the liability of partners for the acts of their co-partners is a branch of the law of agency. In the contemplation of law, every partner is the general and accredited agent of the partnership, and each partner, who does any act necessary for or usually done in carrying on the business of such a partnership as that of which he is a member, binds his co-partners. Thus, in a trading firm, each partner has prima facie authority to bind his co-partners by drawing, making, signing, endorsing, accepting, transferring, negotiating or procuring notes, bills, cheques and other negotiable papers to be discounted in the name and on account of the partnership.41 A partner of a non-trading firm has no such implied authority to bind his co-partners by signing bills or notes in the partnership name. A partner can only bind the firm only if he has express authority to do so and it is incumbent upon anyone taking such bills or notes to satisfy himself, as to the extent of the partner’s authority.42
A firm cannot be made liable on a negotiable instrument signed by a partner of a firm, unless it is signed by him in the name of the firm. Thus, where a bill or note is signed by a partner in the name of a trading firm, it binds and renders liable all the partners in that firm, whether working, dormant, or secret, for credit is generally given to the firm, whomsoever it may consist of.43 Where a partner executes a note or bill, and the same is not signed by him as a partner or on behalf of the firm, but in his own name only, it does not bind or render liable the other partners, even though, it was drawn for the benefit of the firm and in consideration of an advance made on account of the joint trade.44 A promissory note passed by one of the partners, not in the name of a firm but in his individual capacity, is binding on him alone and not on the other members of the firm.45
In two of three promissory notes signed by a partner of a firm, it was indicated that he was signing on behalf of the firm. In the third, there was no such indication, though it was mentioned that he was a partner of the firm. The firm was held to be liable on the first two notes and not on the third.46
Where there is a conflict between ss 19 and 22 of the Partnership Act 1932 and of the NI Act ss 26-28, the latter Act will prevail. A claim against a firm based on a written contract by one partner in the course of business with authority to act will be held to bind the firm. However, when such a claim is made on the strength of a promissory note or bill of exchange, the firm will be held liable on the instrument only if it clearly discloses the firm’s liability. A firm was held liable on three promissory notes executed on the firm’s letterheads and signed by a partner, though it had not been indicated that he was signing on behalf of the firm, and in one note, he was described as the managing partner.47
(3)HINDU JOINT FAMILY
The karta or manager of a Hindu joint family represents the family in all its dealings with the outside world and has an implied authority to contract debts on behalf of the family and for that purpose also has an implied authority to
Page 3 of 3Agency
pledge the credit of the family where he carries on the family business.48 Thus, where a note or bill is executed by the manager of a Hindu joint family for monies borrowed for the family purposes, or for the family business, the same is binding on all the members of the joint family, and can be enforced against them.49 On such an instrument, the other members of the family cannot escape liability on the ground that it was not made or signed by them but by the manager.50 A manager of a joint Hindu family who executes a promissory note as manager for family purposes can be sued on the note so as to bind the family just as effectively as if he had executed a mortgage or a bond. The manager of a Hindu joint family is not an agent of the other coparceners. He is not like a partner who can be treated as an agent of the other partners and ss 26, 27 and 28 of the Act do not apply to the case.51 The minor members of the joint family are equally liable with the major members to the extent of their shares.52
32 See the Bills of Exchange Act 1882,ss 25 and 26.
33 Sadasuk Janki Das v Kishen Prashad (1919) 46 Cal 663.
34 Attwood v Munnings (1827) 7 B&C 278; Alexander v Mackenzie (1848) 6 CB 766; Smith v Prosser [1970] 2 KB 735 .
35 Bank of Bengal v Mcleod (1851-54) 5 MIA 1.
36 Bank of Bengal v Fagan (1851-54) 5 MIA 27.
37 Hogg v Smith (1808) 1 Taunt 347; Murray v East India Co (1821) 5 B & Ald 204.
38 Altwood v Munnings (1827) 7 B&C 278; Fearn v Felica (1844) 14 LJCP 15.
39 Punjab National Bank v Britannia Industries Ltd (2001) 2 BC 707 [LNIND 2001 CAL 89] (DB).
40 Pramod Kumar v Damodar (1953) ILR Cut 221.
41 Bank of Australasia v Breillat (1847) 6 Moo PCC 152, 193.
42 Premabai v TH Brown 10 BHCR 319; Brown v Byers (1847) 16 LJ Ex 112; Dickinson v Valpay (1829) 10 B&C 125; A Subbaraju v C Suryanarayanamurthy (1966) 1 Andh WR 178.
43 Lloyd v Ashby (1831) 2 B & Ald 23; Bunarasse Das v Gholam Hossein (1869-70) 13 MIA 358; Gurram Subharayudu v MP Narasimham AIR 1974 Andh Pra 307.
44 Somasundaram v Krishna Murthi (1907) 17 Mad LJ 126; Kutti Ammu v Raggi Seth (1911) 9 Mad LT 120; Yorkshire Banking Co v Beatson (1880) 5 CPD 109.
45 Sharanbasappa v Rachappa (1933) 35 Bom LR 68.
46 MM Abbas Bros v Chetandas AIR 1979 Mad 272 [LNIND 1978 MAD 155]; Johnstone v Mst Jan Bibi AIR 1928 Lah 722; Rangaraju v Firm Devichand Bhootaji AIR 1945 Mad 439 [LNIND 1945 MAD 161].
47 M Rajagopal v KS Imam Ali AIR 1981 Ker 36.
48 Sakhabhai v Maganlal (1881-82) ILR 6 Bom LR 206; Abdul Majid v Saraswathi 1934 PC 4.
49 Raghunath Singh v Sri Narayan (1923) 45 All 434.
50 Pachkauri Lal v Mulchand (1922) ILR 44 All 544.
51 Shankarrao v Vinayak 1945 Nag 806.
52 Raghunathji v Bank of Bombay (1880-1881) ILR 5 Bom 72; RP Koneti Naicker v T Gopala Ayyar (1915) ILR 38 Mad 482.
Liability of agent signingKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
28 Liability of agent signing An agent who signs his name to a promissory note, bill of exchange or cheque without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the instrument, except to those who induced him to sign upon the belief that the principal only would be held liable.53
(1)AGENT, HOW TO SIGN IN ORDER TO AVOID PERSONAL LIABILITY
When an agent signs or indorses a negotiable instrument, he must signify thereon the capacity in which he does so, otherwise he will make himself personally liable upon the instrument. Unless the agent has clearly affixed his signature to an instrument on behalf of a principal, who is disclosed, or unless he has in some portion of the document clearly and unequivocally disclaimed personal liability, he will remain personally liable.
An agent who signs a promissory note, bill of exchange or cheque for his principal may sign the principal’s name only. Otherwise, to exclude personal liability he must state on the instrument itself that he signs as agent, or that he does not intend to incur personal liability. D, the chairman of a ‘weavers’ co-operative society, executed a promissory note, in which he described himself as the chairman of the society and agreed to pay the amount of the promissory note, but did not exclude his personal liability or state that he was making the note on behalf of or on account of the society. On a suit by the plaintiff to recover the amount of the note, it was held that as there were no words excluding the personal liability of D in the note and as he was a party to the negotiable instrument, he was personally liable.54 Lord Ellenborough stated in Leadbitter v Farrow :55
Is it not a universal rule that a man who puts his name to a bill of exchange thereby makes himself personally liable unless he states on the face of the bill that he subscribes for another or by procuration of another which are words of exclusion? Unless he says plainly, ‘I am the mere scribe’ he becomes liable.
The section, in effect embodies the principle of the above decisions. The Act does not specify the manner in which an agent is to indicate that he signs as agent but any words which clearly indicate that intention will be sufficient to protect the agent. Thus, an agent may sign by adding to his signature such words as sans recours, ‘without recourse’, or other words to that effect. Again the words ‘per pro’, ie, per procurationem, are often prefixed by an agent to the name of his principal. The best manner for an agent to sign or indorse a negotiable instrument, where he wishes to make his principal liable, is to sign or indorse the same as follows:
(a) ‘For James Robinson, Richard Brown.’
(b) ‘James Brown, by his agent or attorney Richard Smith.’
(c) ‘James Brown, by Richard Harris.’
(d) ‘James Brown, agent for Richard Smith.’
(e) ‘For the AB Railway Co, XY, Secretary.56
(f) ‘Hudson Co Ltd, James Brown, Managing Director.’57
In all the above cases, the agent is not personally liable. The signature, however, must not be such as merely to describe him in his capacity as agent, or as filling a representative character, for this does not exempt him from personal liability. An agent, therefore, who signs a negotiable instrument, cannot escape personal liability thereon by the mere addition to his signature of words describing him as agent.58 In making a promissory note or accepting a bill, where parties describe themselves as directors, or by any similar form of description, but do not state on the face of the document that it is on account of or on behalf of those whom they might otherwise be considered as
representing-if they merely describe themselves as directors, but do not state that they are acting on behalf of the company-they are individually liable.59
Thus, an agent, who signs or indorses a negotiable instrument, cannot escape personal liability thereon, by the mere addition to his signature of such words as ‘agent’, ‘secretary’, ‘manager’ or ‘director’ because such words are merely descriptive and are regarded as designatio personae. When the executant of a promissory note described himself as the managing director of a firm, it was not indicative of the fact that he was acting on behalf of the firm and the firm was held not liable.60
When, in a promissory note written in an Indian language, the signer, after giving his own description, adds that he is the agent of another, it means that he is acting as the other’s agent in executing the note.61
In Tirumalareddi Ramagopalal Reddy &; ors v Bhimavarapu Paravathi ,62 the third appellate omitted to mention that she was executing the instrument note on behalf of her minor son and signed it as if she was executing it for herself. The Andhra Pradesh High Court held that if third appellant intended to execute the instrument on behalf of minor she ought to have mentioned in the instrument that she was signing the instrument on behalf of the minor and since she omitted to do so she was personally liable under the instrument.
In the following cases, the agent is personally liable:
A bill of exchange signed:
(a) James Brown;
(b) Directors of AB Co Ltd;
(c) Richard Harris William Smith;63
(d) ‘We, the directors of the AB Co Ltd, promise to pay Rs 10,000;
(e) (Signed) James Brown, Richard Harris [ Button v Marsh ];64
(f) A bill indorsed, ‘James Brown, Agent.’
(g) A note signed, ‘James Brown, Manager.’
(h) A note signed, ‘James Brown, Secretary of AB Co Ltd.’
The managing director of a company was personally liable on a promissory note to the payee in the absence of any indication therein that the maker was acting on behalf of the company although the company later agreed to repay the debt.65
Where the wahiwatdar of a temple executed a promissory note, without indicating that he was acting for the temple management, he was held to be personally liable.66
The karnawan of a tarwad was held personally liable on a promissory note executed by him in his own name, although in the body of the note he had described himself as the karnawan of the tarwad.67
Where the plaintiffs drew a bill prepared by them on the defendants and the bill was got accepted on behalf of the defendants by one of their directors but the name of the defendants was wrongly mentioned in the bill as M Jackson (Fancy) Good Ltd instead of Michael Jackson (Fancy) Goods Ltd and the error was not rectified, the director was held to be personally liable. However, the plaintiffs could not enforce the liability as they were deemed to have taken the acceptance as regular.68 Two officials of a company had indorsed certain bills apparently on behalf of the company. The same officials had also signed the bills on behalf of the company as the acceptor. Evidence showed that the payees had taken the bills on the understanding that the officials would be personally liable on the bills apart from the company’s liability as acceptor. The officials were held to be personally liable on the indorsements.69
(2)MINOR’S LIABILITY
The issue of the liability of a minor on negotiable instruments executed by his guardian raises some difficulties. It is a well-recognised principle that a guardian cannot impose personal liability on a minor and if a note or any other negotiable instrument is to be regarded as an undertaking merely to pay out of the minor’s estate, it is not a
Page 3 of 4Liability of agent signing
negotiable instrument as there is no ‘unconditional undertaking to pay.’70 Where the creditor, not being satisfied by a mere promise on the part of the guardian to pay, secures his right by way of mortgage or charge of the minor’s property, which is certainly in the power of a guardian to give, the minor’s estate will be liable.71 Where a guardian signed his name alone across the stamp on a note and below it, he signed his name as guardian of a minor, he was held personally liable on the note.72
(3)NON-LIABILITY OF UNDISCLOSED PRINCIPAL
It is a general principle of mercantile law that no person can be charged as a principal party to a negotiable instrument unless his name is in some way disclosed on the instrument itself. Thus, an undisclosed principal cannot be used on a negotiable instrument, because in the case of such instruments passing from hand to hand, usage requires that the real contract should appear on the face of the instrument. Accordingly, the section forms an exception to the general law relating to contracts that a principal, though undisclosed, may be sued if it is discovered that some agent acted for him. It has been held that the general provisions of the Indian Contract Act 1872 as to the rights and liabilities of undisclosed principals, were not intended to alter the well-established rules as to negotiable instruments, which declare that no person could be sued on an instrument, unless he appears as a party by name or designation on the face of the instrument.73 Where a person draws a negotiable instrument, and it does not appear on the face of it that he drew it as agent, he cannot set up as an a defence that he drew the bill as an agent.74
It is the essence of a claim upon a negotiable instrument that the person executing the document should disclose on the face of the document itself that he is not personally liable and that he is executing it for someone else.
The name of the person or firm to be charged upon a negotiable instrument must be clearly stated on the face of or on the back of the document, so that the responsibility is made plain and can be instantly recognised as the document passes from hand to hand, and further, the principal’s name must be disclosed in such a way that on any fair interpretation of the instrument, his name is the real name of the person liable.75 Where a promissory note was executed by the managing partner of a firm in his individual capacity, even assuming that the borrowed amount had been utilised by the firm, the firm cannot be made liable on the note.76 It is not open by way of claim or defence to show that the signatory was, in reality, acting for an undisclosed principal.77 Where a person executes a promissory note in his own name and not as an agent acting in the name of another, the maker whose name appears on the promissory note can alone be made liable thereunder. Hence, members of a joint Hindu family cannot be held liable in a suit filed on a promissory note signed by one of its members in his individual capacity, even though the maker of the promissory note may be proved to be the manage of the family.78 In a suit on a promissory note, the person signing the document is the person actually liable. It is not open either by way of claim or of defence, nor is any evidence admissible, to prove that the signatory executed it on behalf of an undisclosed principal.79 In deciding whether the maker of a promissory note executed it as an agent of someone, the instrument alone can be looked into and not the surrounding circumstance.80
(4)AGENT EXCEEDING AUTHORITY
When a person signs a bill or note on behalf of another without authority or in excess of the authority conferred upon him, what remedy has the holder against the person so signing? The principal cannot generally be held liable to the holder unless he has ratified the agent’s act or is estopped from denying the agent’s lack of authority. The holder cannot proceed against the principal, if the holder had knowledge of the agent’s want of authority. Otherwise, the holder may proceed against the agent in an action for damages for deceit, and for a breach of the warranty of authority.81
53 See the Bills of Exchange Act 1882,s 26(1).
54 Damodar v Ramnath (1933) 34 Bom LR 1327.
55 (1816) 5 M&S 345, p 349.
56 Alexander v Sizer (1869) LR 4 EX 102.
57 Chapman v Smethurst [1909] 1 KB 927 .
58 Thomas v Bishop (1734) 2 Stra 955; Rem v Pettet (1834) 1 A&E 196.
59 Dutton v Marsh [1871] LR 6 QB 361 per Lord Cockburn CJ.
60 Chandan Mai v Musammat Krishna (1945) ILR 20 Luck 1.
61 Sivagurunatha v Padmavathi AIR 1941 Mad 417 [LNIND 1940 MAD 445].
62 (2004) III BC 111, (2004) II BC 536 (AP).
63 Courtland v Sanders (1867) 16 LJ (NS) 562.
64 [1871] LR 6 QB 361.
65 M Mahadeva Pillai v Vedavalli Ammal AIR 1992 Mad 183 [LNIND 1991 MAD 252].
66 B Radhakrishnan v Harihar Ramachandra Sansthan (1971) Mah LJ 43.
67 P Govindan Nair v K Nana Menon (1914) 27 Mad LJ 595 (FB).
68 Durham Fancy Goods Ltd v Micheal Jackson (Fancy) Goods Ltd [1968] 2 All ER 987.
69 Rolfe Lubell &; Co v Keith [1979] 1 All ER 860.
70 Wagela Rajsanji v Sheikh Masludin (1887) ILR 11 Bom 551 (PC); Mir Sarwarjan v Fakhruddin (1912) 39 Cal 232 (PC).
71 Hanooman Persaud v Mussamut Babooee (1854-1857) 6 MIA 393.
72 Seshagiri v Seshagiri (1935) Mad 160.
73 Subba Narayana v Ramaswami (1907) ILR 30 Mad 88, p 91.
74 Tarachand v Mohesh Chunder 2 WR 30.
75 Suraj Bahu v Jaitley &; Co AIR 1946 All 361.
76 Rama Rao v Venkateswara (1962) 1 Andh WR 247; Adaikappa Chettiar v Official Assignee, Madras (1969) 2 Mad LJ 115.
77 Sadasuk v Kishan Prashad (1919) 46 IA 33; Sitaram v Chimandas (1928) 30 Bom LR 1300; Sivagurunatha v Padmavathi AIR 1941 Mad 17 (FB) relied on in Pillai v Manuel 1964 Ker LT 164 [LNIND 1963 KER 302].
78 Manchersha v Govind (1900) 2 Bom LR 1305; Soma v Soma AIR 1962 AP 92.
Liability of legal representative signingKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
29 Liability of legal representative signing
A legal representative of a deceased person who signs his name to a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such.
[See the Bills of Exchange Act 1882,s 26(1).]
(1)NATURE AND SCOPE OF PERSONAL LIABILITY OF LEGAL REPRESENTATIVE UPON SIGNING
If an executor or an administrator or a legal representative makes or indorses a bill or note in his own name adding thereto, the words executor, administrator or legal representative, he will still be personally liable thereon, the representative terms being treated as mere surplusage.82
Thus, an executor is personally liable where he signs or indorses a bill or notes as follows:
(a) ‘ AB, executor of CD’.83
(b) ‘ AB, administrator of the estate of CD’.84
Where a promissory note headed ‘Estate of the late W’, was passed by the defendants who were described, as ‘executors of the estate of the late W’, in a suit to recover the amount from the defendants, it was held that under the section, in the absence of express words limiting the defendant’s liability to the estate of the deceased in their hands, they were personally liable to pay the amount.85 Unless, therefore, the legal representative in signing a negotiable instrument expressly limits his liability to the extent of the assets received by him, he will be held personally liable.86
A legal representative may sign or indorse as follows so as to exclude personal liability:
(a) ‘ AB, executor of CD, without recourse.’
(b) ‘ AB, executor of the said CD, without recourse against me personally.’
(c) ‘ AB, executor of CD, with recourse against the estate of the said CD only.’
The legal representative of the deceased holder of a promissory note can file a suit for the recovery of the money due on the promissory note.87
82 Liverpool King v Thorn (1876) 1 TR 487.
83 Bank v Walker (1859) 4 De G&T 24.
84 Childs v Monins (1821) 2 Brod & B 460.
85 Hirijibhoy v Ratnabai (1934) 35 Bom LR 969; Radhakrishnan v Narainibai AIR 1963 MP 191 [LNIND 1962 MP 1].
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87 Shantaram v Shantaram (1938) 40 Bom LR 964.
End of Document
Liability of drawerKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
30 Liability of drawer The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided.88
(1)LIABILITY AND NATURE OF DRAWER’S ENGAGEMENT
The acceptor is primarily liable to pay the amount of a bill that has been accepted. If the drawee declines to accept a bill, or having accepted it refuses or fails to pay at the stipulated time, then under the section, the drawer becomes liable to the holder. The nature of the drawer’s engagement is that, by drawing a bill, he engages that:
(a) one due presentment, it shall be accepted and paid according to its tenor; and
(b) if it be dishonoured, he will compensate the holder or any indorser, provided notice of dishonour has been duly given to him.
The contract of the drawer of a bill of hundi is a conditional one. The drawer only undertakes to pay the amount of the bill in case of dishonour, so there is no demand or debt until dishonour.89 Once the bill is dishonoured and notice of dishonour given, whatever may be the state of account between the drawer and the drawee, the former becomes liable to the payee for that amount which would place him at the stipulated time and place in the same position as if the money has been duly paid.90 In the same manner, the liability of the drawer under the section arises when a bill is dishonoured by non-acceptance, for it is a part of the drawer’s engagement that on due presentment, the bill will be accepted by the drawee. On dishonour of a bill by non-acceptance, followed by a notice of dishonour, the right to sue the drawer for the full amount of the bill immediately accrues to the holder and there is no need to wait till the maturity of the bill or to present it to the drawer for payment.91 If the holder of a bill of exchange that has been dishonoured by non-acceptance chooses to wait till the maturity of the instrument, and does not sue the drawer upon it, he does not acquire a fresh cause of action by reason of its non-payment on the due date. By the non-acceptance, the holder acquires the most complete right of action against the drawer, and no subsequent act or omission of the drawer can give the holder a more extensive right against the drawer than he has already acquired. Similarly, the dishonour by non-acceptance of a hundi payable at a fixed date gives an immediate cause of action against the drawer, and there is no need to wait until the maturity of the hundi, or to present it for payment before proceeding against the drawer.92
In an action on a bill, the drawer cannot plead a collateral agreement as a defence.93 The drawer of a bill, however, can exclude or limit his liability upon the bill through an express stipulation. Thus, ‘pay X or order without recourse to me, pay X or order sans recours’, ‘pay X or order at his own risk, are cases in which the drawer’s liability is excluded or restricted. Bills under letters or credit are often drawn without recourse to the drawer.
The drawer of a cheque cannot escape liability to the holder in due course by stopping payment.94 The defendant gave a cheque to the plaintiff in payment of the price of the goods supplied. The cheque was drawn on branch X of bank A. The plaintiff sent the cheque to bank B for collection. Bank B sent the cheque to branch Y of bank A for realisation. Branch Y realized the amount from branch X, but before making over the sum realised to bank B, bank A went into liquidation and bank B could not realise the money. It was held that payments are always made on behalf of the bank, if the branch does not pay. This liability is not affected because one branch pays the money to the other branch of the same bank. Bank A had failed to pay the money by dishonouring the cheque, and, therefore, bank B could not be held liable to the plaintiff. Bank B’ s is liability could only arise if money had been paid by bank A by honouring the cheque. It was further held that the defendant was bound to pay his dues to the plaintiff and if payment of the cheque had failed by reason of his bank of going into liquidation, his liability still remained to pay the plaintiff. In this view, the defendant as the drawer of the cheque was the principal party liable.95
The presumption of law in cases of acceptance of a cheque in payment of a debt is that if it is dishonored, the creditor could fall back on the original cause of action.96
(2)NOTICE OF DISHONOUR
The secondary liability of the drawer is dependent upon notice of dishonour being given and requisite proceedings taken thereon. The section requires that in order to give the holder a cause of action on the dishonoured bill, he is bound to take all steps necessary to obtain payment and to preserve the rights of the drawer of the bill, such as due presentment and notice of dishonour. Omission on the part of the holder to give due notice of dishonour would discharge the drawer not only from his liability upon the bill, but also upon the original debt. The doctrine of notice of dishonour is based upon a just and equitable principle and may be applied to hundis.97 However, in certain circumstances, notice of dishonour to the drawer is not necessary.98
(3)DRAWER’S CRIMINAL LIABILITY
The drawer of a cheque which is dishonoured for want of funds can now be criminally prosecuted, if certain conditions are fulfilled, under the provisions of ch XVII of the Act, which was introduced by an amendment in 1988.99 Earlier, the question whether the drawer of a dishonoured cheque could be criminally charged depended upon the interpretation and application of the general penal law relating to cheating.
88 Bills of Exchange Act 1882,ss 16 and 55(1).
89 AB Miller v National Bank of India (1892) ILR 19 Cal 146, p 158.
90 Sheth Ka-Haridas v Bahia Bhai (1878-79) 3 Bom 182.
91 Whitehead v Walker (1842) 9 M&W 506.
92 Ram Ravji v Praldhaddas (1896) ILR 20 Bom 33.
93 Karim v People’s Bank of India (1915) 30 IC 35.
94 India Saree Museum v P Kapurchand (1992) 73 Comp Cas 375.
95 Bengal Bank Ltd v Satyendra Nath AIR 1952 Cal 385 [LNIND 1948 CAL 15].
96 Meerasahib v Padmanabha AIR 1965 Ker 28 [LNIND 1964 KER 133]; Jivanal Acharya v Rameshwarlal Agarwalla AIR 1967 SC 1118 [LNIND 1966 SC 162].
97 Moti Lal v Moti Lal (1919) 6 All 78.
98 See the Negotiable Instruments Act 1882,s 98.
99 See notes to ss 138-42 for a discussion of this aspect.
Liability of drawee of chequeKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
31 Liability of drawee of cheque The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and in default of such payment, must compensate the drawer for any loss or damage caused by such default.
(1)BANKER’S LIABILITY AS DRAWEE OF CHEQUE AND RELATION
As a cheque is a bill of exchange drawn on a specified banker, the drawee of a cheque must always be a banker. A banker’s business consists in receiving money from or on account of a customer, and repaying the same on demand on when drawn on by cheque. In order to make a person a customer of a bank, it is necessary that there must be some sort of account, such as a saving deposit or current account.1 A person who has no sort of account with a bank, but is merely in the habit of cashing cheques across the counter is not a customer.2
The relation between a banker and a customer, who pays money into a bank, arises out of contract and is generally one of a debtor and a creditor, with the added obligation on the part of the banker to honour the customer’s cheques, so long as there are funds of the customer in the hands of the banker.3 As soon as the customer deposits money with the banker, the money becomes the property of the banker, and the latter can deal with it as his own, and is not bound to return it in specie. The relation of a banker and a customer neither partakes of a fiduciary character, nor is analogous to the relation between a principal and his agent.4 A banker’s obligation to honour his customer’s cheques may be extended by an agreement supported by a valid consideration to allow the customer to overdraw to a certain limit.5
It is now standard practice for banks to issue blank cheque books (or leaves) to customers holding accounts like current and savings from which, funds can be withdrawn by cheques. These cheque leaves are imprinted with magnetic ink characters that help sort cheques presented for payment and connect them to the account on which they have been issued.
On one hand, a cheque is a mandate to the banker to pay the amount according to the tenor of the cheque and at the same time, the customer contracts that he will draw his cheques in such a manner as will enable the banker to fulfill his obligations, and therefore, in a manner which does not leave any room for any misgiving.6
Either party may put an end to the contract between banker and customer. The customer holding a current account can recover his loan by drawing a cheque on the bank for the amount due to him and presenting it to the banker for payment. Similarly, the banker, having decided not to have dealings with the customer, can close the account after giving sufficient notice and repay the money or tender repayment to the customer.7
If a customer has two accounts at a bank, the banker cannot transfer funds from one account to the other without the customer’s consent.8 A cheque leaf issued for use on one account cannot be used to draw on another account of the customer.9 So, too, a customer having a balance at one branch, cannot withdraw it on demand at another branch though at his own cost he may apply to have it transferred.10 The bank’s promise to repay its customer is a promise to repay him at the branch where his account is kept, and the bank cannot be called upon to repay him until repayment has been demanded at such branch.11 However, banks now allow cheques drawn by some valued customers to be encashed at par at all or specified branches of the bank. Where the account in maintained at a foreign branch of a bank and the customer asks for transfer of funds to India but the banker’s obligation to transfer is frustrated by local legislation or governmental action in the foreign country, the banker’s obligations to pay at the foreign branch cannot automatically be replaced by an unconditional obligation to pay at any other office of the bank.12
The banker is bound to make payment to the proper person, ie, the holder, his servant or agent. Thus, where the payee of a certain cheque sent his servant for receiving payment of the cheque, the officials of the bank took the
cheque from the servant, made him wait for some time, and ultimately informed him that the cheque was paid. In fact, the amount was not paid but by mistake or negligence must have been paid to a wrong person. It was held that the bank was not discharged and was liable to pay over again.13
A banker is justified or bound to dishonour cheques in the following cases.
(a) A banker is justified in refusing payment of a post-dated cheque, if presented for payment prior to the date it bears. Where a bank manager had, without authority certified a post-dated cheque, the bank was not liable on the cheque to a holder in due course, when on presentation on due date there were no funds in the drawer’s account to meet the cheque. Further, the holder in due course could not claim either in contract nor on the actual words used in the certification, there being no privity of contract between him and the drawee-bank and no consideration passing, or on an estoppel.14
(b) Under the section, the banker is bound to pay a cheque only when he has sufficient funds of the drawer in his hands. Therefore, if the customer has no funds to his credit, or if the amount standing to his credit is insufficient to cover the whole amount of the cheque, the banker is justified in refusing payment, but need not necessarily do so. The bank may pay the cheque by extending an overdraft to the customer. In State Bank of India v Vathi Samba Murty ,15 the court remarked: ‘If there was no money available the bank should have dishonoured the cheque unless specifically requested by the defendant for permitting overdrawal. If the banker on his own permitted overdrawal he has no right to claim interest’.
It is submitted that every cheque, the payment of which would result in an overdraft, even if not expressly requested or agreed upon, contains an implied request from the customer to grant the overdraft. If the banker has agreed to honour cheques even without sufficient funds, a dishonour of the customer’s cheques would render the banker liable to an action by the customer for breach of the contract.16
A bank dishonoured certain cheques despite sufficient funds being available on the customer’s account. The bank contended that the funds should have been utilised by the customer for repaying a loan borrowed from another bank, which had requested the drawee-bank to take steps to protect that bank’s interests. The drawee-bank’s action was held to be unfair and arbitrary.17
There is an unequivocal obligation on the banker to honour cheques and pay amounts. A bank cannot withhold payments to any customer simply on the ground that it suspects money held by such customer is for and on behalf of person who owes amount to it.18
An exception to the general rule arises in the case of the cheque issued under a cheque card or credit card plan. The production of the card by the customer and issue of a cheque in accordance with the conditions noted thereon would bind the bank to honour the cheque even if the customer has exceeded the credit limit set by the bank.19
(1) Under the section, the banker is bound to honour his customer’s cheques only when the funds of the customers in his hands are properly applicable to the payment of such cheques. Therefore, if the funds in the hands of the banker are subject to a lien or set-off by the banker, the funds are not properly applicable to the payment of the customer’s cheque, and the banker is justified in refusing payment.
(2) A banker is justified in refusing to honour a cheque that is irregular, or ambiguous, or drawn in a form of doubtful legality.20 Thus, a banker should refuse to pay a cheque containing an apparent material alteration, not properly authenticated by the drawer.
(3) A banker is justified in refusing payment of a cheque drawn by a customer having credit with one branch of the bank, where the cheque is drawn upon another branch in which he has no account or in which his account is overdrawn.21 If a customer has an account with a bank, which has several branches, the branches at which he has no account are justified in refusing to honour his cheques.22 An exception is where cheques are expressly, and with the drawee-bank’s consent, payable at par at all or specified branches of the bank.
(4) When a customer becomes insolvent, or an order of adjudication has been made against him, all his assets vest in the official assignee, and the banker should thereafter refuse to pay his customer’s cheques.23
(5) The duty and authority of a banker to pay a cheque drawn on him by his customer is determined by the customer countermanding payment.24
Page 3 of 7Liability of drawee of cheque
(6) Notice of the death of the customer determines the authority of the banker to honour his cheque, but payment before receiving notice of death is valid.25
(7) By notice that the customer has become mentally unsound, all operations on his account are to be suspended.26
(8) By service of a garnishee or other legal order attaching or otherwise dealing with the money in the banker’s hands.27
(9) Where the banker is prevented, by any government or exchange control restriction, from honouring the cheques of a particular customer, or of a class of persons of which the customer is one.
(10) By notice given by either party to close the account and the notice takes immediate effect.28
When someone claiming to be the payee or holder of a cheque informs the drawee-bank that the cheque has been lost, the bank may ask him to get in touch with the drawer, so that he may countermand the cheque if he so wishes. If the cheque is presented for payment before payment is stopped, the bank should exercise great care and caution in dealing with it. The bank may pay it, or, if the circumstances so warrant, postpone payment.
The banker has to be careful in dealing with accounts operated by agents or authorised officials. In such cases, the banker’s duty of care is owed to the customer and not to the authorised signatories. The banker should, therefore, make reasonable inquiries if he has, or a reasonable banker would have, grounds for believing that the authorised signatories are misusing their authority to defraud the principal or to defeat his true intentions. The banker should pay strictly in accordance with the direction given about the disposal of the moneys payable under the cheques presented. A banker’s actual knowledge of a company’s rules for signing cheques may affect him with notice of irregularity when apparently instructed as to the disposal of the company’s moneys.29
A banker is justified in refusing to honour a cheque drawn in breach of trust where he has notice of the breach. He must not knowingly by a party to the application of trust moneys to any purpose inconsistent with the trust affecting them, even at the mandate of his customer, who has to his knowledge become the owner of the funds in a fiduciary character.30 Thus, a bank would be advised not to honour a cheque on a company account even if it appears to be drawn in accordance with the company’s mandate to the bank, if the bank knows or has reason to believe that it represents financial assistance for the acquisition of the company’s own shares where it is legally prohibited.31
(2)LIABILITY OF DRAWEE-BANK FOR WRONGFUL DISHONOUR
A drawee-bank’s liability presupposes due presentment of the cheque. A bank is not bound to pay, if the cheque is not presented for payment within the usual banking hours. However, when a cheque is presented to a banker, who having sufficient assets of his customer in his hands, dishonours it, he is liable to pay compensation to his customer for any loss or damage caused by such dishonour, not only any pecuniary loss or damage, but also loss of credit or injury to reputation.32 The customer may recover substantial damages if he can show that the dishonour of the cheque caused loss of credit.33 As held by Lord Tenterden in Marzetti v Williams :34
It is a discredit to a person and therefore injurious in fact to have payment refused of a draft for so small a sum for it shows that the banker had very little confidence in the customer; it is an act particularly injurious to a person in trade’.
However, where the drawer has not sustained any actual damage, he is entitled to recover only nominal damages.35 There is a general presumption that a trader customer suffers injury owing to wrongful dishonour of his cheques. Hence, he is entitled to substantial damages without pleading and proving actual damage. A bank wrongfully dishonoured 11 cheques issued by the plaintiff for an aggregate sum of Rs 4,000 to 11 different payees. The plaintiff claimed damages to the extent of Rs 50,000. The plaintiff, being a trader, was awarded substantial damages of Rs 6,000.36 A non-trader customer is not entitled to substantial damages, unless actual damage is alleged and proved. A non-trader customer, whose cheque for Rs 294.40 was erroneously dishonoured by a bank, proved that the dishonour led to the termination of his employment. The court found that the bank’s conduct was negligent and far from reasonable, and awarded damages of Rs. 14,000 to the customer.37 In the event of wrongful dishonour of a cheque, the customer may also claim damages from the drawee-banker on the ground that the answer on the unpaid cheque constituted libel. Courts have expressed differing views on the question whether the answer refer to drawer on a cheque wrongly dishonoured is, as a matter of law, reasonably capable of conveying a defamatory meaning.38 A firm, unaware of a reduction in the limit on an overdraft facility extended to it, issued cheques beyond the reduced limit. The cheques were marked ‘refer to drawer’ and returned unpaid by the drawee-bank. The firm succeeded in its claim against the bank for damages for defamation.39
Page 4 of 7Liability of drawee of cheque
Though a banker is liable to pay compensation to the drawer for wrongful dishonour of his cheque, there is no privity of contract between the holder of the cheque and the banker. Therefore, the holder has no remedy against the banker, but only against the drawer. The banker is not liable to the holder even though he has got sufficient funds of the drawer in his hands.40
(3)FORGERY OF DRAWER’S SIGNATURE
The drawee-bank has no statutory protection when it pays, even if in the normal course and in good faith, a cheque on which the drawer’s signature is forged. It is the duty of a banker to be acquainted with his customer’s signature. If a banker pays a cheque which bears a forged signature of his customer, the banker will generally suffer a loss. The banker cannot debit the customer with the amount so paid. The reason for the rule is obvious. If a customer can be debited for money paid under a forged signature, his bank balance may decline in an extraordinary manner. In fact, any person who knew that the customer had a banking account, could forge his signature and obtain his money. It is the banker’s business to prevent this.
Thus, a document in cheque form to which the customer’s name as drawer is forged is not a cheque but a mere nullity, and a banker making payment thereon cannot make the customer liable, except on the ground of negligence imputable to the customer, which negligence was intimately connected with the transaction and was the proximate cause of the loss to the banker. Where the only negligence imputable to the customer was that he allowed his cheque book to remain in an unlocked box, it was held that the customer was not liable to be debited with the loss though one of the rules of business of the bank said that ‘constituents should keep all blank cheque forms under lock and key, otherwise the bank is not responsible for any loss in this connection.’41 In Bank of Ireland v Trustees of Evan's Charities ,42 Baron Parke observed: ‘If a man should lose his cheque book or neglect to lock the desk in which it is kept and a servant or stranger should take it up it is impossible in our opinion to contend that a banker paying his forged cheque would be entitled to charge his customer with the payment’.
Section 85 provides some protection to a banker paying a cheque carrying a forged indorsement. Such protection is not available to a bank that pays a cheque on which the customer’s signature as a drawer has been forged, even where the forgery cannot be distinguished from the customer’s genuine signature, such as the specimen on the bank’s records. In such a case, it is simply not a cheque issued by the customer and the bank has no mandate from the customer to pay the instrument.43
The Supreme Court has held that a bank paying a cheque with the forged signature of its customer cannot resist his claim with the defence of negligence on his part, such as his leaving the cheque book carelessly so that third parties could easily get hold of it.44 Interpreting the Supreme Court ruling, AN Ray J, expressed the opinion in a later case45 that though a bank cannot take a simple defence of customer’s negligence in a case where a cheque not signed by the customer has been paid, yet the bank would be permitted in an appropriately framed action in tort to claim for loss or damage suffered by it by reason of the customer’s negligence. On the principles of apportionment of liability and of contributory negligence, the bank may be entitled to damages amounting to a certain percentage of the loss suffered by the bank. In the case before the learned judge, there was, however, no such plea.
Payment made on forged cheque cannot be regarded as payment in due course under s 10 of the Act. It may be that the bank is an innocent victim of the fraud, but so is the customer. If there are two innocent parties, the one whose negligence led to the ultimate loss is primarily responsible.46
However, it is the duty of the customer of a bank in issuing mandates to the bank to take reasonable care so as not to mislead the bank. Beyond the care which must be taken in the transaction itself, the customer is not to take precautions in the general course of carrying out business to prevent forgeries on the part of his servant.47 A bill of GBP 500 was presented for acceptance with a stamp of much larger amount than was necessary and with spaces left. The acceptor wrote his acceptance and handed the bill to the drawer, who fraudulently filled up the spaces and turned it into a bill for GBP 3,500. Being sued on the bill by a bona fide holder for value, the acceptor paid GBP 500 into court. It was held that the acceptor owed no duty of precaution to the plaintiff, and was guilty of no negligence, and was entitled to judgment.48 The acceptor of a bill of exchange is not under a duty to take precautions against fraudulent alterations in the bill after acceptance.49 Where, however, the customer misleads the bank by want of proper care in the mode of drawing the cheque, so as to admit of interpolation of an additional word or figure, he cannot complain of a bona fide payment of a cheque so altered. Also, if the customer has, by his negligence or default, induced the banker to make the payment, it is the customer and not the banker who must bear the loss.50 If
Page 5 of 7Liability of drawee of cheque
a cheque be drawn so negligently as to facilitate alteration of the amount payable, any loss caused by such an alteration will fall on the customer who draws the cheque, and not on his banker.51 For example:
(a) A draws a cheque on his bankers for Rs 50, carelessly leaving a blank space before the words and figures ‘fifty’. The holder fills it up as a cheque for Rs 550, and obtains payment. The banker can charge A with the amount so paid.52
(b) A draws a cheque payable to bearer, filling up the space for figures with Rs 20, but leaving blank the space for showing the amount in words. A confidential clerk of the drawer fills in the space for words with ‘rupees five hundred and twenty’ and alters Rs 20 into Rs 520. The clerk cashes the cheque and misappropriates the proceeds. The banker can debit A’s account with Rs 520.53
The defendant’s cheque was encashed by bank B; but the cash was entrusted by B to its servant who accompanied the defendant to the place where the payment was to be made according to the agreement between the defendant and B. B’s servant absconded before making the payment. B could not debit defendant’s account with the amount of the cheque as B was held not to have paid the defendant, and s 85 of the Act was held to be inapplicable.54
In Canara Bank v Canara Sales Corpn ,55 the Supreme Court noted that a bank paying a forged cheque can successfully defend itself in an action by the customer only if the bank proves that he had adopted the payment or was estopped from denying it. Whether such adoption or estoppel has been established would upon the particular facts of the case and the evidence adduced.
Unless the banker-customer contract expressly provides otherwise the customer is under no duty to check the entries in his pass book or statements of his account, and bring any discrepancies to the notice of the banker within a reasonable period after their receipt. Therefore, in an action by a customer against his banker for recovery of amounts paid away on forged cheques, the latter cannot plead that the customer had not carefully checked the entries in the pass book or statements of account. The customer is not estopped merely on the basis that he could have known of the forgeries had he been diligent.56
In the Canara Bank case, forgeries had been committed by an official of the company over a decade or so, and during the period the company did not raise any objection to the entries in the pass-sheets. Yet, the bank could not succeed. The Supreme Court observed that, in the absence of an express condition in the banker-customer contract or an unequivocal ratification by the customer, the bank would not be able to avoid liability on the forged cheques. The court pointed out that the American law on the subject was different from the Indian law, and chose to adopt the reasoning of the Privy Council in Tai Hing Cotton Mills Ltd v Liu Chonghing Bank Ltd ,57 a case from Hong Kong with somewhat similar facts. In an earlier English case,58 a plea to bring the English law in line with the American law on this subject had proved unsuccessful. Where, however the customer has signed balance confirmation letters he may be held bound by the entries relating to the forgeries.59 However, in Allahabad Bank Ltd v Kul Bhushan ,60 the customer’s confirmation was held to be of no value since he had informed the police and the bank immediately after he discovered the forgeries.
Section 72 of the Indian Contract Act 1872, requires that a person to whom money has been paid by mistake must repay it. As a general rule, therefore a banker can recover money paid away on a forged cheque from the recipient,. It seems immaterial that the recipient has spent the money or has altered his position in reliance of the payment. Where there is not negligence on the part of the banker, the mere payment of a forged cheque does not operate as an estoppel against him.61 It was held by the Calcutta High Court in United Bank of India v AT Ali Hussain &; Co 62 that the paying bank was estopped from recovering from either the collecting bank or the payee firm the amount of a forged cheque paid to the bank as the firm’s agent. This decision does not appear to be in line with the Supreme Court’s earlier judgment in Sales Tax Officer, Benares v Kanhaiya Lal .63
A police investigation was proceeding on a complaint by a company that a sum of Rs 95,000 had been withdrawn from its bank account through a cheque bearing the forged signature of the company’s managing director. Meanwhile the company filed a writ petition with the Bombay High Court seeking refund of the amount from the bank. After a preliminary hearing the high court issued an interim order directing the refund. On an appeal by the bank, the Supreme Court set aside the order and deprecated the practice of granting such interim orders on the ground that a prima facie case had been made out, without being concerned about the balance of convenience, public interest, and a host of other considerations.64
Page 6 of 7Liability of drawee of cheque
1 Lacave &; Co v Credit Lyonnais [1897] 1 QB 148 , p 155.
2 Great Western Railway Co v London &; County Banking Co Ltd [1970] AC 414 , p 420.
3 Pott v Clegg (1847) 16 M&W 321; Official Assignee, Madras v Ramchandra (1910) ILR 33 Mad 134, p 141.
4 Foley v Hill (1848) HL Cas 28 it has been held later that a bank acts as the customer’s agent in paying his cheques.
5 Cumming v Shand (1860) 29 LJ Ex 129; Md Hussain v Chartered Bank (1965) 2 Comp LJ 37.
6 London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777 .
7 Bradley v Agra Bank 101 PR 1885.
8 Greenhalgh v Union Bank of Manchester [1924] 2 KB 153 .
9 State Bank of India v Vathi Samba Murty AIR 1988 Ori 50 [LNIND 1986 ORI 46].
10 Clare v Dresdner Bank [1915] 2 KB 576 .
11 Joachimson v Swiss Bank Corp [1921] KB 110 , p 127 (CA); Issac v Barclays Bank Ltd [1943] 2 All ER 682.
12 Indo-Allied Industries Ltd v Punjab National Bank Ltd (1968) 2 Comp LJ 352.
13 Lall Chand v Agra Bank (1891) 18 IA 111.
14 Bank of Baroda Ltd v Punjab National Bank Ltd (1944) 71 IA 124.
15 AIR 1988 Ori 50 [LNIND 1986 ORI 46].
16 Flemming v Bank of New Zealand [1900] AC 577 .
17 Gupta Biscuits P Ltd v United Commercial Bank AIR 1988 Cal 265 [LNIND 1987 CAL 248].
18 N Santosh v Indian Overseas Bank (2003) II BC 637 (AP).
19 Metropolitan Police Commr v Charles [1976] 3 All ER 112.
20 Emanuel v Roberts (1868) 9 B&S 121.
21 Woodland v Fear [1857] 26 LJQB 202; Union Bank of Australia Ltd v Murrary-Aynsley [1898] AC 693 .
22 Bank of India Ltd v Official Liquidator (1950) Bom 375.
23 Mathew v Sherwell (1810) 2 Taunt 439.
24 Mowji Shamji v National Bank of India (1901) ILR 25 Bom 499, p 515.
25 Tate v Hibert 2 Ves 11; Beaumout In Re 1 Ch 889, p 894.
26 Drew v Nunn [1879] 4 QBD 661 .
27 Rogers v Whitely [1889] 23 QBD 236 affd, Rogers v Whitely [1892] AC 118 .
28 Buckingham &; Co v London &; Midland Bank (1895) 12 TLR 70.
29 Bank of Montreal v Dominion Greshamn Co [1930] AC 659 .
30 Union Bank of Australia Ltd v Murray-Aynsley [1898] AC 693 .
31 Selangor United Rubber Estates Ltd v Craddock [1968] 2 All ER 1073; Karak Rubber Co Ltd v Burden [1972] 1 All ER 1210; Barclay’s Bank plc v Quincecare Ltd [1992] 4 All ER 363; Lipkin Gorman v Karpnale Ltd [1992] 4 All ER 409; Royal Brunei Airlines v Tan [1995] 3 All ER 97 (PC).
32 Rolin v Steward (1854) 14 CB 595.
33 Marzetti v Williams (1830) 1 B & Ad 415; Hopkinson v Forster (1874) LR 19 Eq 74.
34 (1830) 1 B & Ad 415.
35 Prehn v Royal Bank of Liverpool (1870) LR 5 Ee 92; Rae v Yorkshire Bank plc (1988, unreported).
36 New Central Hall v United Commercial Bank Ltd AIR 1959 Mad 153 [LNIND 1958 MAD 83].
37 Canara Bank v IV Rajagopal (1975) 1 Mad LJ 420.
38 Plunkett v Barclays Bank Ltd [1936] 2 KB 107 ; Flach v London &; South Western Bank Ltd (1915) 31 TLR 334; Jayson v Midland Bank Ltd (1968) 2 Lloyd’s Rep 409.
39 Hill v National Bank of New Zealand Ltd (1985) 1 NZLR 736.
40 Hopkinson v Forster (1894) LR 19 Eq 74; Meghji Malsee v PC Oommen AIR 1963 Ker 306.
41 Prabhu Dayal v Jwala Bank AIR 1938 All 634.
42 (1855) SHLC 389, p 410.
43 Babulal Agarwala v State Bank of Bikaner and Jaipur AIR 1989 Cal 92 [LNIND 1988 CAL 324], relying on Canara Bank v Canara Sales Corpn AIR 1987 SC 1603 [LNIND 1987 SC 417], distinguishing Pranendra Mohan Das v Central Bank of India AIR 1978 Cal 55 [LNIND 1977 CAL 266].
44 Canara Bank v Canara Sales Corpn AIR 1987 SC 1603 [LNIND 1987 SC 417].
45 Mahavir Prasad Bubna v United Bank of India AIR 1992 Cal 270 [LNIND 1992 CAL 88].
46 Allahabad Bank Ltd v Kul Bhushan AIR 1961 Punj 571, relying on A Abbu Chettiar v Hyderabad State Bank 1954 IRT Mad 1001; EQ Canara Bank v Canara Sales Corpn AIR 1987 SC 1603 [LNIND 1987 SC 417].
47 Bank of England v Vagliano Bros [1891] AC 107 .
48 Scholfield v Earl of Londesborough [1896] AC 514 .
49 Ibid.
50 Young v Grote (1827) 4 Bing 253.
51 London Joint Stock Bank v Macmillan and Arthur [1918] AC 777 .
52 Young v Grote (1827) 4 Bing 253.
53 London Joint Stock Bank v Macmillan and Arthur [1918] AC 777 .
54 Bank of Bihar v Mahabir Lal AIR 1964 SC 377 [LNIND 1963 SC 27].
55 Keptigalla Rubber Estates Ltd v National Bank of India Ltd AIR 1987 SC 1603 [LNIND 1987 SC 417].
56 Keptigalla Rubber Estates Ltd v National Bank of India Ltd [1909] 2 KB 1010 .
57 [1985] 2 All ER 947.
58 Wealden Woodlands (Kent) Ltd v National Westminister Bank Ltd (1983) 133 New LJ 719.
59 Essa Ismail v Indian Bank Ltd (1963) Comp LJ 194.
60 AIR 1961 Punj 571.
61 National Westminister Bank Ltd v Barclays Bank International Ltd [1974] 3 All ER 834.
62 AIR 1978 Cal 169 [LNIND 1977 CAL 322].
63 AIR 1959 SC 135 [LNIND 1958 SC 107].
64 Bank of Maharashtra v Race Shipping and Transport Company (P) Ltd (1995) 83 Comp Cas 478.
Liability of maker of note and acceptor of billKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
32 Liability of maker of note and acceptor of bill
In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand.
In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default.
[See ss 54(1)and88(1)of the Bills of Exchange Act 1882]
(1)LIABILITY OF MAKER UPON DELIVERY AND ACCEPTANCE OF PAYMENT
The maker of a promissory note is primarily liable upon the instrument, and his engagement is absolute and unconditional. The maker of a note, by making it engages that he will pay it according to its tenor. As the maker of a note is the party primarily liable upon the instrument, his liability is absolute, and no notice of dishonour is necessary to charge him, but the maker is not liable until he signs the note and delivers it to the payee or the bearer. Further, the primary and absolute liability of the maker of a note must be distinguished from the secondary and conditional liability of the drawer of a bill of exchange. In general, the maker of a note corresponds to the acceptor of a bill of exchange, and they are both governed by the same rules. The moment it is proved that the maker of note has made the note or the acceptor of a bill has accepted the bill, the onus is upon him to show that he is not liable upon the instrument.65 A Division Bench of the Madras High Court held that the maker of a note, which contained an unconditional undertaking to pay, was not entitled to prove by oral evidence that the parties intended that he was to be liable only as a surety.66 The court observed that the Indian law differs from the English law in this regard, and that s 92 of the Indian Evidence Act 1872 permits no equitable exception. There is an essential antithesis between the legal position of a surety and that of the executant of a promissory note, and so a person who executes a promissory note cannot be held in law to have the position of a surety.67 In the absence of a contract to the contrary, the joint executants of a promissory note are jointly and severally liable thereon.68 Where a person offers to guarantee a bank loan, he may be asked by the bank to join the borrower in the execution of a promissory note against the loan. The bank, however, may not be able to hold the surety liable as a co-obligant, if there are other documents indicating a different intention of the parties. In such a case, all the documents form part of a single transaction.69
The drawee of a bill is not liable upon the bill till acceptance, and till then no privity exists between the drawee and the payee or any other holder.70 The holder cannot sue the drawee for refusing to accept. In case of dishonour, the holder’s remedy is against the drawer.71
Where the plaintiff was the payee of a hundi which was sent by post to him and the hundi got into the hands of a third person who obtained payment of the hundi from the drawee, it was held by the Supreme Court of India that as there was no acceptance of the hundi and the drawee was not liable under s 32 of the Act. There is no provision in the Act that the drawee as such is liable on the instrument, the only exception being in the case of a drawee of a cheque, having sufficient funds of the customer in his hands (s 31) and even then, the liability is towards the drawer and not the payee.72
Page 2 of 3Liability of maker of note and acceptor of bill
The acceptor is the person primarily liable upon a bill of exchange, and is liable by reason of his acceptance. His signature is considered as prima facie acknowledgement that he has, in his hands, funds that the drawer is entitled to call upon him to pay in the manner ordered by him. The liability of the acceptor of a bill is, like that of the maker of a note, absolute and unconditional. By accepting a bill, the acceptor engages that he will pay it, according to the tenor of his acceptance. The liability of the acceptor, however, does not attach merely because he signs his acceptance on the bill; it is necessary that he should either deliver the accepted bill or give notice of such acceptance to the holder.
Under the section, the liability of a maker of a note or the acceptor of a bill of exchange is subject to any contract to the contrary. The expression ‘contract to the contrary’ is used to cover the case of accommodation bills and notes. Under the section, the liability of the maker of a promissory note or the acceptor of a bill of exchange may be excluded or modified by a collateral agreement. As noted in Steele v Mckinley :73
It is undoubtedly competent for parties to a bill to contract inter se expressly or impliedly to alter or even invert the positions and liabilities assigned to them by the law merchant. The drawer and acceptor of a bill may agree that as between themselves, the acceptor shall have the rights of a drawer, and that the drawer shall be subject to the liabilities of an acceptor, and that agreement when proved will be binding upon them both, although it can have no effect upon the obligations to third parties interested in the bill, imposed upon them by the law merchant.
(2)PAYMENT MUST BE ACCORDING TO THE TENOR OF THE NOTE OR ACCEPTANCE
According to the section, the maker of a note must pay it according to the apparent tenor of the note, and the acceptor of a bill must pay it according to the apparent tenor of his acceptance. The distinction between the maker of a note and the acceptor of a bill in the mode of a payment arises from this.
The maker of a note is the originator of the instrument and after making it, he can, in no way, alter it without the consent of the other parties, while the acceptor of a bill is not the creator of the bill. The bill originates from the drawer, but when it is presented to the drawee, he may give a qualified acceptance. Accordingly, when the acceptance is general, the acceptor is bound to pay the bill as it stands; if the acceptance is qualified, he is bound to pay only according to the tenor of his acceptance, and not according to the tenor of the bill as originally drawn.74 In order that a maker or an acceptor may pay an instrument according to the tenor of the note or acceptance as the case may be, it is necessary that:
(a) The payment must be made to the holder of the note or bill; a payment to any other person does not operate as a discharge, except where the instrument is payable to bearer and payment is made in due course.75
(b) Payment by the acceptor to the drawer of a bill of exchange would not absolve the acceptor of his liability to a third party who qualifies as a holder in due course.76
(c) The payment must be made at maturity. The liability on the note or bill is not discharged by payment before maturity.
(3)COMPENSATION FOR DEFAULT
In case, of default of such payment, the maker of a note or the acceptor of a bill is bound to compensate not only the holder of the instrument, but any party to the note or bill for loss or damage sustained by him and caused by such default.77 Any other party is entitled to recover compensation, as the loss or damage to such party arises on his paying to the holder, the amount due on the bill or note.
In consideration of certain advances received from the State Trading Corporation (STC), an export firm indorsed and delivered to it, certain documentary bills drawn on a foreign importer. STC delivered the documents to the importer against its acceptance of the bills. The bills were later dishonoured by non-payment. In legal proceedings by STC, which was holding the dishonoured bills, against the export firm for recovery of advances to the firm, STC pleaded that the firm, as drawer, could have initiated appropriate proceeding against the acceptor for recovery of the amounts due on the bills. The Bombay High Court rejected the plea on the ground that the drawer-firm, not
Page 3 of 3Liability of maker of note and acceptor of bill
being the holder, could sue the acceptor for compensation only after making payment to the payee (or holder) and getting the bills indorsed back to it.78
In the case of accommodation bills and notes, the person for whose accommodation such instruments are made or accepted, cannot claim compensation for loss or damage, unless he has put the maker or acceptor in funds to honour the instrument at maturity.79
The acceptor of a bill is bound to make compensation under this section, and this liability cannot cease by reason of the fact that the acceptor cannot obtain delivery of goods in respect of his acceptance.80 The facts in that case were as follows: On 24 June 1914, a German residing at Hamburg, drew a bill of exchange upon the defendant in favour of the plaintiff for GBP 65-6-6 payable at 30 days’ sight to the order of the plaintiffs for value received. The bill purported to be drawn upon the defendant against 50 bales of goods per SS Lichtenfels, a German steamer. It was presented to the defendant for acceptance with the shipping documents relating to the goods mentioned in the bill; and was accepted on 20 July 1914, payable at the office of the plaintiff in Bombay. The ship reached Bombay just before the outbreak of war between Great Britain and Germany and in order to evade capture left Bombay and took shelter at the neutral port of Marmagoa. The bill was presented for payment on the due date with the shipping documents, but was dishonoured by non-payment. Meanwhile, the British Government issued a proclamation authorising British subjects to make payments for the purpose of obtaining their cargoes in neutral ports to the agents of shopowners in an enemy country. The plaintiff averred its readiness and willingness to hand over the documents against payment of the amount due under the bill. Eventually, the plaintiff filed a suit to recover the amount of the bill, alleging that the acceptance being unqualified and absolute, the defendant was bound to pay. The defendant denied liability, contending that the acceptance was qualified, the bill having been drawn on it against goods, and it need not pay till it was put in a position to receive the goods. It was held that the plaintiff was entitled to succeed from either point of view, for if the acceptance was unqualified, the defendant was bound to pay on due date, and if the acceptance was qualified, it was still bound to pay at or after maturity when money was demanded after the proclamation, whereunder consignees were permitted to take delivery of goods from enemy ships in neutral ports; and that the consideration for the acceptance did not fail, for the proclamation permitted performance of the alleged condition before it was too late.
65 Nazir Ali v Kherchand (1916) 36 IC 996; Union Bank of India v Swastika Motors AIR 1983 Del 240 [LNIND 1982 DEL 177].
Only drawee can be acceptor except in need or for honourKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
33 Only drawee can be acceptor except in need or for honour No person except the drawee of a bill of exchange, or all or some of several drawees, or a person named therein as a drawee in case of need, or an acceptor for honour, can bind himself by an acceptance.81
(1)WHO CAN ACCEPT
The persons who can accept a bill of exchange under the section are:
(a) the drawee of a bill, that is, the person directed to pay;
(b) all or some of several drawees, where the bill is addressed to more than one drawee;
(c) a drawee in case of need who is mentioned in the bill;
(d) an acceptor for honour.
A bill of exchange, as a general rule, can only be accepted by the person or persons to whom it is addressed, and who is or are directed to pay it according to the order of the drawer. A stranger, therefore, cannot accept a bill except as an acceptor for honour. The drawee, to whom it is addressed, cannot, of his own motion, substitute another person for him as drawee. A bill drawn on one person cannot be accepted by another, nor can a bill drawn on one person be accepted by two persons, one named in the instrument and another, a stranger except as an acceptor for honour. A bill may be addressed to two or more drawees but it cannot be addressed to two or more drawees in the alternative or in succession. Where a bill is addressed to two or more drawees, the bill should be accepted by all, but if only some of them accept it, the acceptance is a qualified one and the holder may treat the bill as dishonoured.82 However, if the holder does not treat the bill as dishonoured, the acceptance of the drawees accepting it will be good and binding on them, for the section provides that all or some of several drawees can accept.
A draft was drawn under a letter of credit by the overseas beneficiary on ‘MMTC, Account CSC’. MMTC acted as a canalising agent for the import. Upon signification of CSC’s acceptance on the draft, the shipping documents were delivered to CSC under trust receipt in favour of its banker. The draft was not paid, and in an action by the bank against CSC on the draft, the Supreme Court held that CSC was the drawee, and its acceptance was valid and the statutory liability of an acceptor was fastened on it.83 With due respect, this decision is debatable. If CSC was the drawee, it is difficult to see what was MMTC’s legal status as a party to the draft or the letter of credit.
Where a bill of exchange is drawn on a named person, who accepts it, not for himself, but for and on behalf of a corporation of which he is a member, there is no valid acceptance of the bill.84 If a bill is addressed to several drawees who are partners in a trading firm, each partner has prima facie authority to bind the firm by an acceptance in the name of the firm and if accepted by a partner, in order that the acceptance may bind the firm, it should be in the name of the firm.
However, if a partner accepts such a bill in his own name, he makes himself personally liable on the acceptance, but not the firm. On the other hand, if a bill is addressed to a partner personally, and is accepted by him in the name of the firm, the partner is personally liable as acceptor.
A &; Co, in London, opened a letter of credit for Rs 5,000 for one year in favour of their commission agents B &; Co, to be available through drafts on A &; Co, against produce bought and paid for by B &; Co. The goods were to be shipped in two months, and under lien to A &; Co, until the documents of title were handed over by B &; Co to bankers for transmission to A &; Co. It was held that the credit was not an open credit and that A &; Co was entitled to refuse acceptance; if the goods had not been bought according to the contract, a bank which had negotiated
Page 2 of 2Only drawee can be acceptor except in need or for honour
such bills for B &; Co could not make A &; Co liable.85 It has also been held that the Bank of England was under no obligation to accept a bill drawn on it, by a person who owned government securities on which large sums as dividends were due and were in the hands of the bank.86
The following examples may be noted:
(a) A bill is addressed to William Smith. John Brown writes an acceptance on it. John Brown is not liable as acceptor.87
(b) A bill is addressed to William Smith. William Smith and John Brown write their acceptance on it. John Brown is not liable as acceptor.88
(c) A bill is addressed to the Director of the Hudson Steamship Co Ltd. Three directors and the manager sign their acceptance. The manager is not liable as acceptor.89
(d) A bill is addressed to ‘William Smith, general agent of the Hudson Steamship Co Ltd’. William Smith accepts it thus: ‘Accepted on behalf of the Company - William Smith’. William Smith is personally liable as acceptor.90
(e) A bill is addressed to Harris and Co. William Smith who is a partner in the firm, accepts it in his own name. William Smith is liable as acceptor.91
(f) A bill is addressed to William Smith who is a partner in the firm of Harris and Co. William Smith accepts it in the firm’s name. William Smith is personally liable as acceptor.92
As an exception to the general rule, a stranger to a bill can accept it for the honour of any party already liable on the bill. Such a person is mentioned in the section as an acceptor for honour.
81 Bills of Exchange Act 1882,ss 17(1)and53.
82 See s 86.
83 American Express Bank Ltd v Calcutta Steel Co (1993) 76 Comp Cas 768.
84 Ibrahim v International Banking Corp (1925) 27 Bom LR 283.
85 Chartered Bank of India, Australia &; China v Macfayden &; Co (1895) 64 LJQB 367.
86 Boyse Crofton In Re 33 Ch D 612.
87 New Fleming Spinning &; Weaving Co Ltd In Re (1901) 3 Bom 439; Davis v Clarke (1844) 13 LJQB 305, Fielder v Marshall (1861) 30 LJCP 158.
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34 Acceptance by several drawees not partners Where there are several drawees of bill of exchange who are not partners, each of them can accept it for himself, but none of them can accept it for another without his authority.93
(1)ACCEPTANCE BY SEVERAL DRAWEES
If a bill is addressed to several drawees, under the section, each can bind himself personally by his acceptance, but he cannot accept so as to bind the others except in two cases:
(i) Where one partner accepts on behalf of the firm, so as to bind the firm.
(ii) Where one drawee accepts as agent for another, with the authority of the latter.
Liability of indorserKhergamvala: Negotiable Instruments Act
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35 Liability of indorser
In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without, in such indorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been given to, or received by, such indorser as hereinafter provided.
Every indorser after dishonour is liable as upon an instrument payable on demand.94
(1)INDORSER’S LIABILITY
Every indorser of a bill is in the nature of a new drawer, that is to say, his contractual relations with the holder resemble those of a drawer, and his contract, like that of the drawer is only a conditional one.95 The engagement of the indorser of a bill is that on due presentment, it shall be accepted and paid according to its tenor, and that in case of dishonour, he will compensate the holder or a subsequent indorser who is compelled to pay it, provided that notice of dishonour has been duly given to him.96
The engagement of the indorser of a note is similar to that of the indorser of a bill, subject to the proviso that there is no engagement on his part as to acceptance, for a note is incapable of acceptance. The indorsement of a negotiable promissory note operates, in contemplation of law, between the parties thereto, as the drawing of a bill of exchange in favour of the indorsee, such indorsement being only a request of the indorser that the maker of the promissory note would pay the amount to the indorser or to any holder in due course.97
The liability of the indorser, however, does not arise under the section unless he indorses and delivers the instrument to the transferee, for no contract on a negotiable instrument is complete without delivery. Where the cheque is got discounted from the bank, the person who gets the same discounted, though is a party to the cheque since he delivers the cheque to the bank but he cannot be fastened with liability since he did not endorse the cheque.98
Where a person indorses a bill or note for the accommodation of another, the party accommodated has no right to maintain a suit upon the instrument against the indorser. Likewise, a person who is merely an indorsee for collection cannot maintain a suit against the indorser.99 However, in such cases, the indorser cannot escape liability to a holder in due course.1 As in the case of a drawer, so also in the case of an indorser, reasonable notice of dishonour should be given or received by him before he can be rendered liable on the instrument. The fact that the instrument has been dishonoured, and that intimation of dishonour has been given to the indorser, are conditions precedent to the indorser being made liable on the instrument.2
Since the nature of the liability of an indorser of a cheque is different from that of its drawer, notice of dishonour to the indorser is necessary to preserve the indorser’s liability even if the cheque is returned unpaid by the drawee-bank with the reason refer to drawer.3
In case of dishonour, the indorser is bound to pay, in addition to the amount of the bill, note or cheque, compensation to the holder for loss or damage caused to him by reason of such dishonour. All liability, however, may be negatived or made conditional by an indorser by adding words to his signature, which show that he is not to
be held responsible. Thus, the indorser may express in his indorsement that it is made with this qualification that he shall not be liable on default of acceptance or payment by the drawee. A qualified indorsement may be made by such words as ‘sans recours’ or ‘without recourse to me’ or any equivalent expression.4
When a party signs a negotiable instrument and it is not clear in what capacity he signed it, the whole circumstances relating thereto may be taken into consideration to define his liability.5
It has been held that the word dishonour has been used in the general and commercial sense in ss 30 and 35 of the Act and is not confined to the limited definition under ss 91 and 92 of the Act. Dishonour, as understood, commercially involves a proper demand within a reasonable time for wrongful refusal. It is the duty of the holder in due course to give notice to the parties and unless this is done, the prior party is discharged and he may be left without any remedy.6
94 Bills of Exchange Act 1882,ss 10(2)(a)and55(2)(a).
95 Gills v Freemont (1853) 9 Ex 25 ; Label v Tucker [1867] LR 3 QB 81.
96 See ss 91 and 92 as to what constitutes dishonour.
97 Muhammad v Ranga Rao (1901) ILR 24 Mad 654.
98 Gaddam Venkataraju v Andhra Bank (2001) 2 BC 543, Gaddam Venkataraju v Andhra Bank (2000) 3 Comp Cas 212.
99 Lloyd v Howard [1850] 15 QB 995 .
1 Smith v Knox (1800) 2 Esp 46.
2 Sanehi Lal v Onkar Mal (1920) 18 All LJ 281.
3 Commerical Finances v Thressia (1990) 68 Comp Cas 704.
4 Wakefield v Alexander (1901) 17 TLR 217.
5 Macdonald v Whitefield (1883) 8 App Cas 78 (PC) relied on in Radhakrishnan v Narainibai AIR 1963 MP 191 [LNIND 1962 MP 1].
6 Bhoovarha Kounder v Bhoovarahamurthy Rao (2000) 100 Comp Cas 250; Nanakchand v Lalachand AIR 1958 Punj 222.
Liability of prior parties to holder in due courseKhergamvala: Negotiable Instruments Act
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36 Liability of prior parties to holder in due course Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.
(1)LIABILITY OF PRIOR PARTIES
The holder in due course of an instrument is entitled to maintain an action thereon in his own name against all the prior parties to the instrument. However, in the event of dishonour, the holder is not bound to sue all the prior parties liable to him under the instrument and he may, at his option, select the parties he wants to recover his amount from.
The expression prior party in the section means the maker or drawer, the acceptor, and all the intervening indorsees. Every prior party continues to remain liable on the instrument to every subsequent party, and to a holder in due course, until the instrument is duly satisfied.7 An instrument is deemed to be duly satisfied if the liability of all the parties is extinguished, and the instrument is discharged by payment or satisfaction thereof by the maker or acceptor at or after maturity. An instrument is not discharged by payment by the maker or the acceptor before its maturity. Where an acceptor of a bill pays and takes up the instrument before maturity, he can re-issue and further negotiate it, though he has no right to enforce payment on it against any intervening party to whom he was previously liable.8
The comparison of s 35 and s 36 would show that while s 35 subjects the liability to any contract to the contrary, s 36 has no such qualifying phrase and a holder in due course of a bill or note may recover the amount due on the instrument notwithstanding the existence of facts and circumstances attacking the validity of the transaction between the prior parties even including want of consideration.9
7 Radha Rukmini Ammal v Swaminatha Mudaliar Sons Co and anor (M/s) (2003) 2 Bank CLR 552 (Mad).
8 Burbridge v Manners (1812) 5 Camp 184; Hubbard v Jackson (1827) 4 Bing 390.
9 Radha Rukmini Ammal v M/s Swaminatha Mudaliar Sons Co and anor (M/s) (2003) 2 Bank CLR 552 (Mad).
Maker, drawer and acceptor principalsKhergamvala: Negotiable Instruments Act
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37 Maker, drawer and acceptor principals The maker of a promissory note or cheque the drawer of a bill of exchange until acceptance, and the acceptor are, in the absence of a contract to the contrary, respectively liable thereon as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or acceptor, as the case may be.
(1)NATURE OF THE LIABILITY OF PARTIES TO NOTES, BILLS AND CHEQUES
The contracts of the acceptor, the drawer, and the indorser of a bill are distinct from each other, and the liability of each arises solely out of his respective contract. Though each contracts to pay the same sum of money on the instrument, yet they all contract severally and in different ways, and subject to certain conditions.10 A party to a note, bill or cheque is liable thereon either as a principal debtor or as a surety. The section, along with s 38 mentions the cases in which parties to notes, bills or cheques are liable as principal debtors and those in which they are liable as sureties. Section 37 lays down that the maker of a note and the drawer of a cheque are the principal debtors thereon and all the other parties are liable as sureties.11Section 38 mentions the cases in which parties to notes, bills or cheques are liable as principal debtors and those in which they are liable as sureties. In the case of a bill, until acceptance, the drawer is the principal debtor and the other parties are liable as sureties, but after acceptance, the acceptor is the principal debtor and all other parties are sureties. The provisions of the Indian Contract Act 1872 which regulates the rights and liabilities of principal debtor and surety are, subject to the provisions of the Negotiable Instruments Act 1881, applicable to parties to bills, notes and cheques. Where a promissory note is executed by two or more persons jointly, unless there is a contract to the contrary, they are jointly and severally liable to the holder and the release of one of them will not discharge the other(s).12
(2)ALTERATION OF LIABILITY OF PARTIES BY SPECIAL CONTRACT
Though the general rule is that the maker, drawer, and acceptor are liable as principal debtors, and the other parties are liable as sureties, the section provides that a contract to the contrary may be entered into, whereby the parties may invert their liabilities. Thus, a drawer of a bill may make himself, the principal debtor and the acceptor, a surety for the drawer. Similarly, by a contract, the payee of a promissory note may make himself the principal debtor and the maker a surety for the payee. Similar contracts may be entered into between indorsers and indorsees. In the case of accommodation bills, there is always a presumption that there is a contract to the contrary.13 Thus, where the drawee of a bill accepts the bill for the accommodation of the drawer, the drawer is the principal debtor and the acceptor is the surety, so that if the drawer pays the bill, he cannot proceed against the acceptor, but if the acceptor pays the bill then the drawer is bound to indemnify him. In the absence of a contract to the contrary, the liabilities of successive indorsers inter se are determined according to the ordinary principle of the law merchant, which makes a prior indorser indemnify a subsequent one.14
By reason of s 37 of the Act, the maker, even in the case of an accommodation note, remains liable as principal and the payee as surety only, from the point of view of the holder’s right in the absence of a contract to the contrary. The words ‘a contract to the contrary in the section’ refers to a contract, which displaces the normal right which the holder possesses in law.15
10 Pogose v Bank of Bengal (1877-78) ILR 3 Cal 174, p 184; Doolarchand v Mohabeer 19 WR 304.
11 Fentum v Pocock (1813) 5 Taunt 192; Heylyn v Adamson (1758) 2 Burr 674, p 676.
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38 Prior party a principal in respect of each subsequent party
As between the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also liable thereon as principal debtor in respect of each subsequent party.
Illustration
A draws a bill payable to his own order on B, who accepts. A afterwards indorses the bill to C, C to D, and D to E. As between E and B, B is the principal debtor, and A, C and D are his sureties. As between E and A, A is the principal debtor, and C and D are his sureties. As between E and C, C is the principal debtor and D is his surety.
(1)LIABILITY OF PARTIES INTER SE
The section provides that as between the parties liable under s 37 as sureties for the maker, drawer, or acceptor, each prior party is a principal debtor in respect of each succeeding party. The parties are not mere co-sureties with rights of contribution under s 146 of the Indian Contract Act 1872. Byles explains the relationship of the parties thus:
Suppose a bill to have been accepted and indorsed for value. The acceptor is the principal debtor, and all the other parties are sureties for him, liable only on his default. But though all the other parties are in respect of the acceptor sureties only, they are not as between themselves merely co-sureties, but each prior party is a principal in respect of each subsequent party. For example, suppose a bill to have been accepted by the drawee, and afterwards indorsed by the drawer and by two subsequent indorsers to the holder. As between the holder and the acceptor, the acceptor is the principal debtor, and the drawer and the indorsers are his sureties. But as between the holder and the drawer, the drawer is the principal debtor and the subsequent indorsers are his sureties. As between the holder and the second indorsers, the second indorser is the principal, and the subsequent or the third indorser is his surety.16
Where, after dishonour of an accepted bill, the acceptor tendered the amount, less the amount due to himself from the payee, and the payee refused to accept the tender, claiming the amount from the drawer-company, which had gone into liquidation, it was held that the liability of the drawer continued only as a surety, and he was entitled to the benefit of the set-off in favour of the principal debtor.17 The relationship of the parties on the bill to the holder does not determine the liabilities as between themselves. Thus, where one co-surety was a drawer and the other an indorser, it was held that in spite of their position in the bill, there can be contribution as between themselves.18
16 Byles, Bills of Exchange, twenty-first edn, p 284; Horne v Rouquette [1878] 3 QBD 514 .
17 Indian Bank v Nagindas (1916) 18 Bom LR 689 [LNIND 1916 BOM 103].
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39 Suretyship When the holder of an accepted bill of exchange enters into any contract with the acceptor which, under section 134 or 135 of the Indian Contract Act 1872, (9 of 1877) would discharge the other parties, the holder may expressly reserve his right to charge the other parties, and in such case they are not discharged.
(1)EFFECT OF SURETYSHIP
Section 39 must be read subject to the provisions of the next section. Sections 134 and 135 of the Indian Contract Act 1872 lay down cases in which a surety, is under certain circumstances, discharged from his liability to the creditor.
Section 134 of the Indian Contract Act 1872 provides that the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtor is released, or by any act or omission of the creditor. Under s 135, a contract between a creditor and a principal debtor by which the creditor makes composition with, or promises to give time to, or not to sue, the principal debtor discharges the surety unless the surety assents to such contract.
Section 39 of the Negotiable Instruments Act 1882, however, enables the holder of a bill of exchange to enter into any contract with the acceptor, without thereby losing his rights against the other parties, provided he expressly reserves his rights against those other parties. The reason for the rule is that such a reservation rebuts the implication that the surety was meant to be discharged, and also prevents the rights of the surety against the principal debtor being impaired, the injury to such rights being a cause for the discharge of the surety.19 For example:
(1) The holder of a bill for Rs 5,000 takes from the acceptor Rs 3,000 in full satisfaction of his claim against him. All the other parties are discharged.
(2) The holder of a bill enters into a contract with the acceptor to give him time for payment. The drawer and the indorsers are discharged.
(3) The holder of a bill agrees with the acceptor, not to sue him upon the bill or not to sue him for certain time. The drawer and the indorsers are discharged.
(4) The holder of a bill takes a new bill from the acceptor payable on a future day. The drawer and indorsers are discharged.20 However, where a new bill is taken by way of collateral security, the indorsers are not discharged.21
In all the above cases, however, the prior parties, namely, the drawer and all the indorsers, are not discharged from their liabilities to the holder, if the latter expressly reserves his right to charge them. But the scope of the section is limited to a holder’s contract with the acceptor of a bill, and it does not enable the holder of a bill or note to effectually reserve his rights against the indorsers, when he enters into any such contracts with the drawer or maker. Also, the section has no application where the acceptor is discharged, not by reason of a contract between himself and the holder, but by some act or omission, the legal consequence of which is the discharge of the acceptor. Likewise, the surety is not discharged, if the principal debtor is discharged not by the creditor’s act but by operation of law. Thus, when the acceptor of a bill became insolvent, the holder’s right to proceed against the other parties was not lost by reason of his proving in the insolvency and receiving a dividend, for the acceptor was discharged not by the act of the holder but by operation of law.22 Mere forbearance on the part of the creditor to sue or enforce his remedy against the principal debtor does not discharge the surety. The surety is also not discharged when the contract to give time to or not to sue the principal debtor is made by the creditor, not with the principal debtor but with some third person.23Section 39 of the Act applies where a person signs a promissory note without
adding anything to show that he is acting as executor or administrator of another. It has no application to the case where a person deals with another on the footing that the latter is an executor or administrator.24
In the case of accommodation bills and notes, if the holder, with knowledge of the relation of the parties, gives time to, or agrees not to sue, the accommodated party, the accommodation acceptor is discharged.25 The doctrine extends even to cases where persons, having contracted originally as principals, afterwards become sureties by arrangement, and that fact is made known to the creditor before time is given or other indulgence is shown. A partner retiring under a deed of dissolution having a covenant that the continuing partners should pay the debt and indemnify him, thus becomes a surety to such of the creditors of the partnership as have notice of the covenant.26
19 Kearsely v Cole (1864) 16 MW 128.
20 Gould v Robson (1807) 8 East 576; English v Darley (1880) 2 B&P 61.
21 Pring v Clarkson (1822) 1 B&C 14.
22 Jacobs In Re (1875) LR 10 Ch App 211, p 213.
23 Indian Contract Act 1872,ss 136 and 138.
24 Pestonji v Meherbai (1928) 30 Bom LR 1407.
25 Davies v Stainbank (1854) 6 De GM &; G 679; Overend Gurney &; Co v Oriental Financial Corpn (1874) LR 7 HL 348; Pogose v Bank of Bengal (1877-78) ILR 3 Cal 174; Ramakrishnayya v Kassim (1890) ILR 13 Mad 17; Mulchand v Madho Ram (1888) ILR 10 All 421.
26 Rouse v Bradford Banking Co Ltd [1894] AC 584 .
Discharge of indorser’s liabilityKhergamvala: Negotiable Instruments Act
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40 Discharge of indorser’s liability
Where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser’s remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.
Illustration
A is the holder of a bill of exchange made payable to the order of B, which contains the following indorsements in blank:
First indorsement, “B”.
Second indorsement, “Peter Williams”.
Third indorsement, “Wright and Co”.
Fourth indorsement, “John Rozario”.
This bill A puts in suit against John Rozario and strikes out, without John Rozario’s consent, the indorsements by Peter William and Wright and Co. A is not entitled to recover anything from John Rozario.27
(1)DISCHARGE OF INDORSER’S LIABILITY TO BE HOLDER
A similar provision is found in s 139 of the Indian Contract Act 1872. The reason for this rule as to the discharge of the surety is that the latter enters into his contract on the express understanding that he will, on performance of his engagement, be subrogated to the rights of the creditor. The section only applies to indorsers and not to drawers, whose rights and liabilities have to be determined by the provisions of the Indian Contract Act 1872. The illustration under the section gives an instance of the discharge of an indorser by the act of a holder who, without the indorser’s consent, destroys an indorser’s remedy against a prior party. Similarly, an indorser will be discharged from his liability to the holder, where the latter destroys the securities given by the acceptor and which he had in his hands. The reason for the rule is that an indorser of a negotiable instrument, being in the position of a surety, is entitled to the benefit of those securities to which the holder can have no claim except for the instrument itself.28 The rule as to the discharge of an indorser or indorsers is best illustrated by the following passage:29 ‘The contracts of the several indorsers are so many links of a pendant chain; if the holder dissolves the first, every link falls with it. If the dissolves an intermediate link, all after it are likewise dissolved. But the last link supports nothing, and its dissolution injures no one’.
The striking out must be intentional and if the same is by mistake then it does not destroy the right of the holder to recover on the instrument against the indorser whose name is so cancelled.30 The mere omission of a creditor-bank to enforce its claim against the maker of a hundi pledged with it by the indorser-customer would not release the customer where the bank had not undertaken to enforce the claim.31
The distinction between ss 39 and 40 may be noted. First, s 39 applies only to bills of exchange whereas s 40 applies to all negotiable instruments. Secondly, under s 39, express reservation by the holder of his rights against an indorser does not discharge him; whereas under s 40, if the holder of an instrument destroys or impairs the indorser’s remedy against a prior party, the indorser is discharged from his liability to the holder, despite an express reservation of the holder’s rights against the indorser.
27 The Bills of Exchange Act 1882,s 63(2).
28 Aga Ahmed v Judith (1892) ILR 19 Cal 242 (PC); Duncan Fox &; Co v North &; South Wales Bank (1880) 6 App Cas 1 .
29 Daniel on Negotiable Instruments, s 1307.
30 Wilkinson v Johnson (1824) 3 B&C 428.
31 Shambumal Gangaram v State Bank of Mysore AIR 1971 Mys 156.
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41 Acceptor bound, although indorsement forged An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such indorsement is forged, if he knew or had reason to believe the indorsement to be forged when he accepted the bill.32
(1)ACCEPTOR’S LIABILITY ON A FORGED INDORSEMENT
As a general rule, a forged indorsement can convey no title even to a bona fide holder for value, and such an indorsement cannot affect the title of the person whose indorsement had been forged. Thus, an acceptor of a bill of exchange is not precluded by his acceptance from showing that the indorsement is forged.33 The section, however, lays down that if a person accepts a bill already indorsed, he is precluded from setting up the forgery of the indorsement, if he knew or had reason to believe the indorsement to be a forgery. The reason for the rule is clear. If an acceptor knows or has reason to believe that an indorsement is a forgery, he ought not to accept the bill at all, but having accepted it with knowledge of the forgery, he cannot be allowed to take advantage of his own wrong by showing that he is not liable on the plea of forgery. An acceptor cannot challenge a holder’s title even through a forged indorsement, when he himself accepted the instrument with knowledge of the forgery. The result of such an acceptance is that the acceptor is not relieved from liability and has to pay the amount twice, once to the holder, and again to the real owner of the bill or note. The section, however, has no application if the acceptor has no knowledge or reasonable ground for believing that the indorsement is a forgery.
Acceptance of bill drawn in fictitious nameKhergamvala: Negotiable Instruments Act
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42 Acceptance of bill drawn in fictitious name An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an indorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.
(1)ACCEPTOR’S LIABILITY FOR BILL DRAWN IN A FICTITIOUS NAME
The section reproduces the rule of English Common Law on the subject that:
[w]here a bill is drawn in the name of a fictitious person payable to the order of the drawer, the acceptor is considered as undertaking to pay to the order of the person who signed as the drawer; and therefore, an indorsee may bring evidence to show that the signature of the supposed drawer to the bill and to the first indorsement, are in the same handwriting.34
When a bill is drawn payable to the order of the drawer, the drawer is also the payee of the bill. The expression, a bill of exchange drawn in a fictitious name and payable to the drawer’s order, therefore, means that both the drawer and the payee are fictitious persons. Who is a ‘fictitious’ payee? According to Lord Herschell:
Whenever, the name inserted as that of the payee is so inserted by way of pretence merely, without any intention that payment shall only be made in conformity therewith, the payee is a fictitious person… whether the name be that of an existing person, or of one who has no existence.35
For example:
(1) A bill purporting to be drawn by D to the order of C &; Co, and indorsed by them, is accepted by A, the drawee, payable at his bankers. The bankers discharge the bill at maturity. Afterwards it turns out that the signatures of D &; Co-the drawer and the payee-were forged by A’s clerk, who obtained the money. C &; Co are fictitious payees and the bankers can debit A’s account with the amount so paid.36
(2) The drawer, D, is induced by A to draw a cheque in favour of P, who is an existing person. A, instead of sending the cheque to P, forges his name and pays the cheque into his own bank. P is not a fictitious payee, and D, the drawer, can recover the amount of the cheque from A’s bankers.37
(3) A, a clerk of B &; Co, draws up, according to usual practice, several cheques payable to customers of B &; Co, and gets one of the partners of B &; Co, to sign them. Instead of forwarding the cheque to the payees, A forges their signatures, and cashes them with D, a tradesman. The cheques are collected by D’s bankers. The payees are not fictitious persons, and B &; Co, can recover the amounts of the cheque from D.38
(4) A, a clerk of D, by fraudulently representing to D that work has been done on his account by P, induces D to draw cheques in favour of P, for the pretended work. A then forges the indorsement of P and negotiates the cheques to H, a bona fide holder for value. The cheques are duly honoured by D’s bankers. P is a fictitious payee, and D cannot recover the amount of the cheques from H.39
The section says that where the drawer is also the payee and is a fictitious person, the acceptor is liable on the bill to a holder in due course, if the latter can show that the signature of the supposed drawer and the first indorsement are in the same hand, for the bill being payable to the drawer’s order, the fictitious drawer must indorse the bill before he can negotiate it. However, the liability of the acceptor in such a case is only to a holder in due course, and not to a person who knew or had reason to believe that the drawer was a fictitious person.
Negotiable instrument made, etc., without considerationKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
43 Negotiable instrument made, etc., without consideration
A negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without indorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
Exception I.-No party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.
Exception II.-No party to the instrument who has induced any other party to make, draw, accept, indorse or transfer the same to him for a consideration which he has failed to pay or perform in full shall recover therein an amount exceeding the value of the consideration (if any) which he has actually paid or performed.40
(1)TOTAL ABSENCE OR TOTAL FAILURE OF CONSIDERATION
Sections 43 to 45 deal with the effect of total or partial absence or failure of consideration for a negotiable instrument. Section 43 deals with total absence or failure of consideration. Every contract, except those mentioned in s 25 of the Indian Contract Act 1872, requires consideration to support it, and bills of exchange, promissory notes, and cheques are no exception to this general rule.
As regards negotiable instruments, the presumption of law is that every negotiable instrument was made or drawn for a consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, is accepted, indorsed, negotiated or transferred for a consideration.41 The difference, however, between ordinary contracts and negotiable instruments is noticeable when a suit is brought on these contracts in a court of law. In the case of an ordinary contract, the onus of proof lies on the plaintiff to prove the existence of consideration; whereas in the case of negotiable instruments, it is for the defendant to prove absence of consideration, if that is his defence.42
Section 43 lays down two rules in general:
(a) A negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which subsequently fails, creates no obligation of payment between the parties to the transaction.43 Therefore, as between immediate parties (ie, parties in direct relation with each other, eg between the drawer and acceptor, between the payee and the maker of a note, between an indorsee and his immediate indorser) a negotiable instrument made, drawn, accepted, indorsed or transferred without consideration or for a consideration which fails, creates no obligation of payment, and on such an instrument, the defendant can successfully plead that no consideration moved from the plaintiff to the defendant. If consideration for a negotiable instrument is paid at the time of making, drawing, accepting or indorsing and it were to fail subsequently, such subsequent failure has the same effect as original total absence of consideration.44
In National Bank of Upper India Ltd v Bansidhar ,45 the facts were unusual. Prior to an impending audit of the bank with a view to covering up an unauthorised credit allowed by an official of the bank to one of its directors a businessman was persuaded by the official and the director to execute a promissory
Page 2 of 5Negotiable instrument made, etc., without consideration
note in favour of the bank, upon which the debt was transferred in his name in the bank’s books. As between the director and the businessman, the former undertook to discharge the debt to the bank. In an action by the bank on the note, the Privy Council held that the businessman was liable on the note, which was an effective contract between him and the bank, the credit to the director’s account being sufficient consideration. The businessman had lent himself to the tripartite arrangement fully understanding that its object was the deception of the bank, and that he was not induced by the bank to believe that he would not be held liable on the contract.
In Revathi CP Equipments Ltd v Sangeetha Tubewell Corporation 46 a single judge of the Madras High Court applied the rationale of the Supreme Court ruling to a set of bills of exchange on a performance guarantee in UP Cooperative Federation Ltd v Singh Consultants and Engineers 47 and held that there was no lack of consideration for the bills in question. The bills had been drawn by the seller of a water-well rig on the buyer and its bank, for 90 percent of the purchase price to be paid in a series of installments with interest. The buyer had taken delivery of the rig and used it for some time but claimed that the seller had sold the rig which was only a prototype, by making false representations. The buyer also claimed that the seller, contrary to its agreement, had not got the rig registered under the Motor Vehicles Act 1988, within 15 days of delivery, resulting in considerable loss to the buyer. The buyer sought an injunction restraining its bank from paying the bills on their due dates to the seller. Justice Venkataswamy held that the bills formed a contract separate and independent from the sale contract, and that the injunction could not be granted on the ground of dispute with regard to the performance of the sale contract; the bills operated as absolute payment irrespective of the sale contract, subject to the one and only exception, viz seller’s fraud, which had not been established. With due defence, it is submitted that the obligation of the acceptor would be subject to the provisions of ss 44 and 45 of the Act. Partial absence or failure of consideration such as would fall within the ambit of these two sections, apart from established fraud, would provide a valid defence to the acceptor against the drawer of a bill of exchange. Whether there has been such partial absence or failure of consideration depends upon the facts of each case.
(b) The plea of want or failure of consideration between immediate prior parties cannot be set up against a holder, who has given consideration for the instrument or against any subsequent holder deriving title from him.48 If any such party has transferred the instrument with or without endorsement to a holder for consideration, such holder and every subsequent holder deriving title from him, may recover the amount due on the instrument from the transferor for consideration or any prior party thereto.49 Therefore, as between remote parties (ie, parties who are not in direct relation, eg, the payee and the acceptor, the indorsee and the acceptor, an indorsee and a remote indorser) it is not sufficient for the defendant to show that he received no consideration for the instrument, but the plaintiff can only succeed if he can show that he or some intermediate holder had given value for the instrument, though the defendant might have received none. The failure of consideration, even if it were a total one, is no defence against a holder for value, or any per person deriving title under him. Where a party, who has become the holder of a negotiable instrument without consideration, transfers the instrument to a holder for consideration, such holder and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or from any prior party thereto. For example:
(i) A is the holder of a bill for consideration. A indorses it away to B without consideration. The property in the bill passes to B. The bill is dishonoured at maturity. B cannot sue A on the bill.
(ii) A owes B Rs 500. In order to pay B, A asks C to draw a bill on A for Rs 500, in favour of B, as payee. A accepts the bill, the existing debt being the consideration. B is a holder for value and can sue C, though C has received no value. But C cannot sue A on the bill since there was no consideration between them.
(iii) A draws a bill on B, who accepts it without any consideration. The bill is transferred to C without consideration. C transfers it to D for value. D can sue any of the parties, A, B or C, though as between themselves there would be no right of action.
(iv) A, the holder of a bill, transfers it to B without consideration. B transfers it to C without consideration. C transfers it to D for value. D transfers it without consideration to E. E can recover the amount of the bill from A, B, C, in the same manner as D would have been entitled to do, though E gave no value for the bill and A received none. But E has got no right as against D.
Page 3 of 5Negotiable instrument made, etc., without consideration
(v) A promissory note, payable to order, was transferred by the payee for consideration, by means of a sale deed, but without any indorsement. In a suit by the transferee on the promissory note, it was found that the note was made without consideration and thereupon, the plaintiff claimed a decree by virtue of s 43 of the Act. It was held that the transfer by means of a sale deed, and without any indorsement of a promissory note payable to order is not negotiation thereof, nor is the transferee a ‘holder’ thereof within the meaning of s 8 of the Act, and therefore, such transferee is not entitled to the rights conferred on a holder for consideration by s 43 of the Act. Sections 14, 15 and 48 show that the holder as defined in s 8 is a person to whom there has been negotiation by indorsement and delivery in the case of an instrument payable to order, and not a person who has merely acquired rights under a sale deed.50
(vi) A drew a cheque in favour of B, who indorsed it to C for consideration. The cheque was dishonoured on the strength of instruction from A issued on the ground that there was failure of consideration undertaken by B. It was held that the instrument having been transferred, the rights of the parties were governed by s 43 of the Act. C, being a holder in due course, was entitled to recover the amount of the cheque from A.51
(vii) A company issued a cheque to one of its employees towards payment of wages to certain workmen. The employee discounted the cheque with a bank but did not pay the wages. The company, therefore, stopped payment of the cheque, which was later dishonoured on presentation. The bank sued the company for recovery of the amount. It was held that the bank, being a holder in due course, was not affected by any failure of consideration as between the company and its employee.52
(viii) The manager of a bank steals negotiable securities from the bank, and pledges them with A. Afterwards he obtains them back from A by a fraud, and replaces them in the bank. The bank is ignorant of the transactions. The bank is the holder in due course of these securities, and entitled to retain them against A.53
(ix) The payment of a bill of exchange, promissory note, or cheque, given by the acceptor, maker or drawer to the payee, as a gift inter vivos, cannot be enforced at the suit of the donee against the donor.54
(x) Where A agreed with B, on behalf of the Navy League, to supply refreshments to members at a Naval Review and it had been agreed that in the event of cancellation of the review there should be no liability, it was held in a suit on a cheque by B in advance, that B was not liable when the Review did not come off owing to the King’s illness.55
(xi) At an auction, the successful bidder signed, along with the auctioneer acting as the vendor’s agent, a memorandum of sale and gave the auctioneer a cheque for 10 percent of the purchase price. Later, he stopped its payment, without any justifiable reason. The vendor treated the drawer’s conduct as repudiation of the contract and resold the property at a lower price. The auctioneer sued the drawer for recovery of the amount of the dishonoured cheque. It was held that when the cheque was given to and received by the auctioneer, he warranted to the drawer his authority to sign the memorandum of sale on behalf of the vendor and to receive the cheque in diminution of the drawer’s obligation to pay the full purchase price. This was the true consideration for the cheque and it never failed. The auctioneer could, therefore, succeed.56
The consideration given for a negotiable instrument must be lawful. Otherwise, the instrument cannot be enforced, either between the original or even between the remote parties, unless the holder is a holder in due course, or a person deriving title from such holder without himself being a party to any fraud or illegality affecting the instrument.57 Where the drawer of a bill transfers it to a holder for an unlawful consideration, any subsequent holder, who is not aware of the taint affecting the instrument, can become a holder in due course and can sue the drawer upon it.58 The position is, however, different in the case of a cheque crossed ‘not negotiable’. The holder of such a cheque does not derive any better title than what the transferor had.59
A promissory note is enforceable against all the executants thereof, for consideration paid to one of several joint executants is legally sufficient to support the promise of all the joint executants, and it is not necessary that consideration should move to each executant separately to make the note binding upon that executant.60 Without evidence of a contract limiting the right of recourse of the holder against himself, or breach of contract or of duty on his part which will have that effect, the drawer is liable; and the right to recover is not affected by the loss of any collateral security that may have been given.61 A distinction has been made between want of consideration and consideration that becomes of no value through no fault of the parties. Thus, where a bank obtained a firm’s acceptance of bills which contained a memorandum or reference to bills of lading for specified quantity of cotton, and it was later found that the bills of lading were forgeries and that both the parties were misled in the matter, it
Page 4 of 5Negotiable instrument made, etc., without consideration
was held that the bank did not, by presenting the bills of exchange for acceptance, warrant or represent that the bills of lading were genuine, and that the bank was entitled to recover the amounts due under the acceptance. It was held that the acceptance was full and unconditional, and was not dependent upon the nature of the bills of lading.62
(2)ACCOMMODATION BILLS
An accommodation party to a bill is a person who has signed a bill as drawer, acceptor, or indorser, without receiving value therefore, and for the purpose of lending his name to some other person.63 Such bills are called accommodation bills. An accommodation party stands in the position of a surety for the party accommodated, notwithstanding the fact that his ostensible position on the instrument is that of a principal debtor.64 The party accommodated, by asking another to lend his name, thereby engages either himself to take up the bill, or to provide the accommodation party with funds for so doing, or lastly, to indemnify the accommodation party against the consequences of non-acceptance.65Exception I to the section provides that where an accommodated party pays the amount due under an instrument, he cannot recover that amount from the person who lent his name to the instrument for his accommodation. However, Exception I does not in any way affect the rule laid down in the section. An accommodation party, for instance, is liable on the bill to a holder for value in the same way as any ordinary party who has put his signature on the bill, and it is immaterial whether, when such holder took the bill, he knew such party to be an accommodation party or not.66 The defence of want of consideration between accommodating and accommodated parties will not avail against a holder for value. Though the plea of accommodation can be set up against the party accommodated, yet the parties are liable to a holder for value in the character in which their names appear on the instrument. However, where the holder himself is the party accommodated, he may not, by merely giving value to a prior party, claim the benefit of the rule stated in the section as against the party who accommodated him. Where the rights of bona fide holders are not involved, the section allows the defendant to raise the plea that he did not receive any consideration.67 For example:
(i) H is the payee and holder of a bill drawn by B. The bill is accepted by A for the accommodation of H. H cannot, by merely giving value to B, the drawer, claim the benefit of the rule mentioned in the section as against A, the acceptor. The case falls under Exception I, and H cannot sue A.
(ii) A bill is drawn and accepted for the accommodation of P, the payee. P indorses it away. The bill is dishonoured and P pays the amount of the bill. P cannot sue the drawer or acceptor.68
(3)PARTIAL FAILURE OF CONSIDERATION
Under this exception, a partial failure of consideration has been recognised as a defense. However, the said defense is only available between immediate parties. The exception is can be said to apply against person who offered the inducement and cover cases where the failure of consideration is intentional.
40 See the Bills of Exchange Act 1882,ss 27(2), 28 and 59(3).
41 See s 118(a); Indian Evidence Act 1872,s 114(c).
42 As to ‘consideration’, see notes to s 9.
43 Arumugham Pillai v State of Kerala (2006) 1 Bank CLR 482, para 7 (Ker): TM Xavierkutty v VSSUNNYMON &; anor (2006) I CCR 176 (Ker), TM Xavierkutty v VSSUNNYMON &; anor (2006) II BC 513 (Ker).
44 Motishaw v Mercantile Bank of India (1917) ILR 41 Bom 566; Marshall &; Co v Naginchand (1918) ILR 42 Bom 473.
45 AIR 1929 PC 297.
46 AIR 1989 Mad 302 [LNIND 1988 MAD 413].
47 (1987) 5 JT 406 [LNIND 1987 SC 776].
48 Canara Bank v Sanjeev Enterprises AIR 1988 Del 372 [LNIND 1988 DEL 94].
49 Arumugham Pillai v State of Kerala (2006) 1 Bank CLR 482, para 7 (Ker).
50 Jung Bahadur Singh v Chander Bali Singh (1939) All 419.
Page 5 of 5Negotiable instrument made, etc., without consideration
51 Jethamal v Haridas AIR 1949 Assam 6.
52 Federal Bank Ltd v PSP Panicker AIR 1976 Ker 5 [LNIND 1975 KER 96].
53 London and County Bank v River Plate Bank [1888] 21 QBD 535 (CA).
54 Holiday v Atkinson (1826) 5 B&C 503.
55 Elliott v Crutchley [1906] AC 7 .
56 Pollway Ltd v Abdullah [1974] 2 All ER 381.
57 Perosha v Maneckji (1898) 22 Bom 89, p 92.
58 Doulatram v Nagindas (1913) 15 Bom LR 333 [LNIND 1912 BOM 163].
59 Ladup Ltd v Shaikh and Ritz Casino Ltd [1982] 3 WLR 172 . A cheque crossed ‘not negotiable’ and given in a gaming transaction could not be enforced by the holder who took it from the payee.
60 Anant v Saraswatibai (1928) 30 Bom LR 709; Sornalinga Mudali v Pachai Naicken (1920) 38 Mad 680; Fanindra v Kacheman Bibi (1918) 45 Cal 774; Andhra Bank v Amarnath Goel AIR 1991 Andh Pra 245.
61 Sassoon &; Sons v International Banking Corpn [1927] AC 711 .
62 Leather v Simpson (1871) LR 11 Eq 398.
63 Parr v Jewell (1855) 16 CB 684; Smith v Knox (1800) 3 Esp 46.
64 See ss 32, 37 and 38.
65 Reynolds v Doyle (1840) 1 M & Gr 753; Nanda Ram v Sitla Prasad (1883) 5 All 484.
66 See s 28 of the Bills of Exchange Act 1882. Mills v Barber (1836) 1 M&W 425; Bank of Ireland v Beresford (1818) 6 Dowl 233.
Partial absence or failure of money considerationKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
44 Partial absence or failure of money consideration
When the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionately reduced.
Explanation.- The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the indorser with his indorsee. Other signers may by agreement stand in immediate relation with a holder.
Illustration
A draws a bill on B for Rs 500 payable to the order of A. B accepts the bill, but subsequently dishonours it by non-payment. A sues B on the bill. B proves that it was accepted for value as to Rs 400, and as an accommodation to the plaintiff as to the residue. A can only recover Rs 400.69
(1)EFFECT OF PARTIAL ABSENCE ON RIGHTS OF PARTIES
The section deals with the effect of partial absence or partial failure of money consideration for a negotiable instrument on the rights of the parties thereto. Where the consideration for which a negotiable instrument is signed consists of: (i) money, and (ii) the consideration is absent in part or subsequently fails in part, the amount which a holder standing in immediate relation with the signer is entitled to recover from him is the amount actually paid and not the consideration for which the instrument was signed.
Accordingly, where the consideration for a negotiable instrument consists of money, its partial failure or absence is a defence pro tanto against an immediate party. However, in order to succeed on such a defence, it is necessary that the consideration should consist of money, and that this defence could be urged only against an immediate party, or a party who has agreed to stand in immediate relation with the signer. Partial absence or partial failure of consideration affects neither a holder for value nor a holder in due course where the signer transfers the instrument to such a holder.
Where a promissory note is executed for an amount in excess of what was due on the basis of the Madras Agriculturist Relief Act, there is failure of consideration in so far as the excess amount is concerned and the plaintiff would not be entitled to more than what would be due to him after applying the provisions of that Act to the original debt and its renewals.70 For example:
(i) C accepts a bill for Rs 500 for the accommodation of the drawer. B advances Rs 250 on the bill. B can only recover Rs 250.
(ii) A owes B Rs 500. B draws a bill on A for Rs 1,000. A, to accommodate B, and at his request, accepts it. If B sues A on the bill, he can only recover Rs 500.
(2)IMMEDIATE PARTIES
The explanation gives examples of parties standing in immediate relation. Immediate parties are parties in direct
Page 2 of 2Partial absence or failure of money consideration
relation with each other. All other parties are said to be remote. Prima facie, the drawer and the acceptor, the drawer of a bill and the payee, the indorser and his indorsee, the maker of a promissory note and the payee, and the drawer of a cheque and the payee, are in indirect relation. In addition to these, the explanation points out that other signers may let the agreement stand in immediate relation with the holder. Thus, if a bill is drawn and accepted for the accommodation of the payee, the acceptor would then stand in direct relation to the payee.
69 Darnell v Williams (1817) 2 Stark 166.
70 Garimella v Mangipudi AIR 1953 Mad 975.
End of Document
Partial failure of consideration not consisting of moneyKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
45 Partial failure of consideration not consisting of money Where a party of the consideration for which a person signed a promissory note, bill of exchange or cheque, though not consisting of money, is ascertainable in money without collateral enquiry, and there has been a failure of that party, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionately reduced.
(1)EFFECT OF PARTIAL FAILURE
The section deals with partial failure of consideration where the consideration does not consist of money. The section lays down the rule that partial failure of consideration is a good pro tanto defence against an immediate party provided that the part of the consideration which has failed, though it does consist of money, can be ascertained in terms of a liquidated sum of money.71 Further, the part of the consideration, which has failed, must be ascertainable without any collateral inquiry.72 A partial failure of consideration for a negotiable instrument constitutes no ground of defence against an immediate party, if the quantum to be deducted on that account is a matter not of definite computation, but of unliquidated damages. If, in order to ascertain the value of the consideration that has failed, it is necessary to go into a collateral inquiry, the section does not apply, and the holder will be entitled to recover the whole amount of the instrument, leaving the aggrieved party to a claim for damages. Again, as in s 44, the operation of the rule contained in s 45 is strictly confined to immediate parties only, and does not affect the rights of a holder for value or of a holder in due course. The following examples may be noted:
(i) A accepts a bill for Rs 1,000. This is the agreed price of two bales of cotton to be supplied by B to A. B only delivers one bale to A. B sues A on the bill. A can set up the defence of partial failure of consideration, and B can only recover Rs 500.73
(ii) A accepts a bill for Rs 1,000. This is the agreed price of two bales of cotton to be supplied by B to A. B only delivers one bale. B indorses this bill to C for value. C indorses it to D for value. If D sues A on the bill he is entitled to recover Rs 1,000.
(iii) A agrees to a supply a quantity of paper to B. B accepts a bill for Rs 1,000 drawn by A, being the price of the paper. The paper is delivered to B, but turns out to be not of the quality stipulated for and is worth Rs 500 only. B retains the paper. If A sues B on the bill, B cannot set up as a pro tanto defence that the paper is only worth Rs 500. As the failure of consideration cannot be ascertained without a collateral inquiry, B will have to pay Rs 1,000 to A.
(iv) A joined a chit fund and agreed to make an aggregate subscription of Rs 2,500 in daily instalments of Rs 3.12 each. Within a month, she bid successfully at the chit auction and received Rs 1,750 from the chit company, the balance of Rs 750 representing the commission (Rs 125) payable to the company and the bonus(Rs 625) to be distributed among all the chit subscribers. She then executed, in favour of the company, a promissory note for s 2,409.37 representing the daily instalments remaining to be paid by her. Payments were subsequently made by her only to the extent of Rs 1,344.38 and the chit company sued her on the note for the balance together with interest thereon. A contended that there was a failure of consideration to the extent of Rs 750 as the chit company was not paying her shares of the bonus arising from the chit auctions; the company pleaded that the bonus payments were withheld because of her default in the payment of the daily subscriptions. It was held that ss 44 and 45 did not apply to the case as the consideration for the promissory note was the undertaking of certain rights and obligations by each party in accordance with the terms and conditions of the chit fund. A undertook the obligation of paying the amount of the note in daily installments of Rs 3.12 each; the chit company’s obligation was to pay her from time to time the proper share of the bonus to be distributed to the chit subscribers on each auction, which was a not ascertainable without collateral enquiry.74
Holder’s right to duplicate of lost billKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 3 > Parties to Notes, Bills and Cheques
45A Holder’s right to duplicate of lost bill
Where a bill of exchange has been lost before it is overdue, the person who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again.
If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do so.75
(1)TITLE TO LOST BILLS AND NOTES
In the matter of rights and duties of the owner of a lost bill or note when a bill or note is lost, the finder acquires no title to it as against the rightful owner nor is he entitled to sue the acceptor or maker in order to enforce payments on it. The title of the true owner is not affected by the loss of the instrument, and he is entitled to recover it from the finder.76
If the finder obtains payments on a lost bill or note, the person who pays it in due course may be able to get a valid discharge for it. However, the true owner can recover the money due on the instrument as damages from the finder.77
If the finder of a lost bill or note, which is payable to bearer or which is indorsed in blank and is therefore transferable by mere delivery, negotiates it to a bona fide transferee for value, the latter acquires a valid title to it, and is entitled both to retain the instrument as against the rightful owner, and to compel payment from the parties liable thereon.
During World War I, and as a temporary measure, the Indian Bills of Exchange Act 1916,s 3 enacted as follows:
Where in any suit or other proceeding founded upon a bill of exchange payable outside British India, there is reason to believe that the bill has been lost, and that the loss can reasonably be presumed to be either directly or indirectly due to circumstances arising out of the present war, the court may allow proof of the bill to be given by a copy thereof, certified by a notary public, or by means of such other evidence as the court thinks reasonable under the circumstances, and pass a decree thereon, notwithstanding any rule of law of the place where the bill is made payable.
Provided that such indemnity be given against the claims of other persons as the court may require.
If the finder of a lost bill or note, which is payable to order and therefore transferable by indorsement and delivery, forges the indorsement of the loser and negotiates it to a bona fide transferee for value, the latter acquires no legal title to it, for a forgery can confer no title; and a payment by the acceptor or other party liable to a person claiming under a forged indorsement, even though made in good faith, will not exonerate him.
It is advisable that the owner of a lost bill should give notice of the loss to the parties liable on the bill for they will thereby the prevented from taking it up without proper inquiry. Public advertisement of the loss may also be given if the amount is large.
The party, who has lost a bill must make an application to the drawee for payment at the time it is due, and give notice of dishonour to all the parties liable, otherwise he will lose his remedy against the drawer and indorsers.
Page 2 of 3Holder’s right to duplicate of lost bill
Under the section, the loser can apply for a duplicate of a lost bill.
(2)HOLDER’S RIGHT TO DUPLICATE OF LOST BILL
The power to obtain a duplicate of a lost bill is part of the mercantile laws of countries. Ample scope is given to this power by courts of equity in England, both on bills lost before and after maturity and on notes as well; and against the acceptors or indorsers as well as against the drawer, on a satisfactory indemnity being given. The obligation of the drawer of the lost bill to issue a duplicate one is dependent on the guarantee been given by the holder of such instrument against any future demand.
In a case where the payee of a bank draft lost it and the bank refused to issue a duplicate without an indemnity bond from the purchaser, who was, however, not willing to execute such a bond, it was held that the draft was a bill of exchange, or could be treated as one in terms of s 17, and hence the payee was entitled to get a duplicate.78
In State Bank of India and others v Soya Udyog Ltd ,79 a party lost two demand drafts and as such required the bank to issue duplicate demand drafts and the bank, in turn required the party to deposit margin money for the issue of duplicate demand drafts apart from indemnity bond. The question arose as to whether under s 45 A furnishing of security by way of indemnity bond is sufficient compliance or not. The Supreme Court held that a perusal of s 45 A shows that where a bill of exchange has been lost before it is overdue, the person who is the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer, to indemnify him against all persons in case the bill alleged to have been lost shall be found again. The said provision requires furnishing of security in addition to indemnity bond to indemnify in case of any loss and since the respondent failed furnish the security money to indemnify any loss the appellants cannot be said to be negligent or deficient in service.
(3)DESTROYED INSTRUMENT
As to the case of an instrument destroyed, there is Common Law authority that an action lies, and secondary evidence is admissible of the contents of the bill, on its destruction being proved.80 Accordingly, a bill in equity was dismissed in one such case, on the ground that the plaintiff had a remedy at law.81
The section gives a statutory remedy to the owner of a lost bill. It says, that the owner of a lost bill may, if the bill is lost before maturity, apply to the drawer to give him a duplicate bill, giving him security, if required, to indemnify him against any future demand, and the holder of a lost bill cannot claim payment on it, if the original has been duly paid.82 If the drawer on tender of indemnity declines to give a new bill, an action would lie to compel him to do so, and damages might be claimed in the alternative.83
The following points may be noted:
(i) The section is confined in its operation to bills only; it does not apply to notes.
(ii) The section applies to bills before they are overdue.
(iii) The remedy given to the owner of the lost bill is against the drawer alone. The loser may compel the drawer to give him a duplicate bill upon an undertaking of indemnity, but no provision is made as to obtaining a fresh acceptance of fresh indorsements.
Under this section, it is only the holder of a lost bill who is eligible to apply for a duplicate. Therefore, if a bill is payable to order and is transferred for value but without indorsement, the transferee, if he loses the bill, cannot apply for a duplicate in his own name, for he is not a holder, ie, a person entitled in his own name to the possession of the bill.84
75 This section was inserted by of the Negotiable Instruments (Amending) Act 2 of 1885 s 3. See also the bills of Exchange Act 1882,s 69.
76 Lowell v Martine (1813) 4 Taunt 799.
Page 3 of 3Holder’s right to duplicate of lost bill
77 Burn v Morris (1834) 2 Cr & W 579.
78 State Bank of India v Jyoti Ranjan Mazumdar AIR 1970 Cal 503 [LNIND 1970 CAL 83].
79 State Bank of India and others v Soya Udyog Ltd (2003) 1 Bank CLR 431 (SC).
80 Pierson v Hutchinson (1809) 2 Camp 211, p 212.
81 Wright v Maidstone (1855) 24 LJ Ch 623.
82 Indur Chandra v Lachmi Bibi 15 WR 501.
83 King v Zimmerman (1871) LR 6 CP 466.
84 Good v Walker [1892] 61 LJ QB 736; Kaminee Debia v Radha Sham 18 WR 58.
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 4 > Of Negotiation
46 Delivery
The making, acceptance or indorsement of a promissory note, bill of exchange or cheque is completed by delivery, actual or constructive.
As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or indorsing the instrument, or by a person authorised by him in that behalf.
As between such parties and any holder of the instrument other than a holder in due course, it may be shown that the instrument was delivered conditionally or for a special purpose only, and not for the purpose of transferring absolutely the property therein.
A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof.
A promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery thereof.1
(1)DELIVERY NECESSARY TO COMPLETE CONTRACTS ON NEGOTIABLE INSTRUMENT
Just as a deed is of no legal effect until it has been delivered, so too, a negotiable instrument does not effectively bind any of the parties to it till delivered. Every contract on a bill, whether the drawer’s, acceptor’s or an indorser’s, is incomplete and revocable until delivery of the instrument in order to give effect thereto.2 Till delivery, the instrument is not clothed with the essential characteristics of a negotiable instrument.3 As was stated by Bovill CJ in Abrey v Crux: 4
To constitute a contract there must be a delivery over of the instrument by the drawer or the indorser for a good consideration and as soon as these circumstances take place, the contract is complete, and it becomes a contract in writing.
The rights and liabilities under a negotiable instrument arise only if what is delivered under s 46 is complete negotiable instrument.5
In order to make the property in an instrument pass, it is not sufficient to indorse it, because mere signature does not make a contract. It must, further, be delivered to the indorsee or the agent of the indorsee. There is a clear distinction between the act of signing a negotiable instrument and the act of delivering it to the payee. Under s 46 of the Act, the making of a cheque is complete as soon as the drawer delivers it, actually or constructively, to the payee. The delivery need not be to the person whose name is written on the cheque or even to any agent authorised by the person named as payee. So long as the person drawing the cheque delivers it with the intention to pay, the property of the drawer in the cheque passes to the payee.6 As stated by Kania J in Damji Hirji v Mahomedali: 7
A person may sign a promissory note or a negotiable instrument in his own house and keep it there without incurring any obligation to anyone at all. When such a document is tendered to the payee and accepted by him there arises a contract between the parties. The signature on a negotiable instrument becomes necessary because
of the provisions of of the Negotiable Instruments Act section 4. It is only a preparation. It does not amount to an offer, and, therefore does not become any part of the contract.
The English law on the matter was stated by Mellish LJ in ex p Cote8 as follows:
In order to make property in bills pass, it is not sufficient to indorse them. They must be delivered to the indorsee or to the agent of the indorsee. If the indorser delivers them to his own agent, he can recover them, if to the agent of the indorsee, he cannot recover them.
Further, it is essential to delivery that it should be made with the intention of passing the property in the instrument to the person to whom it is delivered. The contract on a negotiable instrument until delivery remains incomplete and revocable.9
Under the Act, delivery is essential to complete the acceptance of a bill, as it is necessary to complete the making or indorsement of a bill, note or cheque. However, by s 7 of the Act, the drawee is given the option to complete the contract of acceptance on a bill by giving notice of his having signed the bill to the holder or any person on his behalf. However, such communication of acceptance may be made either to the holder of the instrument at the time or to some party liable on the instrument, for it inures for the benefit of all parties.10
Where the instrument is sent through post on the request of the creditor, either expressed or implied, the post office would be constituted as the agent of the addressee for the purpose of receiving such payment and the property in instrument passes to the creditor as soon as it is posted.11
Where the drawee, after writing the acceptance gives notice to, or retains the bill according to the direction of, the person entitled to the instrument, there is a constructive delivery thereof, and the contract of acceptance becomes complete and irrevocable.12 For example:
(1) A owes B Rs 1,000. A, makes a promissory note for the amount payable to B. A dies, and the note is afterwards found among his papers. B has no right to this note, and cannot sue on it, if delivered to him.13
(2) A, a drawee, receives a bill from B, the holder, and writes his acceptance on it. Afterwards, A hears that the drawer has become bankrupt. A cancels his acceptance and returns the dishonoured bill to B. This is no acceptance, as A never delivered the bill so as to make himself liable upon it.14
(3) A owes money to B. A, makes a promissory note for the amount in favour of B. For safety of transmission, he cuts the note in two halves and posts one half to B. Before posting the other half he changes his mind, and writes to B demanding back the half he has sent. He is entitled to do so, for a partial and inchoate delivery is ineffectual to pass property in the entire note.15
(4) H, the holder of a bill, specially indorses it to A, and puts it in a letter addressed to A. The letter is put in the office letter-box from whence it is stolen. A’s indorsement on the bill is forged, and is negotiated. The property in the bill remains in H.16
(5) A makes a promissory note in favour of B, and places it in the hands of his agent for delivery. This does not invest B with any right to the note. A may subsequently revoke the note before it is delivered.17
(6) A makes a note in favour of B and delivers it to a stockholder. B acquires no property in the note.18
In Thorappa v Umedmalji,19A held a hundi which was drawn on defendant B. A indorsed it in favour of C in satisfaction of A’s debt and forwarded it to C by post. The hundi failed to reach C but got into the hands of a stranger from whom it passed to D. It bore two forged indorsements one purporting to be from C to one L and the other from L to D. D presented the hundi to B, and obtained payment from him. C apprised A of the loss of the hundi and obtained its duplicate, which was presented to B, who refused to pay twice over. C sued A and got payment. A then sued B, C and D to recover the amount due on the hundi. The court held that A, having paid the amount of the hundi to a wrong person, who held it under a forged indorsement, remained liable to the true owner for the amount of the hundi. It also held that D was also similarly liable for having come into possession of the hundi through forged indorsement but took no property in it, and the proceeds of the hundi received by him were the monies of the true owner and that the true owner of the hundi at the date of the suit was A and not C, since to pass property in a hundi it should not only be indorsed, but also delivered to the indorsee. There was no delivery of the hundi in this case to C.
In Mitchell-Henry v Norwich Union Life Insurance Society Ltd,20 the defendants sent a written notice to the plaintiff
Page 3 of 4Delivery
stating that a sum of GBP 48, 5s 8d which would shortly become due to them from the plaintiff, should be paid at their office, and asking the plaintiff when remitting to return the notice. The plaintiff sent to the defendants, by registered post, a packet containing GBP 48 in treasury notes, and a postal order for stamps for 5s 8d. The packet was not insured. It was stolen before it reached the defendants and they never received the money. The Court of Appeal held that it was not usual to send so large a sum as GBP 48 in treasury notes by post, and that the plaintiff failed to prove that he had discharged his debt to the defendants.
In the case of a note given for capital supplied to a partnership, of which the plaintiff and defendant were partners, it was held that the note should be paid irrespective of the state of assets of the partnership.21
(2)DELIVERY, ACTUAL OR CONSTRUCTIVE
Delivery means transfer of possession, actual or constructive, from one person to another. According to the section, delivery may be actual or constructive. Actual delivery consists in the physical act of handing over the instrument by one person to another or to his agent on his behalf.22 A change of actual possession is necessary to actual delivery [see illust (a) under s 47]. However, in the case of constructive delivery, delivery takes place without change of actual or physical possession. A person is said to have constructive possession of a thing when it is in the actual possession of his agent, clerk or servant on his behalf [see illust (b) under s 47]. A bill or note may, therefore, be delivered without change of actual or physical possession. The following are examples of constructive delivery of an instrument:
(1) A holds a bill on his own account. A subsequently indorses it in favour of B, and holds it as B’s agent.
(2) A holds a bill as B’s agent. A subsequently attorns to C, and holds it as C’s agent.
(3) A holds a bill as B’s agent. A subsequently holds it on his own account.
(3)DELIVERY CONDITIONAL OR FOR SPECIAL PURPOSE
Where an instrument is delivered conditionally, or for a special purpose, the section allows oral evidence to be adduced between immediate parties and a holder other than a holder in due course, to show that the delivery was not made, and not for the purpose of transferring the property in it. Oral evidence is allowed in such cases, not for the purpose of varying the terms of the written contract, but to show that the writing does not really represent the contract between the parties. Where a bill is delivered conditionally or for a special purpose, the relations between the person who so delivers it and the person to whom it is delivered are substantially those of principal and agent.23
Delivery of an instrument for a specified purpose, and on condition that it shall be returned if not applied for that purpose, constitutes the holder a mere bailee, trustee or agent with a limited title and power of negotiating it. Any subsequent holder with notice of the specific purpose or condition must apply the instrument accordingly.24
When a bill or note is delivered conditionally or for a special purpose, the liability of the person delivering it does not commence till the condition has been fulfilled or the purpose has been satisfied.
If the condition is not fulfilled, or the purpose is not satisfied, the true owner is entitled to get back the instrument from the person to whom it was so delivered or from anyone who has taken it with notice of the fact. The section stresses that the pleas of conditional delivery or delivery for special purpose are available against immediate parties, and also against remote parties, who take it with notice of the condition or special purpose or other defect in the title. However, these pleas may not be set up against a holder in due course, for if a bill is delivered conditionally or for a special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively presumed, and he acquires a good title to it.
For example:
(1) A makes a note in favour of B, his servant, and hands it to his wife to deliver it to B if B continues in A’s service till A’s death. A dies and his wife delivers the note to B. B remained in A’s service till A’s death. B can recover the amount of the note from A’s estate.25
Page 4 of 4Delivery
(2) A, the holder of a bill, indorses it in blank and hands it to B, on condition that he should forthwith restore certain bills. B does not do so. B cannot sue A on the bill and if he sues, A can set up the breach of condition.
(3) A, the holder of a bill, indorses it ‘B or order’ for the express purpose that B may get it discounted. B does not do so and negotiates the bill to C. If C takes the bill bona fide and for value, ie, if C is a holder in due course, C acquires a good title to the bill and can sue all the parties on it.
(4)DELIVERY OF BEARER AND ORDER INSTRUMENTS
A promissory note, bill of exchange or cheque payable to bearer is negotiated by mere delivery thereof, however a promissory note, bill of exchange or cheque payable to order is not negotiated by mere delivery thereof and has to be endorsed as well. Sections 47 and 48 specifically provide for negotiation of both these kinds of instruments.
1 See the Bills of Exchange Act 1882,ss 2, 21 and 31.
2 See the Bills of Exchange Act 1882,s 21.
3 Chapman v Cottrell 34 LJ Ex 186.
4 (1869) LR 5 CP 42.
5 Krishnankutty v Velayudhan and others (2006) 1 Bank CLR 814 (Ker).
6 Thakursi v King Emperor (1948) Nag 620.
7 (1941) 41 Bom LR 959, p 963.
8 (1873) LR Ch 27.
9 Bhawanji v Devji (1895) ILR 19 Bom 635.
10 Pragdas v Daulatram (1887) ILR 11 Bom 257, p 270.
11 MRF Ltd v EMCO Goa Pvt Ltd (2001) 2 BC 403,following CIT v Patney & Co (M/s) AIR 1959 SC 1070 [LNIND 1959 SC 87] and Jagdish Mills Ltd v CIT AIR 1959 SC 1160 [LNIND 1959 SC 115].
12 Cox v Troy (1882) 4 B & Ald 474.
13 Bromage v Lloyd (1847) 1 Exch 32.
14 Bank of Van Diemen’s Land v Bank of Victoria (1871) LR 3 PC 526.
15 Smith v Mundy (1860) 29 LJQB 172.
16 Arnold v Cheque Bank (1876) 1 CPD 578, 584, p 592.
Negotiation by deliveryKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 4 > Of Negotiation
47 Negotiation by delivery
Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof.
Exception.-A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.
Illustration
(a) A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep for B. The instrument has been negotiated.
(b) A, the holder of a negotiable instrument payable to bearer, which is in the hands of A’s banker, who is at the time, the banker of B, directs the banker to transfer the instrument to B’s credit in the banker’s account with B. The banker does so, and accordingly now possesses the instrument as B’s agent. The instrument has been negotiated, and B has become the holder of it.26
(1)NEGOTIATION BY DELIVERYThe main part of the section is an exact reproduction of para 4 of s 46 except for reference to s 58. The section deals with negotiation of bearer instruments. The expression, an ‘instrument payable to bearer’, means an instrument which is expressed to be so payable or one on which the only or last indorsement is an indorsement in blank.27 Where an instrument so payable to bearer is to be transferred to any person so as to constitute that person as the holder thereof, the only thing the section requires to be done is mere delivery to such person. In the case of an instrument payable to bearer, transfer by delivery without indorsement is sufficient to constitute the transferee as the holder of the instrument.
Where an instrument is negotiated by mere delivery, the transferor does not put his signature on the instrument, and therefore there is no privity of contract between the transferor and any subsequent transferee, and the transferor is not liable on the instrument either to an immediate party or to any subsequent holder, in case the instrument is dishonoured at maturity. A transferor, by not indorsing the instrument, exonerates himself from the liability thereon as an indorser. When a transfer of an instrument takes place without an indorsement, the transaction is deemed to be in the nature of a sale of the instrument.
Where the transfer is by delivery, the transferee has no right of recovery against the transfer upon the instrument, nor can he get back the amount paid by him to the transferor on the failure of consideration. For: ‘…it is extremely clear that if the holder of a bill sent it to market without indorsing his name upon it, neither morality nor the law of this country will compel him to refund the money for which he sold it, if he did not know at the time he sold it that it was not a good bill’.28 Thus where the payee of a cheque got the same discounted from the bank but did not endorse the same he is not liable, if the cheque is dishonoured.29
However, if a person sells a bill for a valuable consideration, being fully aware that it was of no value, and the purchaser is not aware of this fact, the seller will be bound to refund the price he received for it. For, if he knew the bill to be bad, it would be like sending a counterfeit coin for circulation to impose upon the world instead of the
(2)EXCEPTIONSection 46 deals with the making, accepting and indorsement of a negotiable instrument completed by delivery thereof, and provides for the case of conditional delivery or delivery for a special purpose. The general provision, however, as to conditional delivery or delivery for special purpose contained in s 46 cannot apply to the section. Under the section, the negotiation is by mere delivery and there is no question of indorsement. Hence the necessity of a separate exception to the section. The exception provides that where a negotiable instrument payable to bearer is delivered on condition that it is not to take effect except in a certain event, then such an instrument is not negotiable, and no person, taking it with a knowledge of the condition can acquire a title to it, nor can he sue on it any prior parties until the event has happened.
However, this exception does not apply to a holder for value without notice of the condition, who acquires a good title to the instrument and can enforce payment on it against any party thereto.
26 See the Bills of Exchange Act 1882,ss 31(2)and33.
27 Fydell v Clark (1796) 1 Esp 447 per Lord Kenyon; see also Fenn v Harrison 3 TR 757. This is the position in English law and it appears that in the opinion of the learned author (Khergamvala) the same position obtained in India and a transferor by delivery is not covered by s 43.
28 See s 13, Expln II.
29 Gaddam Venkataraju v Andhra Bank (2001) 2 BC 543, Gaddam Venkataraju v Andhra Bank (2000) 3 Comp Cas 212
30 Read v Hutchinson (1813) 3 Camp 352 per Lord Kenyon.
End of Document
Negotiation by indorsementKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 4 > Of Negotiation
48 Negotiation by indorsement
Subject to the provisions of section 58, a promissory note, bill of exchange or cheque31 [payable to order], is negotiable by the holder by indorsement and delivery thereof.32
(1)NEGOTIATION BY INDORSEMENT AND DELIVERY
The section is an exact reproduction of para 5 of s 46 except for reference to s 58. It deals with the negotiation of instruments payable to order, and declares that such instruments are negotiable by an indorsement of the holder completed by delivery. In order that a transferee of an instrument payable to order may acquire the rights of a holder in due course, it is necessary that the instrument must be negotiated in the manner prescribed by the section. However, the section leaves untouched, the rules of general law regulating the transmission of instruments by operation of law or by devolution. A bill or a note is a chose in action as well and it can be transferred as an ordinary chose in action. Thus, if the holder transfers an instrument payable to order by simple delivery without indorsing it, the transferee merely acquires the rights of an assignee of an ordinary chose in action, and does not get any of the advantage of negotiability, for the instrument not being indorsed, is merely assigned and not negotiated.
Where a promissory note is indorsed and delivered by only one of the payees, there is valid indorsement and delivery of the note, and is not effectual to operate as negotiation of the note. It is, therefore, open to the other payees at any time thereafter to make a fresh and valid indorsement and negotiation.33 For example:
(1) A, is the holder of a bill payable to ‘A or order’. A writes his indorses and transfers the bill for value to B. B can become a holder in due course.
(2) A is the holder of bill payable to ‘A or order’. A, by simple delivery, transfers the bill without indorsing it to B. B is not a holder in due course, but is a mere assignee of a chose in action and takes the bill subject to all defects.
31 Substituted by Act 8 of 1919 s 4, for ‘payable to the order of a specified person, or to a specified person or order’.
32 See the Bills of Exchange Act 1882,s 31(3)
33 Voruganti v Vanka Venkata AIR 1953 Mad 840 [LNIND 1953 MAD 284].
Conversion of indorsement in blank into indorsement in fullKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 4 > Of Negotiation
49 Conversion of indorsement in blank into indorsement in full
The holder of a negotiable instrument indorsed in blank may, without signing his own name, by writing above the indorser’s signature a direction to pay to any other person as indorsee, convert the indorsement in blank into an indorsement in full; and the holder does not thereby incur the responsibility of an indorser.34
(1)EFFECT OF CONVERSION OF INDORSEMENT
The section provides that any holder of a bill indorsed in blank may convert the indorsement in blank into an indorsement in full,35 by writing above the indorser’s signature a direction to pay the instrument to another person or his order. The advantage of such a course is that the holder, though he transfers the instrument, does not incur the responsibility of an indorser.36
For example, A is the holder of a bill indorsed by B in blank. A, writes over B’s signature the word ‘pay to C or order.’ A, is not liable as an indorser, but the writing operates as an indorsement in full from B to C.37
The appellants Nos 2 and 4 converted the endorsement in the blank into an ‘endorsement in full’, and presented it for passing. The court held that even assuming that the petitioner had a role to play in passing of the cheque, it cannot be said that he had committed any offence by passing the cheque without caring to verify the signature of payee on the reverse of the cheque inasmuch admittedly the signature on the reverse of the cheque drawn in favour of the first respondent was genuine. Only in cases where signatures are forged, the petitioner may be required to explain as to how he passed the cheque without taking proper care to see if the signature on the reverse of the cheque were of the payee or not.38
34 See the Bills of Exchange Act 1882,s 34(4).
35 M Venkateswara Rao v Bollisetty Bapanaiah I (2005) BC 167 AP.
36 Hirschfield v Smith (1866) LR 1 CP 340.
37 Vincent v Horlock (1808) 1 Camp 442
38 M Venkateswara Rao v Bollisetty Bapanaiah (2005) I BC 167 Andh Pra.
Effect of indorsementKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 4 > Of Negotiation
50 Effect of indorsement
The indorsement of negotiable instrument followed by delivery transfers to the indorsee the property therein with the right of further negotiation; but the indorsement may, by express words, restrict or exclude such right, or may merely constitute the indorsee an agent to indorse the instrument, or to receive its contents for the indorser, or for some other specified person.
Illustrations
B signs the following indorsements on different negotiable instruments payable to bearer-
(a) ‘Pay the contents to C only.’
(b) ‘Pay C for my use.’
(c) ‘Pay C or order for the account of B.’
(d) ‘The within must be credited to C.’
These indorsements excluded the right of further negotiation by C.
(e) ‘Pay C.’
(f) ‘Pay C value in account with the Oriental Bank.’
(g) ‘Pay the contents to C, being part of the consideration in a certain deed of assignment executed by C to the indorser and others.’ These indorsements do not exclude the right of further negotiation by C.39
(1)INDORSEMENT AND ITS EFFECT
The section must be read subject to the provisions of s 46, as to conditional delivery, and must be supplemented by s 52, which recognises conditional indorsement. The first part of the section explains the effect of an indorsement which may be thus stated: An unconditional indorsement of a negotiable instrument, followed by an unconditional delivery thereof, transfers to the indorsee the property therein, vests in him the right of action against all parties whose names appear on the instrument, and gives him a right of further negotiating the instrument to anyone he pleases. However, such a transfer by an indorsement vests in the indorsee a right to sue only the parties whose names appear on the bill, and the indorsement does not entitle him to sue third parties on the original consideration.40 The remedy of an indorsee of a promissory note, executed by the managing member of a joint Hindu family, is limited to that on the note, unless the indorsement is so worded as to transfer the debt as well, and the stamp law is complied with; and, therefore, in the case of an ordinary indorsement, the indorsee cannot sue the non-executant coparceners on the ground of their liability under the Hindu law.41
An indorsee of a promissory note can sue the prior parties thereto only on the promissory note itself and he cannot sue them (except his immediate transferor) on the original consideration, unless the indorsee is also the assignee of the original debt. A suit on a promissory note can only be filed against the maker of a promissory note or his legal representative. The manager of a Hindu joint family executed a promissory note in respect of a debt contracted by him, as the manager, for a family necessity. The note was indorsed by the creditor in favour of the plaintiff. Meanwhile, the manager died, leaving behind his son and widow. The plaintiff filed a suit against them on the
original debt and asked for a decree to be recovered from the joint family estate. It was held that the suit was not maintainable, as it was not by an indorsee on the promissory note but on the original debt. Even if the suit was based on the promissory note, it would still not be maintainable since it was not against the maker of the promissory note or his legal representative.42
The payee of a promissory note, sometime before his death, indorsed it in favour of one of his four sons. Under his Will, all his assets and properties not mentioned therein were bequeathed to all the sons. The indorsee-son indorsed the note in favour of himself and his three brothers and subsequently filed a suit against the maker, who had meanwhile become insolvent and his minor sons represented by their mother, for recovery of the amount of the note. The court held that the payee’s indorsement in favour of his son amounted only to a transfer for collection (it would have amounted to an assignment of the debt had the note been properly stamped) and as such, the property in the note continued to be that of the payee and on his death, passed on to all his sons according to the will. Hence, as the residuary legatees, the sons, could hold the insolvent maker’s sons also liable though they had not joined their father in executing the note. This was so because the payee himself could have sued them.43 It is submitted that any liability of the non-executant sons would be based, not on the note, but on the underlying debt of their father.
In Chandrasekhara Gowda v Canara Bank,44 it was held that the bank could not hold a borrower liable as an indorser of a promissory note which is lodged with the bank as collateral security. This was on the ground that the bank could not proceed on the principal security itself, namely a vehicle hire-purchase agreement between the borrower and the maker of the note since the receivables under the agreement had not been assigned to the bank and the agreement stood cancelled upon purchase of the vehicle by the hirer. The Karnataka High Court sought support for its verdict from S Chattanatha Karayalar v Central Bank of India Ltd,45 but in that case the issue was whether a surety attracted primary liability on a promissory note which he had signed along with the principal debtor of the plaintiff bank. In the case before the Karnataka High Court, as a holder in due course of the note, the bank’s right against the indorser could not be defeated by the non-availability of the primary security; a collateral security is taken to protect the lender’s interests when the principal security fails or is inadequate.
The section has also been held to apply to an instrument which is made payable in the first instance to bearer, and which are, by subsequent indorsements made payable to order. Thus, where a hundi was drawn in favour of a payee or bearer and was indorsed by the payee to a person named therein, it was held that it ceased to be a bearer hundi and was payable only to the person whose name was mentioned.46
(2)RESTRICTIVE INDORSEMENT AND RIGHT OF INDORSEE
The second part of the section deals with the subject of restrictive indorsement. A restrictive indorsement is one which prohibits further negotiation of the bill, or which expresses that it is a mere authority to deal with the bill as directed thereby and not a transfer of the ownership thereof. No negotiation of a bill can take place if it contains words prohibiting its transfer. This restriction may be imposed after the bill has been put into circulation by an indorser, who indorses it restrictively. However, when an indorsement is made with an intention of restricting or excluding the right of further negotiation, the section requires that the indorsement must contain express words to that effect. The mere omission to add words of negotiability to a special indorsement does not make it restrictive. Under the section, the effect of a restrictive indorsement is:
(i) to prohibit or exclude further negotiation, or
(ii) to constitute the indorsee an agent to indorse the instrument, or to receive its contents for the indorser, or
(iii) to constitute the indorsee and agent to receive it contents for some other specified person.
Where a bill is indorsed restrictively, the relation between the indorser and the indorsee is substantially that of principal and agent. A restrictive indorsement gives the indorsee the right to receive payment of the bill, and to sue any party thereto that his indorser could have sued, but he has no power to transfer his rights to any other person, unless he is expressly authorised to do so. The bill has, in fact, come to the end of its negotiability, and the last indorsee is the person who can sue upon it. In Rahmath Bi v Angappa Raja,47 a promissory note was indorsed for collection. The court held that though the indorsement was not supported by consideration the indorsee had the locus standi to file an insolvency petition against the maker of the note, on the basis of nonpayment of the note and the indorser could join as an additional petitioner. The death of the indorser does not affect the right of an indorsee for collection to claim payment.48
Page 3 of 3Effect of indorsement
Where a restrictive indorsement authorizes further transfer, all subsequent indorsees take the bill with same rights and subject to the same liabilities, as the first indorsee under the restrictive indorsement.
The section deals with restrictive indorsement, which, in express words restricts or exclude the right of the indorsee and cannot be made applicable to cases where the indorsee wishes to satisfy the court by oral evidence that he was indorsee for a particular purpose only.49
For example:
(1) A indorses a bill ‘Pay B or order for my use’. B indorses it on his own account and discounts it with C. C receives the amount of the bill at maturity. A can recover the amount of the bill from C.50
(2) A indorses a bill ‘Pay B or order for account of C’. B is C’s agent. B indorses the bill to D. D collects the bill at maturity. C can sue D for the amount so recovered.51
A cheque made payable to ‘A only’ is not negotiable. A crossed cheque marked account payee does not restrict its negotiability; it was held that any words other than not negotiable were not sufficient to make such a cheque not negotiable.52 However, banks are generally unwilling to collect such a cheque for someone other than the payee, for fear of losing the statutory protection under s 131, in case the customer has no good title to the cheque. Thus, in practice, such a marking virtually restricts negotiability. As a result of the Cheque Act 1992, in England, cheques crossed as account payee are not transferable, and thus are not negotiable.
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51 Who may negotiate
Every sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payee or indorsees, of a negotiable instrument may, if the negotiability of such instrument has not been restricted or excluded as mentioned in s 50, indorse and negotiate the same.
Explanation.-Nothing in this section enables a maker or drawer to indorse or negotiate an instrument, unless he is in lawful possession or is holder thereof; or enables a payee or indorsee to indorse or negotiate an instrument, unless he is holder thereof.
Illustration
A bill is drawn payable to A or order. A indorses it to B, the indorsement not containing the words ‘or order’ or any equivalent words. B may negotiate the instrument.53
(1)GENERAL RULES AS TO WHO MAY NEGOTIATE
Section 51 lists the category of persons who may indorse a negotiable instrument. These are the sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payee or indorsees. A case inevitably arises when a maker or a drawer has to indorse an instrument made or drawn payable to his own order, eg, ‘pay to myself or order’, or ‘pay to my order’. Where the right to indorse is vested in several persons jointly, all of them must join in the endorsement. Again, where a bill or note is payable to the order of payees or indorsees who are not partners, all must indorse, unless the one indorsing has been authorised to indorse for the others. It is generally presumed that a partner of a trading firm has power to indorse a negotiable instrument on behalf of the firm. There is no such presumption in the case of a partner of a non-trading firm.
For example:
(1) A bill is ‘payable to the order of A and B. A alone indorses it to C. This is not sufficient. C cannot sue the acceptor.54
(2) A bill is payable to the order of A and B. A with B’s previous authority indorses it to C thus; ‘for self and B’. This is sufficient. C can sue the acceptor.
(3) A bill is payable to A and B, or the order of either of them. A alone indorses it. This is sufficient.55
The section enumerates those persons who may indorse. Therefore, if a stranger indorses an instrument, he cannot be called an indorser, neither is he liable thereon as such. He may be held liable as a guarantor to the person in immediate relationship with him. Under s 56 of the BE Act, a stranger signing a bill otherwise than as a drawer of acceptor incurs the liabilities of an indorser to a holder in due course.
Section 51 does not require that all the payees should indorse at the same time; indorsement on different dates is valid.56
Where an instrument is drawn in the form ‘Pay AB per X’, the correct indorsement is AB per X and an indorsement by the agent in his own name is irregular.57 A negotiable instrument was executed in favour of A as agent of B. It was indorsed to C by A, without describing himself as B’s agent. It was held that in the absence of any evidence to
show that A was intended to be the beneficial owner of the instrument, the indorsement could not convey in this country any title to C so as to enable him to sue any party liable on the instrument.58
The Explanation to s 51 requires that though a maker or a drawer may indorse or negotiate an instrument, he cannot do so unless he has come into possession of the instrument in a lawful manner, or is a holder thereof. Further, the Explanation requires that as regards a payee or an indorsee of an instrument, before he can indorse or negotiate it, he must be a holder thereof. Therefore, a person, who steals or finds a lost instrument, cannot indorse and negotiate it, as he is not a holder within the meaning of the Act.
53 See the Bills of Exchange Act 1882,s 31(3).
54 Carvick v Vickery (1781) 2 Doug 652.
55 Watson v Evans (1863) 32 LJ Ex 137.
56 Voruganti v Vanka Venkata AIR 1953 Mad 840 [LNIND 1953 MAD 284].
57 Slingsby v District Bank [1931] 2 KB 588 , p 595.
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52 Indorser who excludes his own liability or makes it conditional
The indorser of a negotiable instrument may, by express words in the indorsement, exclude his own liability thereon, or make such liability or the right of the indorsee to receive the amount due thereon depend upon the happening of a specified event although such event may never happen.
Where an indorser so excludes his liability and afterwards becomes the holder or the instrument, all the intermediate indorsers are liable to him.
Illustration
(a) The indorser of a negotiable instrument signs his name adding the words “Without recourse”.
Upon this indorsement he incurs no liability.
(b) A is the payee and holder of a negotiable instrument. Excluding personal liability by an indorsement ‘without recourse,’ he transfers the instrument to B, and B indorses it to C, who indorses it to A. A is not only reinstated in his former rights, but has the right of an indorsee against B and C.59
(1)CONDITIONAL INDORSEMENT
According to s 5, a drawer may not draw a bill conditionally however, s 30 states that but he may exclude his liability; and at the most, an acceptor can make his acceptance conditional in accordance with s 86; but an indorser stands in this favourable position that he can either entirely exclude his liability as an indorser or make his liability conditional. The section gives power to an indorser to insert in the indorsement by express words, a stipulation negating or limiting his own liability to the holder. This can be achieved in any of the three ways:
(a) By excluding his liability, eg, the holder of a bill may indorse it thus: ‘Pay A or order without recourse to me, or Pay A or order sans recours, or Pay A or order at his own risk’. In all these cases, the holder does not incur any liability on the bill as an indorser.
(b) By making his liability dependent upon the happening of a specified event which may never happen, in such a case, the liability of the holder as an indorser, arises only upon the happening of the event specified, and is extinguished if the event becomes impossible, or the conditions specified are not fulfilled. In the latter case, the indorsee gets no right to sue the indorser. However, the indorsee can sue the prior parties before the happening of the event.
(c) By making the right of an indorsee to receive the amount of the instrument, depend upon the happening of a specified event, which may never happen. The difference between (b) and (c) is that, in (c) the indorsee’s right, being dependent upon the happening of an event, he cannot sue prior parties before the happening of such event, whereas in (c) he can do so even before the happening of the event.
(2)NEGOTIATION BACK AND ‘TAKING UP’ OF A BILL
The general rule is that the holder in due course of a negotiable instrument may sue all prior parties to the
Page 2 of 2Indorser who excludes his own liability or makes it conditional
instrument. This rule is, however, subject to an exception, the object of which is to prevent circuity of action. When a bill or note is negotiated back to a prior party, the prior party is remitted to his former position and comes within the definition of a holder. However, it is not necessary that the bill or note should be re-indorsed to him. He may cancel the indorsements in full, subsequent to that which constituted him the holder, and may further negotiate the bill or maintain a suit against parties antecedent to him. Such a transaction is called taking up of the bill.
However, if the bill or note is negotiated back to a prior party by a proper indorsement, the prior party in addition to his rights as a former holder also acquires the rights of a holder by virtue of the last indorsement. However, he cannot enforce, by a suit, payment of the instrument against an intermediate party to whom he was previously liable by reason of his prior indorsement, for the law does not permit circuity of action.
For example, A, the holder of a bill indorses it to B. B indorses it to C. C indorses it to D. D indorses it to A. A by his first indorsement is liable to B, C and D; and B, C and D are liable to A under the second indorsement. A, therefore, cannot sue B, C and D but A may, by striking off the indorsement of B, C and D, again negotiate the bill.
However, where an instrument is negotiated back to a prior party, the holder can enforce payment against all intermediate parties to whom the holder was not liable as prior party, as for example, where the prior indorsement was without recourse. This is the rule mentioned in the second clause of the section and illust (b) to the section is to the same effect.
59 See the Bills of Exchange Act 1882,ss 16(1)and33.
End of Document
Holder deriving title from holder in due courseKhergamvala: Negotiable Instruments Act
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53 Holder deriving title from holder in due course A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course.60
(1)DERIVING TITLE FROM ANOTHER HOLDER
The section says that a title that has been cleared from defects by passing through the hands of a holder in due course remains immune from those defects, notwithstanding that a subsequent holder may have notice that defects once existed, provided he was not a party to them.61 The rule mentioned in the section, however, is subject to a qualification in England, and though the Act is silent on the point that qualification would undoubtedly be applied in India. The rule is that the holder of an instrument, deriving title from a holder in due course must not himself have been a party to any fraud or illegality affecting the instrument. If he were a party to such fraud or illegality, he does not acquire the rights of a holder in due course. For example:
(1) A bill originally obtained by fraud from the drawer, gets into the hands of A, a holder in due course. A indorses the bill to B by way of gift. B can sue the acceptor for he stands on A’s title.
(2) A, by fraud, induces B to make a promissory note in his favour. A indorses the note to C, who takes it as a holder in due course. C subsequently indorses the note to A for value. A cannot sue B on the note.
(3) A partner in a firm fraudulently indorses a firm bill to D in payment of a private debt. F is cognisant of the fraud, but is not a party to it. D indorses the bill to E, who takes it for value and without notice. E indorses it to F. F acquires E’s rights. If he gave value to E, he can sue all the parties to the bill; if he did not give value, he can sue all the parties except E.62
A holder deriving title from a holder in due course, stands in his shoes and can sue the acceptor, drawer, and all prior parties whom the holder in due course himself could have sued. However, it is not necessary that the holder with a derivative title should have given consideration for the instrument.63 Thus, a person to whom a holder in due course has transferred a bill for collection can maintain a suit upon the bill in his own name as he is a holder deriving title from the holder in due course and is competent to sue under the section.64
60 See the Bills of Exchange Act 1882,s 29(3).
61 Guildford Trust v Goss (1926) 43 TLR 167; Kredit Bank v Schenkers [1927] WN 39.
62 May v Chapman (1847) 16 M&W 355.
63 Subrao v Sitaram (1900) Bom LR 891.
64 Ardeshir v Khushaldas (1908) 10 Bom LR 268 [LNIND 1907 BOM 199].
Instrument indorsed in blankKhergamvala: Negotiable Instruments Act
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54 Instrument indorsed in blank Subject to the provision hereinafter contained as to crossed cheques, a negotiable instrument indorsed in blank is payable to the bearer thereof even although originally payable to order.65
(1)EFFECT OF INDORSEMENT IN BLANK
A negotiable instrument, though originally made or drawn payable to order, may be indorsed in blank and delivered to any person, and the effect of such an indorsement and delivery is to convert the instrument into one payable to bearer and transferable by mere delivery in the same manner as if the instrument were originally made or drawn payable to bearer.66
An indorsement in blank specifies no indorsee, and a bill so indorsed becomes payable to bearer.67
A bill is payable to the order of John Smith. He signs on the back, ‘John Smith’. This act is interpreted by the law merchant as an indorsement in blank by John Smith, and operates as if he had written:
(i) I hereby assign the bill to bearer.
(ii) I hereby undertake that if this bill is dishonoured, I will indemnify the bearer, on receiving due notice thereof.68
Where an order cheque indorsed in blank is also crossed, the drawee-banker will have to make payment in accordance with the crossing.
65 See the Bills of Exchange Act 1882,s 34(1).
66 Peacock v Rhodes (1781) 2 Doug 633, p 636.
67 Bills of Exchange Act 1882,s 34(1).
68 Chalmer’s Bills of Exchange Act, twelfth edn,pp 111-12.
Conversion of indorsement in blank into indorsement in fullKhergamvala: Negotiable Instruments Act
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55 Conversion of indorsement in blank into indorsement in full If a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it cannot be claimed from the indorser in full, except by the person to whom it has been indorsed in full, or by one who derives title through such person.69
(1)EFFECT OF AN INDORSEMENT IN BLANK FOLLOWED BY AN INDORSEMENT IN FULL
The short title to the section, viz, ‘conversion of indorsement in blank into indorsement in full’, is incorrect. The short title is same as that of s 49, however the section does not, unlike s 49, deal with the conversion of a blank indorsement into an indorsement in full but only with the effect of an indorsement in blank followed by an indorsement in full. The rule stated in the section can be summarised as follows: if an indorsement in blank is followed by an indorsement in full, the instrument still remains payable to bearer and is negotiable by delivery as against all parties prior to the indorser in full, though the indorser in full is only liable to the holder who acquired title directly through the indorsement, and person deriving title through such holder.70
For example, A, the payee-holder of a bill, indorser it in blank and delivers it to B, who indorses it in full to C or order. C without indorsement transfers the bill to D. D as the bearer is entitled to receive payment or to sue the drawer, acceptor, or A, who indorsed the bill in blank, but they cannot sue B or C.
69 See the Bills of Exchange Act 1882,ss 8(3)and34(4).
70 Smith v Clark (1794) 1 Peake 295; Walker v Macdonald (1848) 2 Ex 527 .
Indorsement for part of sum dueKhergamvala: Negotiable Instruments Act
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56 Indorsement for part of sum due No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount has been partly paid a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance.71
(1)Partial Indorsement
The object of the section is to prevent an instrument being transferred for a portion only of the sum at the time due under it.72 The indorsement must be an indorsement of the entire instrument. A partial indorsement, ie, an indorsement that purports to transfer to the indorsee a part, only of the amount payable, does not operate as a negotiation of the instrument. According to Byles: ‘Such an indorsement is not warranted by the custom of merchants and would be attended with this inconvenience to the prior parties, that it would subject them to a plurality of action’.73
In the same manner, an indorsement that purports to transfer the instrument to two or more indorsees severally, and not jointly, would come within the prohibition against partial indorsement though not expressly forbidden by the section. For example:
(1) A is the holder of a bill for Rs 1,000. A indorses it thus; ‘Pay B or order Rs 500.’ This is partial indorsement and invalid for the purpose of negotiation.
(2) A is the holder of a bill of Rs 1,000. A indorses it thus; ‘Pay Rs 500 to B or order, and Rs 500 to C or order.’ Though the whole amount of the bill is transferred to B and C, as each of them is an indorsee of only a part of the amount, the indorsement is partial and invalid for the purpose of negotiation.74
(3) C, the holder of a bill for GBP 100, indorses it ‘Pay D or order GBP 30’. This is invalid unless C also acknowledges the receipt of GBP 70.75
The last part or the section states that, if a bill has been paid in part, the fact of the part payment may be indorsed on the instrument and it may then be negotiated for the residue. For example, a bill may be indorsed thus: ‘Pay A or order Rs 500 being the unpaid residue of the bill’. Such an indorsement would be valid.
Where the maker of a note makes a part payment, but the payment is not indorsed thereon and the note is fraudulently negotiated by the payee to a third party, the payee has an equitable duty to indemnify the maker to the extent of the part payment in the event of the latter being held liable to pay the full amount of the note to the holder.76
71 See the Bills of Exchange Act 1882,s 32(2).
72 A personal contract cannot be apportioned; Hawkins v Cardy (1699) 1 LD Raym 360.
73 Byles on Bills of Exchange, twenty-first edn, p 166.
Legal representative cannot by delivery only negotiate instrument indorsed by deceased
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57 Legal representative cannot by delivery only negotiate instrument indorsed by deceased The legal representative of a deceased person cannot negotiate by delivery only a promissory note, bill of exchange or cheque payable to order and indorsed by the deceased but not delivered.
(1)INDORSEMENT BY LEGAL REPRESENTATIVE
A legal representative cannot complete an indorsement made by the deceased by merely delivering the instrument, for, a legal representative is not the agent of the deceased. For example:
A is the holder of a bill. A specially indorses it to B, but dies before delivering it. A’s executor subsequently hands the bill to B. The indorsement in invalid and B cannot sue on the bill.
The instrument, as described in this section, can be negotiated by the legal representative only by re-indorsement and delivery.77 However, in re-indorsing the instrument, the legal representative should be careful to exclude his personal liability thereon
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58 Instrument obtained by unlawful means or for unlawful consideration When a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, no possessor, or indorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or indorsee is, or some through whom he claims was, a holder thereof in due course.78
(1)SCOPE OF SECTION
The section deals with the rights acquired by negotiation, ie, transfer according to the rules of the law merchant. It recognises the paramount rights of a holder in due course, and thus constitutes the main difference between the negotiation of a bill or note and the transfer of any other chose in action. The section deals with two sets of circumstances. First, it deals with the legal status of a possessor or an indorsee of a negotiable instrument which has been lost, or which has been obtained from any maker, acceptor or holder by means of an offence, or fraud, or for an unlawful consideration. Secondly, the section deals with the status of a holder in due course under similar circumstances.
(2)LOST INSTRUMENT
The finder of a lost instrument acquires no rights to it against the true owner. However, if the instrument which is transferable by mere delivery gets into the hands of a holder in due course, he is entitled to retain the instrument against the true owner and to compel payment upon it.
(3)INSTRUMENTS OBTAINED BY MEANS OF AN OFFENCE
Examples of such instruments are discussed below.
(i) Stolen Instrument
A person who has obtained a negotiable instrument by theft cannot enforce payment of it against any party thereto nor retain it against the party from whom he has stolen it. If he negotiates the instrument to a purchaser, who gives value for it, but has notice of the fact that the instrument has been stolen, the transferee cannot acquire a better title than the thief, and cannot enforce payment or retain the instrument as against the party from whom the thief obtained it. However, if a person who has stolen a bill or note payable to bearer transfers it to a holder in due course, he confers a good title on him or any person deriving title from such holder.
In the case of a stolen instrument, the thief does not acquire any title to it and the proceeds of the bill may be followed in the hands of the thief or any volunteer from him.79 However, if a stolen instrument is negotiated by delivery to a transferee for value without notice of the theft, the transferee acquires a good title to it not only against the thief, but also against any party prior to him.80
(ii) Instruments Obtained by Fraud
Fraud vitiates all agreements and transactions. The law sets itself against fraud to the extent of breaking through almost every rule, sacrificing every maxim, getting rid of every ground of opposition which may be presented, so as to prevent it from succeeding.
It is of the essence of all contracts, including those on negotiable instruments, that they must have been brought
Page 2 of 5Instrument obtained by unlawful means or for unlawful consideration
about by the free consent of parties competent to contract. Thus, if a person obtains an advance of money on a hundi by making false representations, knowing them to be false and knowing also that without them, he could not have got the money, the lender is entitled to rescind the contract on the hundi and to sue for the recovery of the amounts advanced.81 Therefore, if a negotiable instrument was executed under coercion, or made or obtained by fraud, proof of such coercion or fraud is a good defence against an action on the instrument. So, if the maker or acceptor, when sued on an instrument proves that it was obtained from him by fraud, the impostor is not entitled to recover anything. Similarly, any subsequent negotiation or transfer may be vitiated by fraud, which may be set up as a defence. An instrument given by defrauding a third person is as bad as one given by defrauding a party to the transaction.82 Under the section, the possessor or an indorsee, who claims through the person who obtained the instrument by means of fraud, cannot recover payment on it from any party thereto.
The defence of fraud cannot generally be set up against a holder in due course or a holder deriving title from such holder. If, however, it could be shown that a person who was not negligent was induced to sign an instrument, being represented to him to be a document of a different kind, he would not be liable even to a holder in due course. Thus, where, owing to the fraud of a third person, the nature of the instrument is misrepresented in such a way that the person affixing his signature does not know that as he is signing a negotiable instrument, but believes that as he is signing a document of a different character, he is not bound by the instrument, particularly so since his mind did not accompany his signature. He never intended to sign a negotiable instrument, and therefore, in contemplation of law, did not sign it at all. This defence is known as non est factum and was successfully pleaded in Carlisle and Cumberland Banking Co v Bragg.83
However the person signing must not be guilty of negligence, otherwise he would be estopped from denying the validity of his signature as against a holder in due course. The decision in the Carlisle case was overruled by the House of Lords in Saunders v Anglia Building Society,84 where an aged widow, who having broken her spectacles could not read signed an assignment of her house to a third party, having been made to believe that it was a deed of gift to her nephew. The assignee mortgaged the house to a building society, which ultimately sought to obtain possession of the house consequent on default in the repayment of the mortgage installments. The lady pleaded non est factum but did not succeed. In the House of Lords, the correct rule was stated to be that a person who signs a document and parts with it so that it may come into other hands, has the responsibility of a normal man of prudence, to take care of what he signs and if he neglects the responsibility, they he cannot deny his liability under the document according to its tenor. The onus of proof rests upon him. Special rules might apply to negotiable instruments.
Where the defendant insists on fraud as a defence, he must repudiate the contract altogether, and retain no benefit under it.85
Every holder is presumed, until the contrary is proved, to be a holder in due course. However, if in a suit by a holder, it is proved that the instrument was given under undue influence, the burden is shifted to the holder to prove himself to be a holder in due course, or a transferee from one.86
(iii) Instruments Obtained for an Unlawful Consideration
If the consideration for a note, bill or cheque is unlawful, the instrument is void. Every agreement for which the object of consideration is unlawful is void. The general rules as to the legality of object or consideration of a contract apply to contracts on negotiable instruments, and a negotiable instrument given for a consideration, which is illegal or opposed to public policy or immoral or specially prohibited by statute, is void and creates no obligation between the parties thereto.87 For the application of this provision, the knowledge that the amount is to be utilised for such purpose is essential. Merely because the amount under the instrument is utilised for such purpose does not make the instrument bad. Thus there has to be a consensus ad idem or meeting of minds for the utilisation of the amount.
A promissory note executed in payment of a debt arising out of share speculation was held void.88 A bill or note given in consideration of future illicit cohabitation,89 for persuading a woman to marry the promisor,90 to a witness for giving evidence,91 are void, being opposed to morality and public policy. However, a holder in due course obtains a good title to an instrument though it was originally made or drawn or subsequently negotiated for an unlawful consideration.
(iv) Forged Instrument
Forgery is the fraudulent making or alteration of writing to the prejudice of another man’s right. The most common species of forgery is signing the name of an existing person. It is also forgery to sign the name of a fictitious or a
Page 3 of 5Instrument obtained by unlawful means or for unlawful consideration
non-existing person, intending it to be believed that a real person signed the instrument, if the signature were placed with a fraudulent or dishonest intention.
A man’s signature of his own name may amount to forgery, if it is put with the intention that the signature should pass for the signature of another person, having the same name.
Forgery is a subject covered by criminal law, and here it is intended to deal with the fraudulent placing of a signature on a bill, whether of a drawer, acceptor or indorser, and the consequences arising thereunder. It has been pointed out as a general rule that all persons whose names appear on an instrument are primarily liable thereon. It is, therefore, of utmost importance, that the greatest possible protection should be afforded when a man’s name has been forged. The liability for loss through forgery should render the holder extremely cautious as to the identity for the transferor and the genuineness of his signature. As a general rule, a forged signature cannot convey title.
Where a signature on a negotiable instrument has been forged, the forged signature is wholly inoperative, and the property in the instrument remains in the person, who was the holder at the time when the signature was forged.
The holder of a forged instrument cannot enforce payment thereon nor can he give a valid discharge thereof. However, if, a holder does manage, in spite of the forgery, to obtain payment of the amount of the bill, he cannot retain the money. The true owner may compel the person who has paid the bill to deliver it to him, and the debtor will be obliged to pay all over again to the rightful holder. The true owner may sue, in tort, the person who is in receipt of the money on the ground of conversion of his bill or for money had and received for his use. A person who has paid money by mistake on a forged signature, may recover it from the person to whom he has paid it.92 This principle has universal application, and a holder in due course is not exempt from it, for there is a great difference between a defect in title (in which case, a holder in due course is protected) and an entire absence of title as in the case of forgery (in which case, he derives to title). However, in order that this rule may operate, it is essential that the holder must have taken the instrument through or under the signature, ie, the signature must have been a necessary part of the instrument so as to pass the instrument from its last possessor to the holder. Therefore, if the signature of the drawer or acceptor of a bill has been forged, no title passes and in either case, the bill is entirely valueless. For example:
(1) On a note for Rs 1,000, A forges B’s signature so as to make him the maker. C, a holder, who takes it bona fide and for value, acquires no title to the note.
(2) On a bill for Rs 1,000, A’s acceptance to the bill is forged. The bill comes into the hands of B, a bona fide holder for value. B acquires no title to the bill.
Forgery cannot be ratified, for a forger does not act, and does not purport to act, on behalf of the person whose signature he forges. However, a person whose signature has been forged may, by his conduct, be estopped from denying its genuineness to an innocent holder.
For example, A’s acceptance to a bill is forged. B, a bona fide holder for value, is informed that the signature is not A’s. B writes to inquires and is informed by A that the signature is his. A is liable on the acceptance.
(v) Forged Indorsements
The case is, however, different where an indorsement is forged. The answer depends entirely upon the question whether the instrument is indorsed in full or in blank. If an instrument is indorsed in full, the signature of the person to whom or to whose order the instrument is negotiated must be a genuine one, for a title to the instrument can only be established through his indorsement. Therefore, if a bill or note is negotiated by means of a forged indorsement, a person claiming under that indorsement, though he is a purchaser for value and in good faith, cannot acquire the rights of a holder in due course. He acquires no title to the bill or note.93
For example:
(1) A bill is indorsed, ‘Pay John Brown or order’. John Brown must indorse the bill, and if his signature is forged, the bill is worthless.
(2) A bill is payable to: A or order. It is stolen from A and the thief forges A’s indorsement and indorses it to B who takes it in good faith and for value. B acquires no title to the bill, nor can be recover upon it or give a valid discharge for it.
Page 4 of 5Instrument obtained by unlawful means or for unlawful consideration
Section 58, which protects a holder in due course where a negotiable instrument has been obtained by means of an offence, does not apply to a case of forgery. Where a party, primarily liable on a negotiable instrument pays the amount thereof, to a wrong person, who holds it under a forged indorsement, he remains liable to the true owner. This is subject to an exception in the case of cheques and bank drafts. No holder can acquire a good title to an instrument through a forged indorsement.94
However, different considerations arise where an indorsement is forged on an instrument that is already indorsed in blank. In such a case, when the instrument gets into the hands of any person, a transfer can be made by simply delivery, and it is immaterial as far as the holder is concerned that the transferor indorsed the bill in any name whatsoever. Where an instrument is indorsed in blank and it bears a further forged indorsement, the holder does not derive his title through the forged indorsement, and he can sue any of the parties to the bill without being affected by the forgery.
For example, a bill is indorsed; Pay John Brown or order. John Brown indorses the bill in blank. It comes into the hands of A. A passes it by simple delivery to B. B forges A’s indorsement and transfers it to C. As C, the holder, does not derive his title through the forged indorsement of A, but through the indorsement of John Brown which is genuine, he can sue any of the parties to the bill irrespective of A’s forged indorsement. A similar result would follow where the forged indorsement is made on an instrument originally drawn or made payable to bearer.
(vi) Banker’s Liability on a Forged Indorsement
Where a bill is accepted as payable (or domiciled) at a banker’s, the banker cannot debit his customer’s account with a payment made on a forged indorsement. Bankers, who undertake the duty of paying their customer’s acceptances cannot do anything other than pay offhand. In paying their customers’ acceptances in the usual way, bankers incur a risk. They have no recourse against their customer, if they pay on a genuine bill to a person appearing to be the holder, but claiming through or under a forged indorsement. The bill is not discharged, the acceptor remains liable and the banker has simply thrown his money away if he cannot recover from the person to whom he has paid it.95 By virtue of s 85, a banker who pays a cheque or a demand draft with a forged indorsement is protected, provided the payment is one in due course.96
(4)PRIVILEGES OF A HOLDER IN DUE COURSE
The title of the holder in due course of a negotiable instrument as defined in s 9 is free from equities and other defences which could be urged against prior parties. This special privilege is secured to him by means of certain rules and estoppels contained in the Act. These may be briefly summarised as follows.
(1) According to s 20, a person who has signed and delivered to another, a stamped but otherwise inchoate instrument, is precluded from asserting, as against a holder in due course, that the instrument has not been filed in accordance with the authority given by him, the stamp being sufficient to cover the amount.
(2) According to s 42, where a bill of exchange is accepted payable to the order of the drawer in a fictitious name, and is indorsed in the same hand as the drawer’s signature, the acceptor is not permitted to allege, as against a holder in due course, that such name is fictitious.
(3) According to ss 46 and 47, if a bill or note is negotiated to a holder in due course, the other parties to the bill or note cannot avoid liability on the ground that the delivery of the instrument was conditional or for a special purpose only.
(4) According to s 58, the defences on the part of the person liable on a negotiable instrument that the instrument had been lost or obtained from him by means of an offences or fraud or for an unlawful consideration, cannot be set up against a holder in due course.
(5) According to s 120, no maker of a promissory note and no drawer of a bill of exchange or cheque and no acceptor of a bill of exchange for the honour of the drawer shall, in a suit thereon by a holder in due course, be permitted to deny the validity of the instrument as originally made or drawn.
(6) According to s 121, no maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s capacity at the date of the note or bill to indorse the same.
Page 5 of 5Instrument obtained by unlawful means or for unlawful consideration
78 Bills of Exchange Act 1882, see ss 29(2), 38(2) and (3).
79 Banque Belge v Hambrouck [1921] 1 KB 321 .
80 Raphael v Bank of England (1855) 17 CB 161; Chichester v Hill (1882) 52 LJQB 160.
81 Baboo Lall v Joy Lall (1916) ILR 24 Cal 533.
82 Cockshott v Bennett (1788) 2 TR 733; Byrant v Christie (1816) 1 Stark 329.
83 [1911] 1 KB 489 .
84 [1970] 3 WLR 1078 ; Foster v Mackinnon (1869) KR 4 CP 704; Lewis v Clay (1898) 67 LJQB 224; Chimanram v Diwanchand (1932) ILR 56 Bom 180.
85 Davis v Harness (1875) LRCP 166.
86 Talbot v Von Baris [1911] 1 KB 854 .
87 Indian Contract Act 1872,s 25.
88 Badridas Kothari v Megraj Kothari AIR 1967 Cal 25 [LNIND 1966 CAL 69].
89 Manika Gounder v Muniammal AIR 1968 Mad 392 [LNIND 1967 MAD 33].
90 Lowe v Peers (1770) 4 Bur 225.
91 Sashannah v Ramaswamy (1868-69) 4 MHCR 7.
92 Indian Contract Act 1872,s 72.
93 Mascarenhas v Mercantile Bank of India (1932) 34 Bom LR 1; Mercantile Bank v Caeiro (1928) 30 Bom LR 1222; Mercantile Bank v D’Silva (1928) 30 Bom LR 1225; Mercantile Bank of India v Mascarenhas (1930) 32 Bom LR 1210; Vasudeo v National Savings Bank Ltd (1952) 54 Bom LR 765 [LNIND 1951 BOM 94].
94 Thorappa v Umedmalji (1923) 25 Bom LR 604.
95 Bank of England v Vagliano Bros [1891] AC 107 96 See notes to s 85.
Instrument acquired after dishonour or when overdueKhergamvala: Negotiable Instruments Act
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59 Instrument acquired after dishonour or when overdue
The holder of a negotiable instrument, who has acquired it after dishonour, whether by non-acceptance or non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights thereon of his transferor:
Accommodation note or bill.- Provided that any person who, in good faith and for consideration, becomes the holder, after maturity, of a promissory note or bill of exchange made, drawn or accepted without consideration, for the purpose of enabling some party thereto to raise money thereon, may recover the amount of the note or bill from any prior party.
Illustration
The acceptor of a bill or exchange, when he accepted it, deposited with the drawer certain goods as a collateral security for the payment of the bill, with power to the drawer to sell the goods and apply the proceeds in discharge of the bill if it were not paid at maturity. The bill not having been paid at maturity, the drawer sold the goods and retained the proceeds, but indorsed the bill to A. A’s title is subject to the same objection as the drawer’s title.97
(1)NEGOTIATION OF DISHONOURED INSTRUMENTS
As a general rule, a bona fide holder for value of a negotiable instrument is not affected by any defects in the title of his transferor. This rule is, however, subject to two exceptions:
(i) when a holder acquires it with notice of dishonour, and
(ii) when he acquires it after maturity. The section lays down the consequences which follows the negotiation of dishonoured instrument and overdue instruments.
Where a negotiable instrument has been dishonoured, any person who takes it with notice of dishonour takes it subject to any defect in title, attaching thereto at the time of dishonour. The transferee of a dishonoured instrument, who takes it with notice of dishonour, cannot acquire the instrument before it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. In the case of a dishonoured instrument, the holder, when he knows that fact appearing on the bill, is put on inquiry about the title of his transferor.
For example, a bill is dishonoured by non-acceptance. The bill is indorsed to A. A indorses it to B. As between A and B the bill is subject to an agreement as to the discharge of A. The bill is afterwards indorsed to C, who takes it with notice of dishonour. C takes the bill subject to the agreement between A and B.
(2)NEGOTIATION OF OVERDUE INSTRUMENT
A bill or note is not deemed to be overdue until the expiry of the day on which it falls due, and, where days of grace are allowed, it is only after the termination of the last day of grace that the instrument becomes overdue. There is nothing to prevent the transfer of an overdue instrument. The transferee, however, does not get the advantages of negotiability, for an instrument which is overdue can only be negotiated subject to any defect in title affecting it at maturity, and no person to whom it is transferred can acquire or give a better title than that which the person from whom he took it, had. A person who takes on overdue instrument cannot be a holder in due course, because s 9 of
Page 2 of 3Instrument acquired after dishonour or when overdue
the Act requires that a holder in due course should acquire the instrument ‘before the amount mentioned in it became payable’. ‘After a bill or note is due, it comes disgraced to the indorsee, and it is his duty to make inquires concerning it. If he takes it, though he gave full consideration for it, he takes it on the credit of the indorser, and subject to all the equities with which it may be encumbered.’98 The fact that maturity has passed is patent on the face of the instrument, and that fact gives notice to the holder that the instrument has either been paid or dishonoured. In fact, after maturity, the contract on the bill is assignable though simply by indorsement, and the bill has ceased to be negotiable in the full sense of the term. A person, who takes an overdue instrument, must not take it blindly and expect to be treated as an innocent holder. If the transferee takes an overdue instrument, without making satisfactory inquiries, he takes it at his own risk, and gets no better title than his transferor.
Where a negotiable instrument has been dishonoured or has become overdue, it can only be negotiated subject to the equities which attach to that instrument. However, the equities are those which exist at the time of transfer, and not those arising subsequently or even collaterally.99 The transferee takes such an instrument, subject to all the inherent vices and defeats with which it was tainted at the time of the transfer, eg, fraud, coercion and illegal consideration. In a similar manner, it might be shown that such an instrument was given for a special purpose, or on a certain condition. For example:
(1) A, for a illegal consideration, makes a promissory note in favour of B. B indorses it, when overdue, to C. C gives full value for the note. C cannot sue A for C has no better title than B’s. 1
(2) A bill is payable to the drawer’s order. B accepts it for an illegal consideration. The drawer, before its maturity, indorses it to C, who takes it for value and bona fide. C indorses the bill, when overdue, to D. D acquires a good title and can sue all parties to the bill, for C had a good title and D acquired C’s.2
(3) A bill is obtained from the drawer for a special purpose. A, in fraud of that purpose, indorses the bill when overdue to B. B cannot recover from the acceptor.3
(4) B made three notes payable to C or order, and subsequently gave C two more notes replacing the first three, and to cover further advances. All the notes were payable on demand, and given on the understanding that they should not be negotiated. C indorsed all the notes to D. Thereafter, B paid C the amount due on the last two notes without being are that C had parted with the notes and did not ask for or receive any of then from him. Afterwards, C obtained the five notes from D by fraud, and handed them over to B, the maker. The court held that D could recover from B on these five notes as B did not becomes a holder for value, the previous satisfaction of the notes not being a consideration given by him when he received bank the notes; and as they were then overdue, he acquired no better title than the payee had, while they were in his hands.4
(3)NEGOTIATION AFTER COMPLETE OR PARTIAL DISCHARGE
Where the indorsee of a promissory note payable on demand is not aware that the note has been discharged by the maker, or that any demand was made on the maker, he can claim as a holder in due course, even if the note was negotiated to him after such discharge or demand.5 Similarly, where payments by the maker were not noted on the note and the indorsee was not aware of the payments, the court held that he could claim as a holder in due course.6
(4)ACCOMMODATION NOTES AND BILL
The proviso lays down an exception to the rule contained in the section as to the negotiation of an overdue bill. The law regarding overdue bills mentioned in the section, ie, the taking of an overdue instrument amounts to notice to the holder of the equities attaching to it, does not apply to the case of accommodation notes and bills, and the holder of such notes and bills may recover the amount from any prior party, even after maturity. The case of accommodation notes and bills is an exception to the general rule that the title of a person, who takes an instrument after maturity is subject to all defences which could be set up against the transferor. Where an accommodation note or bill is negotiated after maturity, the proviso says that a holder for consideration may recover thereon. The holder of an accommodation instrument after maturity is in the same position as of a holder before maturity, provided he takes it in good faith and for value. For example, a bill is payable three months after date. It is accepted for the accommodation of the drawer. After maturity, the drawer indorses it to A for value. A can recover from the acceptor.
Page 3 of 3Instrument acquired after dishonour or when overdue
97 Bills of Exchange Act 1882 s 36(2)and(5).
98 Tinson v Francis (1807) 1 Camp 19.
99 Harry v Dhumam Lall (1882) 5 Mad 108.
1 Amory v Merewether (1824) 2 B&C 573.
2 Chalmers v Lanton (1808) 1 Camp 383.
3 Lloyd v Howard [1850] 15 QB 905 .
4 Nash v De Freville (1909) 2 DB 72 CA.
5 A Venkataratnam v A Kanakasundra Rao AIR 1936 Mad 89
6 Annamalai Chetti v Maung Saing AIR 1927 Rang 161; Asirvatham v Palaniraju AIR 1973 Mad 439 [LNIND 1973 MAD 9].
Instrument negotiable till payment or satisfactionKhergamvala: Negotiable Instruments Act
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60 Instrument negotiable till payment or satisfaction
A negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity) until payment or satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction.
[See of Bills of Exchange Acts 36(1)]
(1)DURATION OF NEGOTIABILITY
In the words of Lord Ellenborough: ‘[a] bill of exchange is negotiable ad infinitum until it has been paid by, or discharged on behalf of, the acceptor’.7
An instrument negotiable during its origin continues to be negotiable until payment or satisfaction thereof, by or on behalf of the acceptor or maker at or after maturity. However, if an instrument is paid before maturity, the payment is not a payment is due course, and the instrument continues to be negotiable and is not discharged by such payment. If the acceptor or maker pays and takes up an instrument before maturity, he is not precluded from reissuing it before maturity.8 Under the section, it is, however, necessary that the payment or satisfaction must have been made by or on behalf of the maker, drawee or acceptor at or after maturity, and not by any other person. In order to stop the negotiability of the instrument, the party ultimately liable thereon must pay it.
Presentment for acceptanceKhergamvala: Negotiable Instruments Act
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Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 5 > Of Presentment
61 Presentment for acceptance.
A bill of exchange payable after sight must, if no time or place is specified therein for presentment, be presented to the drawee thereof for acceptance, if he can, after reasonable search, be found, by a person entitled to demand acceptance, within a reasonable time after it is drawn, and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default.
If the drawee cannot, after reasonable search, be found, the bill is dishonoured.
If the bill is directed to the drawee at a particular place, it must be presented at that place; and if at the due date for presentment he cannot, after reasonable search, be found there, the bill is dishonoured.
1[Where authorised by agreement or usage, a presentment through the post-office by means of a registered letter is sufficient.]2
(1)ADVANTAGES OF PRESENTMENT FOR ACCEPTANCE
There are two kinds of presentment, namely presentment for acceptance and presentment for payment. It is not necessary to always present a bill of exchange for acceptance before presenting it for payment, eg, bills payable on demand, bills payable a certain number of days after date, and bills payable on a day certain, need not be presented for acceptance before presenting them for payment. It is a common practice to obtain the acceptance of the drawee as soon as possible after the bill is drawn, where it is not payable immediately but on a future date. However, even without such acceptance, the bill is a negotiable instrument, as all parties competent to contract, who have put their signatures on the bill, are liable on it even before such acceptance. A person to whom the bill has been negotiated before acceptance may sue upon it as a holder in due course.3 There are, however, two cases in which presentment for acceptance is necessary:
(i) Where a bill is payable after sight, presentment for acceptance is necessary in order to fix the maturity of the instrument.
(ii) Where a bill expressly stipulates that it shall be presented for acceptance, it must be presented for acceptance before it is presented for payment.
However, even in cases where presentment is optional, as for instance where a bill is payable a certain period after date, it is always desirable to get the bill accepted as soon as possible in order to
(i) obtain the additional security of the acceptor’s name on the bill, or
(ii) obtain an immediate right of recourse against the drawer and the other parties, in case the bill is dishonoured by non-acceptance. It is also advantageous to the drawer, that upon non-acceptance, he may be receiving early notice of dishonour and be equipped to remove his assets from the drawer’s reach.
Section 61 provides for presentment for acceptance only when the bill is payable after sight, and not when it is payable on demand. In a bill payable after sight, there are two distinct stages, first when it is presented for acceptance and later, when it is presented for payment. Section 61 deals with the former, and s 64 deals with the latter. When, however, the bill is payable on demand, both the stages synchronise, and there is only one
presentment which is both for acceptance and payment. When the bill is paid, it involves an acceptance; but when it is not paid, it is really dishonoured for non-acceptance. It is acceptance that establishes privity on the instrument between the payee and the drawee.4 Whether the bill is payable after sight, at sight, or on demand, acceptance by the drawee is necessary before he can be fixed with liability on it. For example:
(i) A, draws on B a bill payable three months after date in favour of C. The bill is negotiated by A to C, and passes through several hands before it is presented to B for acceptance. Whether B accepts it or not, A, C and all other indorsers remain liable on it if B fails to pay it on the due date. If at any time before the expiry of the three months, the bill is presented to B and he refuses to accept, the holder gets an immediate right of action against all antecedent parties.
(ii) A draws on B a bill payable three months after sight. The bill must be presented to B for acceptance, for until he has seen it the maturity of the bill cannot be fixed. If B refuses to accept, the holder gets a right of action against all antecedent parties owing to the fact of dishonour.
(2)PRESENTMENT TO WHOM
Presentment for acceptance must be made to the drawee or to his duly authorised agent. The holder must, however, make the demand for acceptance in clear and unequivocal terms.5 Proof must be given to show that the person to whom presentment was made was the drawee.6 Presentment for acceptance consists in actually exhibiting the bill by the holder to the drawee, and not in merely giving notice to him that a bill is in the possession of the holder. The drawee is also entitled to insist upon the production of the bill for acceptance so that he may see it and decide whether he should accept it or not, and, in case of its non-production, may decline to accept it.
Where there are several drawees who are not partners, presentment must be made to all of them, unless one drawee has authority to accept for all, in which case, presentment may be made to him only. The holder is entitled to have the acceptance of all the drawees, and if one of them refuses to accept, he is entitled to treat the bill as dishonoured.
If the drawee be dead, presentment may be made to his legal representative. If the legal representative accepts the bill, he should take care to expressly limit his liability to the extent of the assets which come into his hands, otherwise he would make himself personally liable.
If the drawee is bankrupt, presentment may be made to his assignee.
(3)PRESENTMENT BY WHOM
Under the section, presentment for acceptance should be made by some person entitled to demand acceptance. He is usually the holder, but the drawee may accept a bill even though the person presenting it is not the lawful holder thereof. By presenting the bill for acceptance, the holder does not give a guarantee as to the genuineness of the instrument or any document attached thereto.7 If the person who presents a bill subsequently turns out not to be the legal holder thereof, the drawee’s acceptance will inure for the benefit of the rightful owner. A person duly authorised by the holder may also make presentment.
(4)TIME FOR PRESENTING
All bills must be presented before maturity. The following rules may be stated:
(i) In the case of a bill, which specifies the period for presentment, it must be presented within that period.
(ii) In the case of a bill for which presentment for acceptance is optional, it must, if presented for acceptance, be presented at any time before payment.
(iii) A bill payable after sight, must, if no time is specified therein for presentment, be presented within a reasonable time after it is drawn. Such a bill ought to be presented without unreasonable delay, for the longer the delay, the greater the risk that the drawer runs of the insolvency of the drawee. In determining the reasonable time for presentment for acceptance, focus shall be on the nature of the bill, the usage of
Page 3 of 3Presentment for acceptance
trade with regard to similar instruments, and the distance between the place where the bill is drawn and the place where it is to be presented for acceptance, and the particular facts of the case.8
In all cases where presentment for acceptance is made, it must be made during business hours and on a business day.
(5)EFFECT OF NON-PRESENTMENT
Where presentment for acceptance is necessary, the section says that in default of such presentment by the holder, the drawer and all the indorsers are discharged from liability to the holder making such default, and no action is maintainable even in respect of the debt or other consideration for which the bill was given.9
(6)PRESENTMENT FOR ACCEPTANCE WHEN EXCUSED
Where presentment for acceptance is necessary, presentment is excused and the bill may be treated as dishonoured in the following cases:
(i) Where the drawee is a fictitious person or one incapable of contracting.
(ii) Where the drawee cannot, after reasonable search, be found.
(iii) Where, though the presentment is irregular, acceptance has been refused on some other ground.
(iv) Where the drawee becomes bankrupt or is dead.
1 Added by s 4, Act 2 of 1885.
2 See the Bills of Exchange Act 1882,ss 39 and 41.
3 National Park Bank of New York v Berggren & Co (1914) 110 LT 907.
4 Jagjivan v Ranchhoddas AIR 1954 SC 554 [LNIND 1954 SC 112] relied on in Manickchand v Chartered Bank AIR 1961 Cal 653 [LNIND 1960 CAL 201].
5 Cheek v Roper (1804) 5 Esp 175.
6 Bateman v Joseph (1810) 12 East 433; Smith v Bank of New South Wales (1872) LR 4 PC 194, p 208.
7 Guaranty Trust Co of New York v Hannay &Co [1918] 2 KB 623 .
Presentment of promissory note for sight.Khergamvala: Negotiable Instruments Act
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62 Presentment of promissory note for sight. A promissory note, payable at a certain period after sight, must be presented to the maker thereof for sight (if he can, after reasonable search, be found) by a person entitled to demand payment, within a reasonable time after it is made and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default.10
(1)PRESENTMENT FOR SIGHT
The section deals with the necessity of presentment for sight of notes payable a certain period after sight and the effect of non-presentment. The expression ‘after sight’, in a promissory note, means after presentment for sight. It means that payment is not to be demanded till the note has been exhibited to the maker.
A promissory note payable a certain period after sight is payable on expiry of that period after presentment for sight.11 When a promissory note is made payable a certain period after sight, it is necessary to present it for sight in order to fix the maturity of the instrument. The section says that if default is made in such presentment, all the antecedent parties are discharged from liability to the person making such default.
10 See the Bills of Exchange Act 1882,ss 39 and 89.
Drawee’s time for deliberation.Khergamvala: Negotiable Instruments Act
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63 Drawee’s time for deliberation. The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow the drawee12 [forty-eight hours] (exclusive of public holidays) to consider whether he will accept it.13
(1)DELIBERATION TIME FOR DRAWER
The principle laid down in the section seems to be of universal application. The drawee is entitled to demand 48 hours to consider whether he will accept the bill, and the holder who presents the bill for acceptance must allow him that time. At the expiration of the 48 hours, the drawee must return the bill accepted or dishonoured. After forty-eight hours, the holder should demand the re-delivery of the bill, and if the drawee does not return the bill duly accepted, the holder must treat the instrument as dishonoured. In counting the period of 48 hours, public holidays are to be excluded.14
If the drawee with whom the bill is left for acceptance destroys it, or does not return it to the holder, the latter may sue for recovery of the bill or for damages. However, if through the negligence of the holder, the bill is returned to a wrong person, the drawee is not liable to the holder.15
12 Substituted by s 2; Act 12 of 1921 for ‘twenty-four’.
13 See the Bills of Exchange Act 1882,s 42.
14 Bank of Van Diemen’s Land v Bank of Victoria (1871) LR 8 PC 526.
Presentment for payment.Khergamvala: Negotiable Instruments Act
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64 Presentment for payment.
16[(1)] Promissory notes, bills of exchange and cheques must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter provided. In default of such presentment, the other parties thereto are not liable thereon to such holder.
17[Where authorised by agreement or usage, a presentment through the post office by means of a registered letter is sufficient.]
Exception.-Where a promissory note is payable on demand and is not payable at a specified place, no presentment is necessary in order to charge the maker thereof.
18[(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 the 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.]19
(1)BROADER SCOPE FOR DEFINITION OF ‘CHEQUE’
The definition of cheque20 has been broadened to include the electronic image of a truncated cheque and a cheque in the electronic form. Thus the section has also been suitably amended to provide rules as to presentment of a truncated cheque. The amendment, despite recognising electronic image of a truncated cheque, has made provision for the drawee bank to call for the truncated cheque in original if it is not satisfied about the instrument.
(2)EFFECT OF PRESENTMENT FOR PAYMENT
The section lays down the general rule as to presentment of negotiable instruments for payment. In the absence of an express stipulation requiring presentment, presentment for payment is not necessary to charge the maker of a note or the acceptor of a bill, for they are the principal debtors on these instruments. The reason for this rule is that by the Common Law, a debtor is bound to seek out his creditor and pay him.21 Presentment of a promissory, note or a bill of exchange contemplated by s 64 is necessary only if the payment is to be made at the place of the debtor, not if it is to be made at the place of the creditor.22 Presentment of a note or a bill for payment is not a condition precedent to the liability of the maker or acceptor, and therefore presentment for payment is not necessary to render him liable. However, no one would be likely to sue the maker of a note or the acceptor of a bill without having first demanded payment from him. If he did, he would probably be compelled to pay the costs of the action but in order to charge the other parties, presentment is necessary, except in the case mentioned in s 76. In default of such presentment the parties other than the maker of a note, the acceptor of a bill and the drawee of a cheque, ie, the drawers and the indorsers in the case of bills and cheques, and the indorsers in the case of promissory notes, are discharged from liability on the instrument to the holder making default.
Under s 64, the result of non-presentment of hundis for payment is not an exemption of the acceptor from liability but the exemption of only other parties to the hundi. The word ‘other’ has been used to show that there is a difference between s 64 and ss 61 and 62 where the words used are no party. The section therefore, means that the parties who are mentioned in the section may be liable but other parties to the instruments are not liable. The acceptor of the hundi, therefore, remains liable on it even if it was not presented for payment.23 Where a promissory note payable three months after date was not presented for payment, the parties other than the maker were held discharged from their liability. The maker is nevertheless liable except when the note is payable at a specified place.24 The liability of the drawer and the indorsers being conditional upon due presentment for payment, such liability is extinguished if that condition is not fulfilled. If the holder neglects to present the instrument, he cannot sue the drawer and the indorsers on the instrument. It has however been held that, in the case of a cheque, the expression other parties thereto used in the section does not include the drawer. Otherwise, it would lead to the incongruous situation where the drawer would escape liability even if he had not provided adequate funds to the drawee-banker to meet the cheque. 25
If the holder fails to present the instrument for payment according to the provisions of the Act, he cannot sue his transferor on the original consideration or for failure of consideration.26
The statutory requirement of presentation for payment is mandatory and the legislative intent is expressed by the words ‘must be’. The consequences of non-presentment have also been made clear namely, a non-presentment will absolve the liability of any of the other parties thereto.27 When a party to a bill is discharged from his liability thereon, by reason of the holder’s omission to perform his duties as to presentment for acceptance or payment, protest, or notice of dishonour, such party, it seems, is also discharged from liability on the debt or other consideration for which the bill was given.28
A debtor issued certain cheques to his creditor in repayment of the debt. The creditor never presented the cheques for payment but sued the debtor on the basis of the original debt. The court held that the suit was maintainable, as the cheques were not accepted as unconditional payment of the debt and that the non-presentment of the cheques did not affect the debtor’s liability to the creditor.29 It would appear that the debtor in this case did not prove that he suffered any damage by non-presentment of the cheques. Even so, the decision is debatable, since, on acceptance of the cheques by the creditor, the cause of action based on the debt was suspended.
In presenting an instrument for payment, the holder should exhibit it to the person from whom he demands payment, and when the instrument is paid, the holder must forthwith deliver it up to the person, who pays it.30 The presentment for payment must be such as would be sufficient to charge the indorsers and other persons collaterally liable on the bill, and the document itself must be so presented, as to enable the person presenting it to give it up, if paid.31
Due presentment is insisted upon for the benefit of the maker, drawee or acceptor. He is entitled to ask for the production of the instrument for cancellation on payment. In Srinivasa Gownder v Kannu Gownder ,32 the maker of a promissory note made payment to the payee without asking for the note. In fact one year earlier, the payee had indorsed it away to a third party. In a suit by the indorsee, who was a holder in due course, it was held that the maker was liable to him. The maker was negligent and could not plead absence of notice of the indorsement.
An agent employed to make presentment for payment and entrusted with a bill, is bound to use due diligence in presenting it for acceptance, even when presentment is optional, and is liable to his principal for damage due to his negligence.33
(3)PRESENTMENT BY AND TO WHOM
When presentment for payment is to be made, it must be made by the holder or some person authorised to receive payment on behalf of the holder. Presentment for payment must be made to the principal debtor, namely, the maker of a promissory note, the acceptor of a bill of exchange and the drawee of a cheque, or to their duly authorised agents. Where the maker, the acceptor, or the drawee has died, presentment may be made to his legal representative, or where he had been declared an insolvent, then to his assignee.
Page 3 of 4Presentment for payment.
The exception to s 64 is not a real exception to the rule contained in the section, for the section requires presentment for payment to charge the drawers and the indorsers, and does not deal with the case in which presentment is necessary to charge the maker of a note. The proper place of this exception would have been s 74, which deals with the presentment of instruments payable on demand. The effect of this exception is that where a promissory note is payable on demand and at a specified place, presentment of the note is necessary in order to charge the maker thereof.34 The practical result of the principle stated in the exception is that the maker cannot take advantage of any informality in presentment to him, and in the case of a demand promissory note not payable at a specified place, presentment for payment is not necessary to charge the maker thereof.
Where a promissory note is expressed to be payable on demand, but no place of payment is specified in it, the expression on demand is a mere technical expression meaning that payment ought to be made immediately or at once. It does not import a condition that a demand should be made before action is brought. The action itself is a demand.35 In such cases as well as cases where alternative places of payment are specified, the Common Law rule, namely, that the debtor should find the creditor and pay the debt, applies. In L N Gupta v Tara Mani ,36 a promissory note made and delivered in Bangalore was expressed to be payable on demand at Bangalore or any part of India. The payee a resident of Delhi sent a notice from there to the maker demanding payment. It was held that a suit on the note would lie in Delhi. However, in Jivatlal v Lalbhai ,37 where demand was made by a notice sent from Bombay to the maker in Ahmedabad it had been held that the suit would not lie in Bombay. The money was payable where the demand was communicated to and received by the debtor.
In Manek Devji v Ratan bai ,38 it was held that a Kutch court could not entertain a suit on a note executed in Bombay by a resident there although it was expressed to be payable anywhere.
In J N Sahni v State of Madhya Bharat ,39 it was held that the above-mentioned Common Law rule does not apply to promissory notes payable on demand and not expressed to be payable at a specified place.
In Aru nachalam Chettiar v Murugappa Chettiar ,40 it was held that if a note is made at one place delivered at another place and expressed to be payable at some other place, a suit on the note could be filed at any of these places at the plaintiff’s option.
16 Renumbered as by Amendment Act 2002 sub-s (1).
17 Inserted by s 2, Act 6 of 1897.
18 Inserted by Amendment Act 2002.
19 Bills of Exchange Act 1882,ss 45 and 87(2).
20 See s 6 of the Act.
21 Walton v Mascall (1844) 13 M&W 452.
22 Baldeo Prasad v Ram Kali AIR 1962 All 123 [LNIND 1961 ALL 60].
23 Benares Bank Ltd v Hormusji AIR 1930 All 648, dissenting from Oudh Commercial Bank v Gur Din AIR 1920 Oudh 191; Manik Ratan v Prakash Chandra AIR 1955 Cal 338 [LNIND 1954 CAL 31] and Canara Bank v Sanjeev Enterprises AIR 1988 Del 372 [LNIND 1988 DEL 94].
24 Ghania Lal v Karam Chand AIR 1929 Lah 240.
25 Harish Chander v Ganga Singh & Sons AIR 1974 P& H 156.
26 Camidge v Allenby (1827) 6 B&C 373.
27 Punjab National Bank v Britannia Industries Ltd (2001) 2 BC 707 [LNIND 2001 CAL 89] (DB).
28 Peacock v Purssell (1863) LJPC 266.
29 Harish Chander v Ganga Singh & Sons AIR 1974 P& H 156.
Hours for presentment.Khergamvala: Negotiable Instruments Act
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65 Hours for presentment.
Presentment for payment must be made during the usual hours of business, and, if at a banker’s, within banking hours.41
Presentment should be made during the usual hours of business of the maker or acceptor. By virtue of ss 70 and 71 of the Act, the presentment may be made at the residence of the party, or wherever he may be found, within the usual hours of business.
As to bankers, it is laid down that a presentment made outside the hours of banking business is not a good presentment. If a bill is payable at a bank, it must be presented within banking hours.42 What constitutes banking hours must be proved in each particular case, and will depend on what have been notified by the drawee-bank (branch) as its business hours, and, otherwise, on the known banking custom in the town or city where the instrument is made payable.
In downtown Mumbai, the usual banking hours are from 11 am to 3 pm on week days, and from 11 am to 1 pm on Saturdays. Suburban branches may operate on different time-schedules. The consequences of non-presentment in accordance with the provisions of the section are laid down in s 64. If presentment is not made within the usual hours of business at a bank, the presentment will be deemed a mere nullity and of no legal effect, and the holder must bear the consequences of his negligence, ie, the indorsers and other parties to the bill are discharged from all liability to such holder.
41 See the Bills of Exchange 1882,s 45(3).
42 Parker v Gordon (1806) 7 East 385; Whitaker v Bank of England (1835) 1 CM&R 750.
Presentment for payment of instrument payable after date or sight.Khergamvala: Negotiable Instruments Act
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66 Presentment for payment of instrument payable after date or sight. A promissory note or bill of exchange, made payable at a specified period after date or sight thereof, must be presented for payment at maturity.43
(1)PRESENTMENT OF INSTRUMENT PAYABLE AFTER DATE OR AFTER SIGHT
The rule stated in the section should be declared more generally, and should provide that bill or note payable otherwise than on demand must be presented for payment at maturity. Only two kinds of instruments, viz, those payable at a specified period after date, and those payable at a specified period after sight, are mentioned in the section. However, these are not the only instruments that are not payable on demand. For example, a bill may be payable on the expiry of a certain period after the occurrence of a specified event. The general rule, therefore, is that all instruments payable otherwise than on demand must be presented for payment at maturity.
A bill of exchange made payable at a specified period after date must be presented for payment at maturity and want of presentment relieves the indorser from liability.44
Bills and notes must be presented for payment on the day they fall due, and where days of grace are allowed, they must be presented on the last day of grace. An earlier presentment is premature and ineffectual.45 Thus, where a bill was presented after the period specified for payment but before the expiry of the period of grace, it was held it was not a valid presentment.46
43 See the Bills of Exchange 1882,s 45(1).
44 Benares Bank v Priya Das (1930) All 106.
45 Wiffen v Roberts (1795) 1 Esp 262.
46 Jhandu Lal v Wilayati Begum (1925) ILR 47 All 572.
Presentment for payment of promissory note payable by installments.Khergamvala: Negotiable Instruments Act
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67 Presentment for payment of promissory note payable by installments. A promissory note payable by installments must be presented for payment on the third day after the date fixed for payment of each installment; and non-payment on such presentment has the same effect as non-payment of a note at maturity.
(1)PAYMENT OF PRESENTED PROMISSORY NOTES IN INSTALLMENT
When a promissory note is payable in installments (eg, notes executed in respect of term loans or deferred buyers’ credits that are repayable in installments over agreed periods) the presentment of such a note is to be made as each installment falls due, allowing three days of grace for each installment. If there is default in making presentment of a note payable in installments, when an installment falls due, only the indorsers would be discharged from liability to the holder for that installment. However, as such notes usually contain a stipulation that in default of payment of any installment, the whole amount shall become due, non-presentment of such a note may discharge the indorsers altogether on the note.
The due dates of the installments, however, must be clear from the instrument itself; otherwise the instrument is not valid as a note.47.
Presentment for payment of instrument payable at a specified place and not elsewhere.
Khergamvala: Negotiable Instruments Act
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68 Presentment for payment of instrument payable at a specified place and not elsewhere. A promissory note, bill of exchange or cheque made, drawn or accepted payable at a specified place and not elsewhere must, in order to charge any party thereto, be presented for payment at that place.48
(1)PLACE OF PRESENTMENT
Sections 68, 69, 70 and 71, indicate the proper place at which the presentment must be made. The gist of the sections may be stated thus:
(a) Where the place of payment is indicated in an instrument by the maker, drawer or acceptor, it must be presented at that place for payment.
(b) If no such place is stated, the note or the bill must be presented at the place of business, if any, or at the usual residence, of the maker, drawer or acceptor, as the case may be.
(c) If he has no known place of business or fixed residence, presentment may be made to him wherever he can be found.49
A bill was accepted ‘payable at 1, Duke Street, London’. Presentment, after the acceptor’s death, at 1, Duke Street was held sufficient without making search for the acceptor’s executor.50
The acceptor of a bill accepts it payable at his banker’s. The bill must be presented at the bank. A presentment to the acceptor personally is insufficient.51
Where a bill is drawn or accepted payable at a particular place, want of presentment at the specified place will not discharge the acceptor. In order to compel presentment at that place, the acceptor must accept the bill payable ‘at a specified place and not elsewhere’. For example:
(i) A bill is accepted payable at the Bank of Baroda. This is a general acceptance, and want of presentment at the Bank of Baroda will not discharge the acceptor.
(ii) A bill is accepted payable at the Bank of Baroda and not elsewhere. The holder must present it at the Bank of Baroda before he can sue the acceptor.
A default in presentment at the specified place, if required under s 68, has the effect of discharging all the parties thereto, including the acceptor of a bill and the maker of a note; whereas under s 64, only other parties are discharged by non-presentment.
The place of presentation also assumes importance in the procedural law as well as it has been held that the holder in due course of a negotiable instrument, can present a suit to recover amount covered by it, only in a court within whose territorial jurisdiction defendants therein reside, or carry on business; or in a court within whose territorial jurisdiction, place at which such negotiable instrument, can be presented under ss 68 to 70 of the Act.52
(2)CHEQUE CLEARING SYSTEMS
In metropolitan centres as well as bigger towns and cities, cheques received for collection are not presented directly to the respective drawee-banks (unless for special reasons, the collecting bank makes direct presentment) but are
Page 2 of 2Presentment for payment of instrument payable at a specified place and not elsewhere.
presented through clearing houses, generally run under the auspices of the Reserve Bank of India, State Bank of India or some other leading bank in the town, and claims are settled between banks at the end of the day through accounts, with the institution running the clearing system. Cheques, which are to be returned unpaid, are also routed through the clearing house.
In Royal Bank of Ireland Ltd v O’ Rourke ,53 the Supreme Court of Ireland held that in a clearing system presentment to the drawee-bank took place when a cheque was delivered to the bank’s employee or agent at the clearing house. Dissenting from this view, Bingham J (as arbitrator) held in Barclay’s Bank plc v Bank of England ,54 that the presenting bank’s responsibility to its customer in respect of the collection of a cheque is discharged only when the cheque is physically delivered to the drawee-branch for a decision whether to pay it or not.
Technological developments have revolutionised the methods adopted for processing and presenting of cheques received for collection. Modern cheque leaves are encoded in magnetic ink characters, in machine-readable form with numbers denoting the drawee-bank and the branch, the drawer’s account and the particular cheque. To these the collecting bank adds the amount of the cheque and numbers denoting the collecting bank and branch and the account of the customer for whom the cheque is collected. When presented to and received by the drawee-bank, normally through a clearing system, the cheques are further processed electronically and the drawer’s account is debited and the collecting bank given credit.
With the enormous growth in the volume of cheques handled by banks, a system known as cheque truncation has come to be adopted in Britain and elsewhere in other developed countries under which, cheques are not physically presented to the drawee-banks but are retained with the collecting banks, which convey essential particulars or digital images of the cheques to the drawee-banks.
In Britain, the BE Act was amended towards the end of 1996 to allow such electronic presentment of cheques. Such a presentment, which is treated as equivalent to physical presentment, does not require to be made at the proper place or during business hours on a working day. However, the drawee-bank has an option to request, before the close of business on the next business day following electronic presentment, for physical presentment of the cheque. The amended BE Act also now allows banks to specify places other than the drawee-branches for presentment of cheques drawn on them.
48 See the Bills of Exchange 1882,ss 45 (4)and87.
49 Benares Bank v Hormusji (1930) 52 All 696.
50 Philpot v Briani (1827) 3 C&P 244, Philpot v Briani 172 ER.
51 Gibb v Mather (1832) 2 Cr LJ 254, Gibb v Mather 149 ER.
52 SSV Prasad v Y Suresh Kumar (2005) 1 Bank CLR 557 AP, SSV Prasad v Y Suresh Kumar (2006) 2 Bank CLR AP 569, SSV Prasad v Y Suresh Kumar (2005) I BC 330 AP.
53 1962 IR 159.
54 [1985] 1 All ER 385.
End of Document
Instrument payable at a specified placeKhergamvala: Negotiable Instruments Act
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69 Instrument payable at a specified place
A promissory note or bill of exchange made, drawn or accepted payable at a specified place must, in order to charge the maker or drawer thereof, be presented for payment at that place.55
In order to meet the requirements of the section, the place of payment must be sufficiently particularised and it should be evident in the body of the instrument. If presentment for payment is not made at that place, the maker or the drawer will be discharged.56 Though the section only mentions the maker and the drawer, an indorser also stands on the same footing and presentment for payment at the specified place is necessary to charge the indorser, who otherwise, would be discharged from his liability to the holder by s 64.
However, a mandate to present a negotiable instrument at a particular place cannot be watered down through a process of treating endorsement, or transfer of Negotiable Instruments Act.57 What constitutes a specified place depends upon the circumstances of each case.58 A promissory note made payable at Poona, Bombay or elsewhere is not payable at a specified place within the meaning of the section, and does not require presentment for payment.59 In the case of a similar promissory note, it was held that payment could be demanded and enforced at any place the creditor chose; he did so in Bombay.60 It has been held that a city or town at large may be taken to be a specified place, but presentment of the promissory note would be necessary only if the maker has a residence or place of business in that city or town and in the absence of such residence or place of business, mere possession of the note by the payee in the city or town would be sufficient.61 However, in Dungarmul v Shambu Charan ,62 it was held that a promissory note made payable at Calcutta could not be said to be payable at a specified place. The payee’s knowledge of the maker’s address was not considered to be of decisive significance. This decision was followed in Sivaram v Jayaram Mudaliar ,63 where the note was made payable at Madras and it was held that presentment was not necessary. The Madras High Court held that if a town or city at large is mentioned as the only place of payment there can be no responsibility on the payee to search for the maker’s address in the town or city and thus no presentment would be necessary. It does not mean that in every conceivable instance, oral evidence would be automatically excluded. Where there is no apparent ambiguity, no oral evidence will be permitted. Where the name of a small village is mentioned in a note as the place of payment and the maker resides there, the note should be presented at his residence.64 In D Sethuramalingeswara Rao v P Pichatah ,65 it was held that a promissory note made payable at Gudalur must be presented for payment there.
Where a note is made payable at either of two places it is sufficient to present it at any one of the places.66 If the place of payment is mentioned as the acceptor’s residence a presentment to any inmate of the house will suffice. 67
55 See Bills of Exchange 1882,ss 45(4)(a)and87.
56 Spindler v Grellett (1847) 1 Ex 348 .
57 SSV Prasad v Y Suresh Kumar (2005) 1 Bank CLR 557 AP, SSV Prasad v Y Suresh Kumar (2006) 2 Bank CLR AP 569, SSV Prasad v Y Suresh Kumar (2005) I BC 330 AP.
58 Mehr Baksh v Hari Chand AIR 1935 Lah 623.
59 Dorabji Naoroji v Jamshedji Pestonji (1936) 38 Bom LR 395.
Presentment where no exclusive place specified.Khergamvala: Negotiable Instruments Act
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70 Presentment where no exclusive place specified. A promissory note or bill of exchange not made payable as mentioned in ss 68 and 69, must be presented for payment at the place of business (if any), or at the usual residence, of the maker, drawee or acceptor thereof, as the case may be.68
(1)PRESENTMENT AT PLACE OF BUSINESS OR RESIDENCE
According to ss 68 and 69, when presentment for payment is to be made, it must, be at the place of payment specified in the instrument by the maker, drawer or acceptor. If no such place is stated, the instrument must be presented at the place of business (if any) or at the usual residence of the maker, drawee or acceptor as the case may be under the provisions of the section.69 The section does not say whether the holder has any option to choose between the place of business and residence of the maker or acceptor. Presumably, the section does not give the holder any such option, for it would be absurd to present a bill to a trader at his private residence instead of his place of business. Where no place of payment is mentioned in the instrument, but the address of the drawee is given, the instrument may be presented at that address.70
69 Gouri v Narayana AIR 1963 Ker 246 [LNIND 1962 KER 232]; D Sethuramalingeswara Rao v Perla Pichaiah (1993) 78 Comp Cas 616.
Presentment when maker, etc, has no known place of business or residence.
Khergamvala: Negotiable Instruments Act
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71 Presentment when maker, etc, has no known place of business or residence. If the maker, drawee or acceptor of a negotiable instrument has no known place of business or fixed residence, and no place is specified in the instrument for presentment for acceptance or payment, such presentment may be made to him in person wherever he can be found.71
(1)PRESENTMENT IN PERSON
If a maker, drawee or acceptor has no known place of business or fixed residence as mentioned in s 70, presentment may be made to him personally, wherever he may be found. Therefore, a presentment to the party in person on the street or at any other place where he can be found may be made under the authority of the section.72
71 See the Bills of Exchange Act 1882,s 45 (4)(b) and (d).
Presentment of cheque to charge drawer.Khergamvala: Negotiable Instruments Act
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72 Presentment of cheque to charge drawer. 73[Subject to the provisions of section 84] a cheque must, in order to charge the drawer, be presented at the bank upon which it is drawn before the relation between the drawer and his banker has been altered to the prejudice of the drawer.74
(1)PRESENTMENT OF CHEQUE SO AS TO EFFECT CHARGE ON A DRAWER
The section must be read with s. According to s 6, a cheque is a bill of exchange drawn on a banker and payable on demand. A cheque, therefore, like other bills of exchange, must be presented for payment to the bank on which it is drawn, and only upon presentment and dishonour of the cheque, is the holder entitled to sue the drawer. Presentment need not be at the drawee-bank; it may be made through a clearing house also. The combined effect of ss 72 and 84 is that if a cheque is not presented within a reasonable time, and in consequence of non-presentation, the drawer suffers damage, the drawer is discharged to the extent of the damage suffered. 75
In a controversial decision, the Madras High Court held that the drawer of certain cheques could not held liable thereon to the holder, who, presumably at the instance of the payee, did not present the cheques for six months to the drawee-bank. There was no evidence, however, that the drawer suffered any damage because of the delay.76
73 Inserted by s 2, Act 6 of 1897.
74 See the Bills of Exchange Act 1882,s 74(1).
75 Wheeler v Young (1897) 13 TLR 468.
76 G Balakrishnan v Official Assignee (1981) 1 Mad LJ 417.
Presentment of cheque to charge any other person.Khergamvala: Negotiable Instruments Act
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73 Presentment of cheque to charge any other person.
A cheque must, in order to charge any person except the drawer, be presented within a reasonable time after delivery thereof by such person.77
(1)Presentment Of Cheques To Charge Indorser
A cheque is generally intended for immediate payment and not for circulation. The drawer’s liability on presentment of a cheque is fixed by s 72. The present section deals with the liability of any person except the drawer, which means the indorsers. In order to charge an indorser, it is necessary that the cheque must be presented within a reasonable time from the delivery of the cheque by such indorser and from the time when the holder receives it from any prior indorser. For instance, A indorses and delivers a cheque to B, and B keeps it for an unreasonable length of time and then indorses and delivers it to C. C presents the cheque for payment within a reasonable time after its receipt by him and it is dishonoured. C can enforce payment against B, but not against A
77 See the Bills of Exchange Act 1882,ss 45, 73 and 74.
Presentment of instrument payable on demand.Khergamvala: Negotiable Instruments Act
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74 Presentment of instrument payable on demand.
Subject to the provisions of section 31, a negotiable instrument payable on demand must be presented for payment within a reasonable time after it is received by the holder.78
(1)PRESENTMENT OF NEGOTIABLE INSTRUMENTS PAYABLE ON DEMAND
Section 31 deals with the liability of the drawee of a cheque to the drawer, and therefore, its connection with the present section, which speaks of presentment of an instrument for payment, is not easy to discover. Sections 72 and 73 relate to the presentment for payment of a cheque in order to charge the drawer and the indorsers.
The scope of the present section, therefore, seems to be confined to the presentment of negotiable instruments payable on demand other than cheques, ie, bills and notes payable on demand. Such instruments being payable immediately, the section requires that they must be presented within a reasonable time after they are received by the holder. Therefore, the presentment of an on-demand note or bill by the last holder, within a reasonable time after he receives the instrument, the liability of his immediate indorser as well as of all parties whose names appear on it are secured to him
Presentment by or to agent, representative of deceased, or assignee of insolvent.
Khergamvala: Negotiable Instruments Act
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75 Presentment by or to agent, representative of deceased, or assignee of insolvent.
Presentment for acceptance or payment may be made to the duly authorised agent of the drawee, maker or acceptor, as the case may be, or, where the drawee, maker or acceptor has died, to his legal representative, or, where he has been declared an insolvent, to his assignee.79
(1)PRESENTMENT TO WHOM
The marginal note to the section is not accurate, since the section only refers to persons to whom, and not by whom, presentment for acceptance or payment may be made. According to s 64, presentment for payment must be made to the maker of a note, acceptor of a bill, and the drawee of a cheque. Under s 75, presentment may be made to:
(i) the duly authorised agent of the drawee, maker or acceptor;
(ii) the representative of a deceased drawee, maker or acceptor;
(iii) the assignee, of an insolvent drawee, maker or acceptor.
79 See the Bills of Exchange Act 1882,s 45(3)and (7).
Excuse for delay in presentment for acceptance or payment.Khergamvala: Negotiable Instruments Act
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Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 5 > Of Presentment
75A Excuse for delay in presentment for acceptance or payment.
80 Delay in presentment81 [for acceptance or payment] is excused if the delay is caused by circumstances beyond the control of the holder, and not imputable to his default, misconduct or negligence. When the cause of delay ceases to operate, presentment must be made within a reasonable time.]82
The section was introduced by Amending Act of 1920 before which, there was no provision under the Act, providing for delay in presentment for payment, due to reasons beyond the control of holder. The section, in effect, reproduced of the BE Acts 46(1). In 1962, the section was amended to provide for delay in presentment for acceptance as well.
A bill drawn in England was made payable in Paris. By a French moratory law passed in consequence of war, the maturity of bills payable in Paris was postponed by three months. The delay in making presentment was excused.83
In Rajagopal v M Thiagarajan ,84 the delay caused due to a raid by the IT Department wherein the cheque was seized and the holder also lost his father in between it was held that the action of not presenting the cheque within time was excusable.
80 Inserted by s 2 of Act 25 of 1920.
81 Substituted by s 3, of Act 12 of 1921 for the words ‘for payment’.
82 See the Bills of Exchange Act 1882,s 46(1).
83 Rouquette v Overmann [1875] LRQB 525; Francke and Rasch In Re [1918] 1 Ch 470 .
When presentment unnecessary.Khergamvala: Negotiable Instruments Act
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76 When presentment unnecessary.
No presentment for payment is necessary, and the instrument is dishonoured at the due date for presentment, in any of the following cases:
(a) If the maker, drawee or acceptor intentionally prevents the presentment of the instrument, or,
if the instrument being payable at his place of bussines, he closes such place on a business day during the usual business hours, or
if the instrument being payable at some other specified place, neither he nor any person is authorised to pay it attends at such place during the usual business hours, or,
if the instrument not being payable at any specified place, he cannot after due search be found;
(b) as against any party sought to be charged therewith, if he has engaged to pay notwithstanding non-presentment;
(c) as against any party if, after maturity, with knowledge that the instrument has not been presented-
he makes a part payment on account of the amount due on the instrument,
or promises to pay the amount due thereon in whole or in part, or otherwise waives his right to take advantage of any default in presentment for payment;
(d) as against the drawer, if the drawer could not suffer damage from the want of such presentment.85
(1)DISPENSING WITH PRESENTMENT OR PAYMENT IN CERTAIN CIRCUMSTANCES
The present section specifies the circumstances in which presentment for payment is dispensed with, and thus contains exceptions to the rule stated in s 64. The following are cases in which presentment for payment is dispensed with under the section:
(i) Presentment Intentionally Prevented
If the maker, acceptor or drawee of a note, bill or cheque actively does something whereby he intentionally prevents presentment, or deprives the holder of the instrument and sits over it till after maturity, or misleads the holder so as to make it impossible for him to present, in all these cases, he intentionally prevents the holder from presenting the instrument and thereby excuses the holder from making the presentment.
(ii) Business Place Closed
Where an instrument is payable at the place of business of the maker, acceptor or drawee of a note, bill or cheque,
and he closes such place on a business day during the usual business hours, presentment for payment is not necessary, for, when a person intentionally closes his place of business, the presumption is that he wishes to avoid payment.
(iii) No Person at the Place of Payment
Where an instrument is payable at a specified place, and neither the maker, acceptor or drawee, nor any person authorised to pay it, is present at such place to pay or refuse payment during the usual business hours, presentment for payment is dispensed with.86 It can also be dispensed with in cases where there is no actual refusal, but the house, where the bill is payable is shut and no one is there.87
It is not sufficient to prove that the acceptor’s or maker’s was closed, but it is also necessary for the holder to go further and show that he had inquired after the acceptor or maker or attempted to find him.88
(iv) Payer Cannot be Found
If the instrument is not payable at a specified place, it is the duty of the holder to make inquiries and use due diligence to find the maker, acceptor or drawee for presenting him with the note, bill or cheque for payment. If after search, the maker, acceptor or drawee cannot be found, presentment for payment is not necessary. What constitutes due diligence is a question of fact.89
(v) Waiver, Express or Implied
Clauses (b) and (c) deal with cases in which presentment for payment is waived. Presentment of a note or bill at maturity is not necessary, if the party entitled to require presentment waives it, and promises to pay it notwithstanding non-presentment. A waiver of presentment may be embodied in the instrument itself by words such as ‘presentment waived’ or other words to that effect. A waiver of presentment may be express or implied, and may be made at any time before or after maturity.90 A waiver is implied when any act or conduct of the party is likely to produce in the mind of the holder the impression that the instrument need not be presented for payment. Only a party who is liable on the instrument can waive presentment.91 Clause (c) refers to waiver after maturity, and the cases referred to therein are instances of implied waiver. Clause (c) states that such implied waiver may be inferred when, after maturity of the instrument, any party:
(1) makes a party payment on account of the amount due thereon; or
(2) promises to pay the amount due thereon in whole or in part; or
(3) waives his right to take advantage of any default in presentment for payment.
Due presentment is insisted upon solely for the benefit of the maker, who is prepared to honour his obligation. The requirement can have no application to a maker, who repudiates his obligation. When a maker refuses to pay or puts forward certain defences even before presentment, presentment is not necessary and is deemed to have been waived by the maker.92
Where the maker of a promissory note (payable on demand) declines to accept the holder’s registered notice calling upon him to pay, there is an implied waiver of presentment of the note by the maker; the non-presentment of the note will not be an impediment to the application of the rule of dishonour and the consequences thereof. 93
(vi) When Drawer Could Not Suffer Damage
If want of presentment is not likely to cause the drawee any injury or loss, presentment for payment by the holder is excused. Where the drawer has no funds belonging to him in the hands of the drawer, and the drawer has no reason to expect that the bill would be paid if presented, this is a case in which no possible prejudice can result to the drawer, and presentment is dispensed with.94 However, if the drawer has reason to believe that on presentment the bill will be honoured, the holder is bound to present the bill in order to charge the drawer, even though the latter may not have provided the drawee with sufficient funds to meet it.95 The onus of showing that the drawer could not have suffered any damage is on the person, who wants to excuse himself for non-presentment.96 Clause (d) mainly deals with accommodation bills when they are drawn for the accommodation of the drawer.97
Page 3 of 3When presentment unnecessary.
Section 76(d) does not apply to the case of promissory notes, as the Act throughout makes a distinction between drawer and maker and does not use them as synonymous terms. 98
85 See the Bills of Exchange Act 1882,s 46(2)(c).
86 Howe v Bowes (1812) 16 East 112.
87 Hine v Alley (1833) 4 B & Ad 624.
88 Sands v Clarke (1849) 19 LJCP 84.
89 Hardy v Woodroffe (1818) 2 Stark 319.
90 Jhandu Lal v Wilayati Begum (1925) 47 All 572.
91 Punjab National Bank v Britannia Industries Ltd (2001) 2 BC 707 [LNIND 2001 CAL 89] (DB).
92 CM Sivaram v S Jayaram Mudaliar AIR 1966 Mad 297 [LNIND 1964 MAD 378] relied on in Mateshwar Dayal v Amar Singh AIR 1983 P&H 197 where the maker denied having executed the note.
93 K Venkatasubbayya v P Ranga Rao Tobacco Co AIR 1972 Andh Pra 72.
94 Wirth v Austin (1875) 10 LRCP 689.
95 Prideax v Callier (1817) 2 Stark 57.
96 Madho Ram v Durga Prasad (1911) 33 All 4; Gaya Din v Sri Ram (1917) 39 All 364.
Liability of banker for negligently dealing with bill presented for paymentKhergamvala: Negotiable Instruments Act
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77 Liability of banker for negligently dealing with bill presented for payment When a bill of exchange, accepted payable at a specified bank, has been duly presented there for payment and dishonoured, if the banker so negligently or improperly keeps, deals with or delivers back such bill as to cause loss to the holder, he must compensate the holder for such loss.
(1)BANKER RECEIVING BILL FOR PAYMENT
If a banker receives a bill of exchange for payment and dishonours it, it is his duty to keep the bill in his possession properly and with caution, so as not to cause any loss to the holder, and to return it to him, in the same state as it was, when it was left with him. If he keeps the bill and refuses improperly to deliver it, or negligently delivers it to the wrong person, or negligently deals with it so as to cause loss to the holder, he must compensate the holder for such loss. The effect of the section is to constitute the banker to whom presentment is made a bailee for the holder.
To whom payment should be madeKhergamvala: Negotiable Instruments Act
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78 To whom payment should be made
Subject to the provisions of section 82, clause (c), payment of the amount due on a promissory note, bill of exchange or cheque must, in order to discharge the maker or acceptor, be made to the holder of the instrument.1
(1)PAYMENT TO WHOM
The section deals with the question of discharge of a negotiable instrument by payment. Under the section, payment, in order to operate as a discharge, must be made to the person, who is the holder of the instrument, or to some person duly authorised by him. The words of the section are imperative and a payment, therefore, to any other person will not operate as a discharge, unless the holder elects to treat the payment as payment to him.2 Thus, a bank holding a bill for collection with a lien upon it, is a holder in due course and any payment made to the original indorser for collection in respect of the bill cannot be taken to discharge the liability of the acceptor.3 The maker of a promissory note cannot claim to be discharged of his liability to the holder by making payment to another person on whose behalf he had executed the note.4
Section 78 is subject to s 82(c), which provides that the maker, acceptor or indorser respectively of a negotiable instrument is discharged from liability thereon by payment to all parties thereto, if the instrument is payable to bearer or has been indorsed in blank and such maker, acceptor or indorser makes payment in due course of the amount due thereon. Thus, where a petition for winding up is filed by a holder of bill of exchange based upon dishonour by the company as acceptor and the bills were indorsed by the company in blank, it was held that the payment to drawer is discharged.5
A valid discharge can be given to the maker or to the acceptor of the instrument only as the holder thereof. There is no such thing as a benami promissory note taken in the name of one person yet really meant for another. Thus, where a hand note is executed in favour of the benamidar, it is not open to the promisor to assert that the holder of the note is not the beneficial owner. Such a plea failed in.6 Conversely if a suit is to be based upon the note it must be instituted by the holder and not by any person, who alleges that the original holder is his benamidar and that he is the beneficial owner.
There are conflicting judicial opinions on the question whether the beneficial owner of a negotiable instrument can bring a suit thereon in his own name, although he is not the holder thereof. It has been held that s 78 does not focus on the right of suit and hence, the real owner of the note can sue on the note, provided he is in a position to obtain a good discharge of the liability of the maker of the note. Thus, where a promissory note was executed in favour of a person, who was described as the owner and manager of a certain religious institution which later became a registered society, and a suit on the note was instituted in the name of the society through its secretary, but the payee of the promissory note was not made a party to the suit, it was held that it could not be said that the society was in a position to secure a discharge of the maker of the note from all liability under the note and hence, the suit as brought was not maintainable.7
In Rishab Kumar v Singhai Motilal ,8 it was held that a suit by an undisclosed principal to which the benamidar holder of the instrument is a party is maintainable and the claim may be decreed provided that the suit by the benamidar is otherwise competent and he gives a valid discharge.
It has also been held that the maker of a promissory note can obtain the discharge of his debt by making payment to the holder of the instrument alone and to no one else.9 It makes no difference whether the holder is a benamidar or a true owner.10
A suit by the true owner, who is not the holder, is not maintainable.11 As stated by the court, ‘the entire scheme of the Negotiable Instruments Act is to clothe the person named in the instrument with rights and it is not open to the parties to an instrument, and a fortiori to strangers, to show that a person named therein is not the principal but another, not so named’.
A promissory note was made payable to R, who was also the karta of a joint Hindu family. The court held that payment by the maker to R would discharge his liability since R was the holder. R could sue on the note; irrespective of whether he had advanced the money in his personal capacity or as the karta of the joint family.12
In repayment of a debt owed to a partnership, the debtor executed a promissory note in favour of a partner in his name. The court held that the payee could bring a suit on the note in his own name.13 The court relied on the decision in Subba Narayana v Ramaswami , 14 where it was held that in a suit on a negotiable instrument by the payee or indorsee thereof it cannot be pleaded that he is only a benamidar not entitled to payment. If the note is in favour of a partner of a firm in his capacity as a partner, he cannot sue thereon in his personal capacity.15
Possession of the bill is prima facie evidence of the identity of the holder, and where a holder presents a bill for payment to the acceptor, the latter must pay or refuse payment at his own peril. If it turns out that he has paid the wrong person, he may be called upon to pay a second time. If he refuses to pay, he runs the risk of an action being brought against him for dishonour. The maker of an instrument is entitled to pay to the holder, even though he may receive notice that the debt for which the instrument was given, had been assigned.16 However, where the note itself is assigned and the maker received notice of the assignment, he cannot make payment to the original holder.17
According to the Bills of Exchange Act 1882 (BE Act), if a negotiable instrument has been paid in good faith and without any notice of defect of title, the payment is valid and the instrument is discharged. If a negotiable instrument is made payable to bearer, or is indorsed in blank, so that title to it passes by mere delivery, a finder or a thief can receive payment and give a valid discharge. A payment in due course to that person discharges the maker or the acceptor. Though the definition of holder in s 8 of the Act is not wide enough in include a finder or a thief, and though under the present section, payment is to be made to a holder, practically the same result as under the BE Act is achieved under this Act also, as the section is to be read subject to s 82(c). Under s 82(c), payment in due course of an instrument payable to bearer or indorsed in blank discharges the maker, acceptor or indorser, and the definition of payment in due course under s 10 is wide enough to include payment to a thief or a finder of the instrument. On the other hand, if an instrument is specially indorsed and the instrument is forged, the maker or acceptor cannot discharge the bill by payment to the holder, however innocently he acts. A person claiming under a forged indorsement, though he may be a bona fide transferee for value, is not a holder, and payment to such person would not, except in cases coming under s 85, or 85A, operate as a discharge as against the true owner. For example:
(i) A bill is indorsed to John Brown or order. At maturity the holder is another person by the name John Brown, who indorses the bill and presents it for payment. The acceptor pays him. The bill is not discharged and the acceptor must pay again the real John Brown.
(ii) A bill indorsed in blank is stolen. The thief presents it to the acceptor for payment who pays it in due course. The bill is discharged.
(iii) A bill has been obtained by the indorsee by fraud. The indorsee presents it at maturity to the acceptor who pays it is due course. Under English law, the bill is discharged.18 The position may not be the same under Indian law since a person who obtains a bill or note by fraud, even if he is the indorsee, cannot be considered a holder under s 8.
(2)PAYMENT BY WHOM
Payment will not operate a discharge of an instrument, unless it is made by or on behalf of the maker or acceptor. The maker or acceptor would not be discharged by a payment made by the drawer or an indorser or by a stranger on his own account. If a stranger pays the amount of the instrument to the holder, he would be regarded as a mere purchaser of the instrument.19 However, a payment by the stranger on behalf of a party to the instrument produces the same legal effect, as if it were authorised by that party. The payment by the stranger, however, must be for and on account of the debt. If the drawer or an indorser pays the amount due under an instrument, the instrument is not discharged and may be further negotiated by the drawer or indorser paying it, though the acceptor is liable to the
Page 3 of 4To whom payment should be made
drawer or indorser so paying. However, in the case of an accommodation instrument, payment by the party accommodated would discharge the instrument.20
(3)TIME OF PAYMENT
If a negotiable instrument is paid by the acceptor at or after maturity, the bill is discharged, and no action can then be brought upon it. However, if the payment is made before maturity, the maker or acceptor can reissue it, since payment before maturity operates as a purchase of the instrument. The instrument, under such circumstances, is not discharged, and the acceptor will be liable to pay again on the instrument in the hands of a bona fide transferee for value.21 Where the maker or acceptor makes a payment before maturity, he must get possession of the instrument, in which case, he can re-issue the instrument so as to make himself and all subsequent parties liable.22 The re-issue may take place any number of times before the maturity of the instrument. However, the above observations regarding premature payment can only apply to instruments, which are payable at a determinable future time and not to those which are payable on demand, since they cannot be prematurely paid, being due the moment they are presented.
(4)MEDIUM OF PAYMENT
A negotiable instrument is always expressed to be payable in money, and a holder is entitled to insist upon being paid in money, ie, coins, currency or other legal tender, and cannot be compelled to accept payment in any other medium or form. However, if the holder agrees to accept satisfaction of his debt in any other mode, instead of receiving payment in money, payment by such mode is good. Thus, the holder may, if he so chooses, receive goods or a fresh bill or note in lieu of money, and satisfaction thus obtained will operate as a discharge.23
Payment is deemed to be complete as soon as the money is received by or on behalf of the holder. In the case of a payment by a banker, payment is complete as soon as the money is laid upon the counter to be taken by the receiver.24 If the whole of the amount of a bill is not paid, but a part only, such part payment does not discharge the whole debt. The right of the holder is reduced by the amount paid, and he may sue for the balance.
1 Bills of Exchange Act 1882,s 59(1).
2 Field v Carr (1828) 5 Bing 13.
3 Royal Bank of Scotland v Rahim (1925) ILR 49 Bom 270.
4 Joseph Zacharia v Joseph Kuriakose AIR 1992 Ker 103 [LNIND 1991 KER 433].
5 Tolani Shipping Co Ltd v Saw Pipes Ltd (1999) 97 Comp Cas 394.
6 AIR 1983 Raj 23.
7 Lachmichand v Madanlal AIR 1947 All 52.
8 (1948) ILR Nag 299.
9 Sangeshwar Mandal v Gita Devi AIR 1975 Pat 81.
10 Dal Chand v Satish Chandra AIR 1983 Raj 23; VK Velappu v MJ Varu (1987) 61 Comp Cas 368.
11 Sarajoo v MT Rampayari (1950) ILR Pat 688.
12 Rai Ranjeet Singh v Bind Bahadur Singh AIR 1973 All 547.
13 M Kasi Viswanadham v C Radhakrishna Rao AIR 1973 Andh Pra 99.
14 (1907) 30 Mad 88 (FB).
15 D Jayarama Reddy v Revathi Mica Co (1972) 1 Andh WR 7.
22 Morley v Culverwell (1840) 7 M&W 174; Attenborough v Mackenzie (1856) 25 LJ Ex 244.
23 Sibree v Tipp (1846) 15 M&W 23.
24 Chambers v Miller (1862) 32 LJCP 30.
End of Document
Interest when rate specifiedKhergamvala: Negotiable Instruments Act
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79 Interest when rate specified
When interest at a specified rate is expressly made payable on a promissory note or bill of exchange, interest shall be calculated at the rate specified, on the amount of the principal money due thereon, from the date of the instrument, until tender or realisation of such amount, or until such date after the institution of a suit to recover such amount as the court directs.25
(1)SPECIFIED RATE OF INTEREST
Section 79 lays down that when interest at a specified rate is expressly made payable, then interest shall be calculated at the rate of specified.26 A stipulation for payment of interest may be incorporated in a bill or note in any form. The section deals with the rate of interest and the time from which it begins to run, and the time, up to which it is to be calculated. If the rate of interest is stated in the instrument, no evidence is admissible to pay interest at a different rate.27
(2)USURIOUS LOANS ACT 1918
Where a bill stated inclusive of interest at nil, a zero rate was deemed to have been specified. It was not a case falling under s 80, where no interest rate is specified.28 As to the rate of interest, the terms of the section are imperative, and prior to the passing of the Usurious Loans Act 1918, where the rate of interest was specified in the instrument, however high it might have been, the court had no discretion to alter it, but was bound to grant interest at that rate.29 The court had no power to refuse to allow interest at the rate specified in the instrument, unless there were circumstances that excluded the contract. So long as the parties dealt fairly and openly with one another, they were at liberty to fix any rate of interest they pleased and the court was bound to see that the contract was performed. However, now s 79 has to be read subject to the Usurious Loans Act 1918. Under that Act, the court has power to grant relief against excessive interest. However, in Harish Chander v Ganga Singh 30 and Utsav Lal Gupta v Mohan Bros , 31 the court felt that the provisions of the section were mandatory.
The object of the Usurious Loans Act 1918 is to prevent courts of law from being used for the purpose of enforcing harsh and unconscionable loans carrying interest at usurious rates. When a suit is brought by a creditor:
(a) for a recovery of a loan; or
(b) for the enforcement of any security or agreement in respect of a loan and in such a suit the court has reason to believe:
(i) that the interest is excessive; and
(ii) that the transaction was as between the parties thereto, substantially unfair, then the court, acting under the Usurious Loans Act 1918, may re-open the transaction, and relieve the debtor of liability in respect of excessive interest, or re-open any account already taken between them, and order the creditor to refund any sum paid to him in excess of what was reasonably due, or set aside or alter any security or agreement in respect of the loan.
However, where the agreement purporting to close previous dealings has been entered into by the parties or any persons, from whom they claim, at a date more than six years from the date of the transaction which is the subject of the suit, it cannot be re-opened by the court. In the same manner, a court acting under this Act, has no power to do anything which affects any decree of a court.
The court’s powers to grant relief under this Act do not in any way prejudice the rights of any transferee for value, who satisfies the courts that the transfer to him was made bona fide and that at the time of such transfer, he had no notice of any fact which would have entitled the debtor as against the original lender to relief under this Act.
The Usurious Loans Act 1918 does not apply to a debtor’s suit. The court can grant relief only when the suit is brought by a creditor. The reliefs that the court can grant him against excessive interest are:
(a) where undue influence has been exercised by the creditor and the transaction amounts to an unconscionable bargain; and
(b) where the stipulation for payment of interest is by way of penalty.
Section 21A of the Banking Regulation Act 1949, introduced in 1983, states:
21A. Rate of interest charged by banking companies not to be subject to scrutiny by courts.- Notwithstanding anything contained in the Usurious Loans Act 1918 (X of 1918), or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be re-opened by any court on the ground that the rate of interest charged by the company in respect of such transaction is excessive.
It would, therefore, appear that this provision would also apply to promissory notes executed by debtors in favour of banking companies and in which, as is normal, the rate of interest is specified.
(3)TIME FROM AND UP TO WHICH INTEREST IS CALCULATED
The interest, when the rate is specified in the instrument, is to be calculated from the date of instrument up to the time of tender or realisation of the amount of the principal money. When the instrument is undated, oral evidence may be given to show the date on which the instrument came into existence. If the holder files a suit to recover the amount of the principal money and interest, interest shall be calculated from the date of the instrument till a date to be fixed by the court. The section gives the court discretion as to the time up to which it shall allow interest.
Different views have been expressed by courts on whether the section overrides s 34(1)of the Code of Civil Procedure 1908 which states:
34. Interest.- Where and in so far as a decree is for the payment of money, the Court may, in the decree, order interest at such rate as the Court deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate not exceeding six per cent per annum as the court deems reasonable on such principal sum from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit:
Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six per cent per annum, but shall not exceed the contractual rate of interest or, where there is no contractual rate, the rate at which moneys are lent or advanced by nationalised banks in relation to commercial transactions.32
In Utsav Lal Gupta v Mohan Bros ,33 it was held that the discretion given to the courts under s 34 of the Code of Civil Procedure 1908, (to order payment of interest at a rate not exceeding six percent per annum on the principal amount adjudged from the date of the suit to the date of the decree) is not available in respect of a loan advanced against a promissory note. In such a case the interest pendente lite is governed by s 79 of this Act and the court cannot allow any rate, other than that specified in the note, even though it may be higher than six percent per annum.34
Dissenting from the decision in the Utsav Lal Gupta case, and agreeing with the ratio in Piara Lal Khanna v S Herchand Singh Jaiji ,35 the Andhra Pradesh High Court held in Union Bank of India v P Krishnaiah , 36 that s 34(1)of the Code of Civil Procedure 1908 prevailed over s 79 of the Act and applied to claims on negotiable instruments as well. A harmonious construction of the two sections would in the court’s view, give discretion to courts to fix the rate, not exceeding the contracted rate, from the date of institution of the suit pendente lite. In that
Page 3 of 4Interest when rate specified
case, the high court did not interfere with a rate of 12 percent per annum fixed by the trial court although the promissory note specified a rate of 16.5 percent per annum.
In Deo Nandan v Ram Prasad , 37 a Full Bench of the Patna High Court had held that s 79 of the Act is not absolute and is subject to ss 7 and 8 of the Moneylenders Act. A Division Bench of the J&;K High Court held in Jammu & Kashmir Bank Ltd v Bashir Ahmed Quazi ,38 that the grant or refusal to grant interest pendente lite is governed by s 34 of the Civil Procedure Code 1908 while interest payable up to the date of the suit is outside the scope of that section. Following this ruling it was held by another division Bench of the court in United Commercial Bank v Hans Raj Saraf ,39 that the court was under no obligation to award the contractual rate after institution of the suit in all cases. In that case a rate of four percent per annum fixed by a single judge of the court was considered appropriate in the circumstances of the case.
In Sukhchain Singh v Punjab & Sind Bank ,40 it was held that the court had discretion to allow interest up to six percent per annum from the date of suit till realisation although the contracted rate was 12 percent per annum.
In PK Thankachan v Catholic Syrian Bank ,41 it has been held that as far as pendente lite interest and post decree interest is concerned the court has discretion with respect to the awarding the same. However this discretion has to be judiciously exercised and when a particular amount is awarded, reason for that has to be given, so that one comes to know as to which were those principles which guided the discretion exercised by the court. In the said case, no reason was assigned by the tribunal as to what were those circumstances or situations which guided the discretion of the court to come to the conclusion that pendente lite interest was to be charged at 14 percent per annum whereas the post decree interest had to be at 12 percent per annum.
The appellate tribunal further held that after going through the records, it can certainly be stated that the appellants had intention to repay the money and were displaying that intention by showing colour of their money to the bank. They, therefore, cannot be branded as outright defaulters having no intention to repay the money and if this was the situation, then some leniency had to be shown to the appellants by reducing the pendente lite and post decree rate of interest. Taking an overall view of the matter, the court held that the ends of justice would be met if the appellants were ordered to pay pendente lite and post decree interest uniformly at the rate of 10 percent per annum.
25 Bills of Exchange Act 1882,ss 9(3)and57.
26 Rambilas Dinaram Shivlal v Shantadevi Sitaram Agrawal (2004) II BC 285 (Bom).
27 Gopal v Achut AIR 1941 Nag 271.
28 Canara Bank v Sanjeev Enterprises AIR 1988 Del 372 [LNIND 1988 DEL 94].
29 Govindjee v Ko Poyce 4 Bur LT 203.
30 AIR 1974 P&H 156.
31 AIR 1975 Raj 236 [LNIND 1975 RAJ 40].
32 Those connected with the industry trade or business of the party incurring the liability.
33 AIR 1975 Raj 236 [LNIND 1975 RAJ 40].
34 Mt Bhagwati v Atma Singh AIR 1934 Lah 32 dissenting from the decision in Ram Singh Narain Singh v F Dewan Chand Nand Kishore AIR 1960 Punj 287 and Piara Lal Khanna v S Herchand Singh Jaiji AIR 1961 Punj 442.
35 AIR 1961 Punj 442.
36 AIR 1989 Andh Pra 211.
37 AIR 1944 Pat 303.
38 (1987) Srinagar LJ 249.
39 AIR 1989 J&K 28.
40 (1990) 68 Comp Cas 491, following Ram Singh Narain Singh v F Dewan Chand Nand Kishore AIR 1960 Punj 287 and Piara Lal Khanna v S Herchand Singh Jaiji AIR 1961 Punj 442
Interest when no rate specifiedKhergamvala: Negotiable Instruments Act
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80 Interest when no rate specified
When no rate of interest is specified in the instrument, interest on the amount due thereon shall,42 [notwithstanding any agreement relating to interest between any parties to the instrument], be calculated at the rate of43 [eighteen per centum] per annum, from the date at which the same ought to have been paid by the party charged, until tender or realisation of the amount due thereon, or until such date after the institution of a suit to recover such amount as the Court directs.
Explanation.-
When the party charged is the indorser of an instrument dishonoured by non-payment, he is liable to pay interest only from the time that he receives notices of the dishonour.44
(1)EFFECT OF INTEREST WHEN NO RATE IS SPECIFIED
The section governs cases in which interest is mentioned in the instrument but no rate of interest is specified,45 as well as cases in which interest is not mentioned.46 The section did not abrogate the mercantile usage that prevailed before the Act, though the rate was limited to six percent per annum.
Section 79 lays down that when interest at a specified rate is expressly made payable, then interest shall be calculated at the rate of specified. But where interest is not specified, s 79 is not attracted and it is s 80 which deals with such cases. In such circumstances, the rate shall be calculated at the rate of six47 percent per annum from the date at which the sum ought to have paid by the party charged till realisation of the amount due or until such date after the institution of a suit to recover such amount as the court directs.48
By an amendment through the Banking, Public Financial Institutions and Negotiable Instruments (Amendment) Act 1988, the rate of interest specified in the section was raised from six percent to 18 percent per annum. The amendment was intended to discourage the withholding of payments on negotiable instruments on due dates. Where the transaction was effected before 30 December 1988, when the amended rate was brought into effect, the previous rate applies.49
Where a bill or note is silent as to interest, the silence is, under the section, tantamount to an agreement to pay interest at the rate prescribed in the section. Such interest is payable only from the date of maturity till actual payment and not for any earlier period.50 If an instrument is silent as to interest, no oral contemporaneous agreement will be admissible in evidence to prove that the parties agreed upon a different rate of interest, other than the rate provided for by the section. Where no rate of interest is specified in the instrument then, the section applies and any subsequent agreement about the rate of interest cannot be enforced.51
In a suit on a negotiable instrument, under the summary procedure, the court has power to award the statutory rate of interest, when there is no term in the instrument for the payment of interest. The operation of the section is not excluded by O XXXVII, r 2 of the Code of Civil Procedure 1908.52 Where a bill of exchange expressed the amount payable as Rs 20,000 including interest at nil, it was held that no interest was payable from the due date of the suit; interest at six percent per annum, was payable thereafter.53 The liability on a promissory note payable on demand arises from the date of the note and not from the date on which a demand is made for payment. The interest on the amount, therefore, runs from the date of the demand promissory note.54
As per s 80, interest is to be charged not from the date of transaction but from the date when the amount became due.55 The explanation of the section further lays down that the indorser of the instrument dishonoured by non-payment is liable to pay interest only from time when he receives notice of the dishonour.56
Where, after making a demand, a suit is brought against the maker of a promissory note payable on demand, but the note is silent as to interest and specifies no place for payment, interest at the specified rate is recoverable under the section on the amount of the note from its date.57 However, in Anantacharan v Daitari ,58 the court held that where no demand is made prior to the institution of the suit the date of service of the summons on the defendant will be deemed to be the date of demand and interest will be payable from that date. In Syndicate Bank v NC Kalyani Raghavan ,59 where a promissory note contained a blank as to the rate of interest it was held that interest at the rate of six percent per annum was payable not from the date of the note (which presumably was payable on demand) but from the date of institution of the suit. It was also held that the maker’s acknowledgement of interest charged by the bank at 18 percent per annum did not cast a liability on the maker to pay interest at that rate.
A plaintiff brought a suit upon six hundis drawn by the defendant upon himself in favour of the plaintiff. The hundis were silent as to interest but there was in accordance with the custom prevailing in the district, a collateral agreement embodied in written documents that the hundis should bear interest at a rate equivalent to 30 percent per annum. The defendant contended that, notwithstanding the agreement of the parties, the plaintiff’s right to interest was restricted to six percent by the section. It was held that the section presented no bar to the recovery of the stipulated amount of interest. The section does not purport to deprive those dealing with such instruments of the freedom of contract possessed by other contracting parties. It purports to confer a right to interest, not to take away such a right otherwise existing. When a plaintiff has to rely upon the section as the ground for his claim to interest, no doubt, the terms of the section must be followed but to read the section as depriving him of a contractual right of interest would be to read into it something which it does not say.60 However, it is submitted that this decision may not hold good now.
In CB Joseph v MP Chandran ,61 the court held that s 80 excludes collateral agreements on interest. It was held in Banque Indosuez v Pawan &; Co ,62 that the rate of 18 percent per annum would apply even though the hundi in question had been drawn and fell due for payment prior to the 1988 amendment. In the former case, it had been held that interest of six percent per annum was only payable upto 31 March 1989, and at 18 percent per annum from 1 April 1989, on which date the amendment to s 80 came into effect. In I Arumugam v CN Govindaraj Shetty ,63 it was held that the 1988 amendment did not apply to transactions effected prior to 30 December 1988, and hence the rate of six percent per annum would be payable from the date the amount ought to have been paid until its tender or realisation in such transaction. In Mangubhai Mansukhram Pandya v Pranjivan Tribhovandas Purohit ,64 the promissory notes in question, executed in 1969 and on which a suit was filed in 1972 did not specify the rate of interest. The plaintiff claimed 15 percent per annum, but the court allowed nine percent per annum from the date of suit till realisation.
42 Substituted by s 2, Act 30 of 1926, for the words ‘except in cases provided for by the Code of Civil Procedure 1908,s 532.
43 Substituted by Act 66 of 1988, s 2 for ‘six per centum’.
47 After the amendment of 1988, it is 18 percent. See also UICFINANCE Pvt Ltd v Carews Pharmaceuticals Pvt Ltd and anor (2005) 2 Bank CLR 679 (Cal).
48 Rambilas Dinaram Shivlal v Shantadevi Sitaram Agrawal (2004) II BC 285 (Bom); see also PKTHANKACHAN &; ors v Catholic Syrian Bank (2005) II BC 165 (DRT/DRAT) (DRAT Chennai); UIC Finance Pvt Ltd v Carews Pharmaceuticals Pvt Ltd &; anr (2004) IV BC 471 (Cal).
49 KRAJAGOPAL v M Thiagarajan (1999) 95 Comp Cas 286.
Delivery of instrument on payment or indemnity in case of lossKhergamvala: Negotiable Instruments Act
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81 Delivery of instrument on payment or indemnity in case of loss
65[(1)] Any person liable to pay, and called upon by the holder thereof to pay, the amount due on a promissory note, bill of exchange or cheque is before payment entitled to have it shown, and is on payment entitled to have it delivered up, to him, or, if the instrument is lost or cannot be produced, to be indemnified against any further claim thereon against him.
65[(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 payment67]
(1)PAYER TO BE SHOWN THE INSTRUMENTThe definition of cheque under s 6 of the Act has been broadened to include the electronic image of a truncated cheque and a cheque in the electronic form. Section 64 has also been amended to provide for rules as to presentment of a truncated cheque. Despite the amendment recognising electronic image of a truncated cheque, provision has been made for the drawee bank to call for the truncated cheque in original, if it is not satisfied about the instrument. The present section has also been amended to provide that even after the payment on an electronic image of a truncated cheque, the banker who received the payment shall be entitled to retain the truncated cheque. It has further been provided that 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.
When the holder of a negotiable instrument presents it for payment, he must exhibit it to the person from whom he demands payment, and when the instrument has been paid, the holder must deliver it to the party paying him. This provision is added for the protection of the payer, for: (i) the production of the instrument is a means of identifying the person paid, and (ii) the paid instrument, when delivered to the payer is kept by him as a voucher for his paying the amount.68
The section further provides that any person liable to pay and paying the amount on an instrument which is lost or cannot be produced shall be indemnified against any further claim against him on the instrument. Under O VII, r 16 of the Code of Civil Procedure 1908, a suit may be maintained on a lost negotiable instrument, and the court may grant relief upon indemnity being given by the plaintiff to the satisfaction of the court.
Insistence of presentment of a promissory note is a privilege or an option given to the maker. He can decline to honour his obligation unless the note is presented. The maker may, however, waive this option and such waiver may be express or implied.69
When the maker of a note makes payment thereof, he should get the note back, preferably with an indorsement thereon of the payment by the recipient; if the note is not shown or is not found, he should at least ask for an indemnity from the recipient against any later claim on the note against the maker. If payment is made without any such safeguard, the maker may be held liable on the note by a subsequent holder in due course, despite the payment.70
In a suit on a promissory note against the maker, his defence that he had discharged his liability by payment could not succeed since there was no indorsement of the payment on the note, which was produced by the plaintiff in evidence.71
Discharge from liabilityKhergamvala: Negotiable Instruments Act
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82 Discharge from liability
The maker, acceptor or indorser respectively of a negotiable instrument is discharged from liability thereon-
(a) By cancellation.- to a holder thereof who cancels such acceptor’s or indorser’s name with intent to discharge him, and to all parties claiming under such holder;
(b) By release.- to holder thereof who otherwise discharges such maker, acceptor or indorser, and to all parties deriving title under such holder after notice of such discharge;
(c) By payment.- to all parties thereto, if the instrument is payable to bearer, or has been indorsed in blank, and such maker, acceptor or indorser makes payment in due course of the amount due thereon.1
(1)DISCHARGEWith the exception of s 90, this chapter deals with discharge of parties from liability on a bill, note or cheque. The term ‘discharge’ in relation to negotiable instruments is used in two senses. The discharge of an instrument is to be distinguished from the discharge of one or more of the parties from liability thereon. So long as a negotiable instrument is in existence and is valid, there are certain rights of action upon it, but when these rights have been extinguished, the instrument is discharged. The instrument ceases to be negotiable and even a holder in due course cannot then acquire any right of action upon it. An instrument is said to be discharged only when the party who is ultimately liable thereon is discharged from liability. The discharge of one or more of the parties to a bill or note does not discharge the instrument itself. Thus, in the case of an ordinary note or bill, the discharge of the drawer or indorser would not discharge the instrument, but the discharge of the maker or acceptor thereon will have such an effect. The most obvious and general method of discharging or extinguishing the right of action upon a negotiable instrument of discharging or extinguishing the right of action upon a negotiable instrument is payment by the acceptor or maker according to the tenor of the instrument. The section mentions the following three modes of discharge from liability.
(i) Cancellation
When the holder of a negotiable instrument or his agent cancels the name of any party on the instrument with intent to discharge him, such party and all subsequent parties, who have a right to recourse against the party whose name is cancelled, are discharged from liability to the holder.2 The subsequent parties are in the position of sureties for the prior party whose name is cancelled and a discharge of the principal debtor discharges the sureties. Thus, the cancellation of the drawer’s name would discharge him and all the indorsers; the cancellation of the indorser’s name would discharge him and all the indorsers subsequent to him; and the cancellation of the acceptor’s name would discharge him and all the parties to the instrument. Though cl (a) of the section makes no mention of the cancellation of the maker’s name, it is clear that as he is the party primarily liable on the promissory note, the cancellation of his name would discharge him and all parties subsequent to him, ie, it would operate as a discharge of the instrument. A cancellation to be effectual must be intentional and one made unintentionally or by mistake or without authority of the holder will be inoperative.3Section 83(2) of BE Act requires that the cancellation should be apparent on the instrument, and though the present section does not expressly provide for it, it seems that the same condition would also be required in India. The proper and safe mode of cancellation is to draw a line through the name so as to leave it legible.4 Though, by the cancellation of his name or of the name of a prior party a person may be discharged from liability on the instrument, he may nevertheless be liable in respect of a collateral security given in respect of the debt.5
Though cl (b) confines its operation to discharge by release only, it is intended to apply to all cases in which the maker, acceptor, or indorser is discharged otherwise than by cancellation. This would include a discharge by agreement of the parties and would apply to cases of release, renunciation, and accord and satisfaction. Such modes of discharge are provided for by s 63 of the Indian Contract Act 1872. The case of discharge by accord and satisfaction has been considered in s 78 of that Act.
(iii) Payment
Section 82 (c) provides that the maker, acceptor or endorser respectively of a negotiable instrument is discharged from liability thereon, by payment to all parties thereto, if the instrument is payable to bearer or has been endorsed in blank and such maker, acceptor or endorser makes payment in due course of the amount due thereon.6
When the instrument is payable to bearer, whether originally or by an indorsement in blank, the instrument is discharged by payment in due course.
1 Bills of Exchange Act 1882,ss 59, 62 and 63.
2 Sweeting v Halse (1829) 9 B&C 365 p 569.
3 Bank of Scotland v Dominion Bank [1891] AC 592 ; Prince v Oriental Bank Corpn [1878] 3 App Cas 325 (PC).
4 Wilkinson v Johnson (1824) 7 CBNS 82.
5 Yglesais v Mercantile Bank of River Plate (1877) 3 CPD 60.
6 Tolani Shipping Co Ltd v Saw Pipes Ltd (1999) 97 Comp Cas 394.
Discharge by allowing drawee more than forty-eight hours to accept.Khergamvala: Negotiable Instruments Act
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83. Discharge by allowing drawee more than forty-eight hours to accept. If the holder of a bill of exchange allows the drawee more than7 [forty-eight] hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder.8
(1)DISCHARGE BY ALLOWING DRAWEE MORE THAN FORTY-EIGHT HOURS
By s 63, the drawee of a bill of exchange is entitled to retain it for 48 hours to consider whether he will accept it or not. At the expiration of that time, the holder should demand re-delivery of the bill, irrespective of whether it is accepted or unaccepted.9 If the drawee does not return the bill duly accepted, the holder must treat the instrument as dishonoured, and should give notice of dishonour to the drawer and all prior indorsers. Instead of doing so, if he allows the drawee more time for deliberation, under the section, all parties will be discharged from liability to the holder, unless they consent to the allowance of more than 48 hours. The expression ‘all prior parties’ in the section includes the drawer.
7 Substituted by s 2 of Act 12 of 1921 for ‘twenty-four’.
8 See Bills of Exchange Act 1882,s 42.
9 Bank of Van Diemen’s Land v Victoria Bank (1871) LR 3 PC 526, p 542.
When cheque not duly presented and drawer damaged thereby.Khergamvala: Negotiable Instruments Act
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84. When cheque not duly presented and drawer damaged thereby.
10[(1) Where a cheque is not presented for payment within a reasonable time of its issue, and the drawer or person on whose account it is drawn had the right, at the time when presentment ought to have been made, as between himself and the banker, to have the cheque paid and suffers actual damage through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person is a creditor of the banker to a larger amount than he would have been if such cheque had been paid.
(2) In determining what is a reasonable time, regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the particular case.
(3) The holder of the cheque as to which such drawer or person is so discharged shall be a creditor, in lieu of such drawer or person, of such banker to the extent of such discharge and entitled to recover the amount from him.]
Illustrations
(a) A draws a cheque for Rs 1,000 and when the cheque ought to be presented, has funds at the bank to meet it. The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove against the bank for the amount of the cheque.
(b) A draws a cheque at Ambala on a bank in Calcutta. The bank fails before the cheque could be presented in ordinary course. A is not discharged, for he has not suffered actual damage through any delay in presenting the cheque.11
(1)DISCHARGE BY DELAY IN PRESENTMENT OF CHEQUESThe section must be read with s 72, which deals with presentment of cheques. To claim the right of resorting to the drawer in case a cheque is dishonoured, it is necessary that the cheque should be presented to the drawee-bank within a reasonable time. Cheques are generally intended for immediate payment and not for general circulation. Under the section, if a holder does not present a cheque within a reasonable time after its issue, and the bank fails and the drawer suffers actual damage through the delay, he is discharged from liability to the extent of the damage he has suffered and no more, that is to say, to the extent to which the drawer is a creditor of such banker to a larger amount than he would have been if such cheque had been paid. Thus, if the drawer had the full amount of the cheque deposited with his bank at the time of its failure, he will be discharged in full. However, if the amount of the cheque was in excess of the sum the drawer had with his bank at the date of insolvency of the bank, he suffers damage only in that sum and is discharged to that extent.
The holder of such a cheque, however, shall be a creditor, in lieu of the drawer, of such banker to the extent of such discharge, and is entitled to recover the amount from him by proving against the insolvent bank. If, however, the drawer had no funds to his credit with his banker, but was authorised to overdraw, the drawer would still be discharged, but the holder cannot prove against the banker’s estate.
Bank deposits are now insured, up to a specified limit in individual cases, by the Deposit Insurance &; Credit Guarantee Corporation. In calculating the damage suffered by the drawer as mentioned in the section, any insurance money receivable by him from the Corporation may have to be taken into account.
The section applies only to the drawer of a cheque, and not to an indorser, the case of an indorser being regulated by s 73. To charge an indorser, the cheque must be presented within a reasonable time after delivery of it by him. In default of such presentment, the indorser would be discharged.
Page 2 of 2When cheque not duly presented and drawer damaged thereby.
The provision in s 84(1) is limited in its application to cheques. If the legislature intended to make it applicable to every negotiable instrument or to drafts drawn by one branch of a bank on another branch thereof, there was nothing easier for the legislature than to use appropriate expressions.12
As to reasonable time under cl (2) it has been held in Rajagopal v M Thiagarajan ,13 that reasonable time is six months. However where there was a raid by the IT Department wherein the cheque was seized and there was also some personal loss, it was held that in light of s 75A, the action of not presenting the cheque within time was excusable.
10 Substituted by Act 6 of 1897, s 3 for the original s 84.
11 See Bills of Exchange Act 1882,s 74.
12 Haji Sheikh Hasanoo v Natesa Mudaliar &; Co (1959) 61 Bom LR 1127.
13 (1999) 95 Comp Cas 286.
End of Document
Cheque payable to order.Khergamvala: Negotiable Instruments Act
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85. Cheque payable to order.
14[(1)] Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.
(2) [Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and notwithstanding that any such indorsement purports to restrict or exclude further negotiation.]15
(1)PROTECTION OF BANKS PAYING CHEQUES
The drawee of a cheque is always a banker. By virtue of the section, banks are placed in a privileged position as regards payment of cheques. The section provides that, if a cheque payable to order purports to be indorsed by or on behalf of the payee, and the bank on which it is drawn pays it in due course, the bank is discharged, and it can debit its customer with the amount so paid, though the indorsement of the payee might turn out to be a forgery, or though the indorsement might have been placed on the cheque by the payee’s agent without his authority. The purpose of the section is to free banks from liability in respect of either the genuineness or the validity of the indorsement purporting to be that of the payee or his authorised agent. In view of s 16(2), the section would also apply to an indorsement other than the payee’s.16 The section does not apply to the payment of customers’ bills of exchange and promissory notes.
To claim protection under the section, the banker has to prove that the payment was a payment in due course, ie, in accordance with s 10 of the Act. Thus, good faith and absence of negligence have to be proved.
For example:
(i) A cheque is drawn payable to B or order. It is stolen, and B’s indorsement is forged. The drawee-bank pays the cheque in due course. The bank is discharged from liability and can debit the drawer’s account with the amount of the cheque.
(ii) A cheque is drawn payable to B or order, and delivered to B in payment of a debt. B’s agent, without having any authority to indorse, indorses the cheque per pro for B and obtains payment of the money and misappropriates it. The banker is discharged by payment in due course.
Although by virtue of the section, the drawee-bank is relieved of its responsibility of verifying the genuineness or validity of indorsements on order cheques presented for payment, the bank has to verify the regularity of the indorsements.
A paying bank may rely on the collecting bank’s confirmation of the indorsements appearing on a cheque.17 When an unindorsed order cheque is presented across the counter for payment, it is customary for the banker to ask the presenter to sign on the back of the cheque. It is doubtful if the presenter’s signature could be considered as an indorsement.
If a cheque shows an irregularity on the face of it, the bank should refer it to the customer before paying it; as where the cheque was postdated, a date subsequent to the date of the countermand and a wrong number was specified in the countermand.18 The bank has to see whether any alterations in the cheque have been properly authenticated. When an alteration on a cheque is not authenticated by all the drawers but only by one or some of them, the bank will be paying the cheque at its own risk. Under s 89, protection is afforded to the bank paying a cheque where the alteration is not apparent.19
For the purchase price of certain properties bought from a company in liquidation, a cheque was issued by the purchaser in favour of the official liquidator. The drawee-bank paid the cheque to the official liquidator across the counter and he misappropriated the money. In a suit by the new liquidator against the bank for the recovery of the amount of the cheque, it was held that the bank was liable. The bank had committed a breach of a statutory duty and was negligent in paying to the liquidator direct over the counter. The bank must be deemed to have known that the liquidator ought to have a bank account and that he could not collect a cheque except through that account. The negligent payment by the bank had facilitated his misappropriation. The payment was not, therefore, made in due course within the meaning of s 10 and the bank was not entitled to claim the protection under s 85.20
The manager of a joint stock company, using the company’s rubber seals, indorsed a cheque made payable to the company, and presented it to the drawee-bank over its counter for payment. The cheque was paid after a customer of the bank identified him. Subsequently, the company sued the bank for recovery of the amount, on the grounds that the manager had fraudulently encashed the cheque and that the bank was negligent in not making inquiries about his authority to receive payment. The court held that the bank was not negligent and that it was protected by s 85(1).21 It may, however, be added that it is unusual for a cheque in favour of a company to be presented across the drawee-bank’s counter. Such cheques are generally credited to the company’s bank account.
Sub-section (2) of the section was added by the Negotiable Instruments (Amendment) Act 17 of 1934 and reads as follows:
&to provide that cheques originally drawn to bearer shall not lose their bearer character notwithstanding any indorsement thereon whether in full or in blank and whether such indorsement purports to restrict or exclude further negotiation or not. The necessity for the amendment had arisen out of ruling of the Bombay High Court that under of the Negotiable Instruments Act section 50 and the Explanation thereto, a bearer bill can legally be changed to an order bill by indorsement. This makes it incumbent on banks to examine all indorsements upon bearer cheques and thus considerably increases their work and responsibility without any compensatory advantage to their constituents or to the general public.22
The amendment aimed at removing this difficulty of the banks. The ruling of the Bombay High Court referred to above was in Forbes, Campbell & Co v Official Assignee of Bombay .23
When a payment is made under the circumstances mentioned in the section the drawee is discharged but the section does not say that such a payment would discharge the drawer from his liability on the cheque to the true owner. The drawer of a cheque is discharged if the drawee-bank makes payment in due course to the de facto holder as authorised by the section, for, if the true owner claims payment and the bank refuses on the ground that the cheque had already been paid, such refusal does not constitute a dishonour upon which the drawer’s liability under s 30 can be founded. The drawee being discharged by payment in due course, the drawer is also discharged.24
14 Section 85 re-numbered as sub-s (1) and sub-s (2) added by s 2, Act 17 of 1934.
15 See Bills of Exchange Act 1882,s 60; and the Cheques Act 1957,s 1.
16 Jagjiwandas v The Nagar Central Bank Ltd (1926) ILR 50 Bom 118.
17 Indian Overseas Bank v Reliable Hire Purchase Co Pvt Ltd (1976) 46 Comp Cas 403.
18 Westminster Bank Ltd v Hilton (1927) 136 LT 315 (HL).
19 Tanjore Permanent Bank Ltd v Rangachari AIR 1959 Mad 119 [LNIND 1958 MAD 21].
20 Madras Provincial Co-operative Bank Ltd v South Indian Match Factory Ltd (1945) ILR Mad 328.
21 Bhutoria Trading Co Ltd v Allahabad Bank AIR 1977 Cal 363 [LNIND 1976 CAL 266].
22 Statement of Objects and Reasons.
23 (1925) 27 Bom LR 34.
24 Sulleman v New Oriental Bank Corpn Ltd (1891) 15 Bom 267.
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85A 25 Drafts drawn by one branch of a bank on another payable to order. Where any draft, that is, an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand, purports to be indorsed by or behalf of the payee, the bank is discharged by payment in due course.]26
(1)SCOPE AND OBJECT
The object to the section, which was added by Act 25 of 1930, is to afford protection to bankers in India against forged or unauthorised indorsements on demand drafts, drawn by one branch of a bank upon another branch of the same bank.
Branches of a bank are considered as distinct entities for many purposes. Where one branch of a bank debits the account of its customer in a valid manner, and transfers the money to another branch of the bank or its head office, the transaction does not amount to merely a transfer of the bank’s own money from one branch of the bank to another branch, but involves the receipt of the money by the transferee bank, and hence it becomes a collecting bank.27 It was held in Haji Sheikh Hasanoo v Natesa Mudaliar& Co 28 that a draft drawn by one branch of a bank upon another branch thereof is not a cheque not being a negotiable instrument as it is not an instrument under which there is a remedy against the drawer since the drawer and the drawee are the same person. A better view, however, seems to be that a bank draft is a negotiable instrument.29 In Central Bank of India Ltd v Gopinathan Nair ,30 the bank paid a demand draft on which the payee’s indorsement had been forged. It was held by Mathew J that the form of the indorsement should have put the drawee branch on inquiry and as no inquiry was made the branch was negligent and was not protected under the section. The draft was drawn in favour of a sole proprietary concern. The concern had maintained an account with the drawee branch for a long time and the branch was familiar with the form in which the proprietary signed cheques and drafts on behalf of the concern. The forged indorsement was not in that form and contrary to the usual practice of the proprietor the draft appeared to be indorsed to a third party and collected by another bank for that party’s account. This decision was overruled by a Division Bench of the Kerala High Court which held that the paying bank was not negligent. The bench observed that, in determining whether a paying bank was negligent or not, different considerations applied to a payment over the counter and a payment to another bank through the clearing.31
In Tukaram Bapuji Nikam v Belgaum Bank Ltd ,32 after reviewing important Indian legal decisions relating to demand drafts, Vimadalal J summarised the main propositions to be derived from them as follows:
(i) The relationship of the purchaser of a draft and the bank from which that draft has been purchased is merely that of debtor and creditor;
(ii) The purchaser of the draft can, therefore call upon the bank from which he has purchased it to cancel the draft and pay back the money to him at any time before the draft has been delivered to the payee.
(iii) If, however the sole object of the issue of the draft was to transmit the money to another person, a fiduciary relationship is created between the purchaser and the bank which issued it, and the purchaser can countermand payment, only if the bank has not actually parted with money held by its as agent, thus terminating the relationship of principal and agent.
(iv) Ordinarily, a bank issuing a draft cannot refuse to pay the amount thereof, unless there was some doubt as to the identity of the person presenting it as being or properly representing the person in whose favour it was drawn, or, in other words, unless there is reasonable ground for disputing the title of the person presenting the draft.
(v) Once the draft has been delivered to the payee or his agent, the purchaser is not entitled to ask the issuing bank to stop payment of the draft to the payee on other grounds such as matters relating to consideration,
Page 2 of 2Drafts drawn by one branch of a bank on another payable to order
and the issuing bank can thereafter pay back the amount of the draft to the purchaser only with the payee’s consent.
In Raghavendra Singh Bhadoria v State Bank of Indore ,33 two bank drafts were honoured when presented by the payee despite a request by the purchaser of the drafts not to pay. The purchaser brought an action against the bank. The Madhya Pradesh High Court applied to the case the observations made by the Supreme Court in UP Cooperative Federation Ltd v Singh Consultants and Engineers P Ltd ,34 with respect to restraint of payments under bank guarantees and letters of credit and held that unless serious allegations of fraud with prima facie evidence of it is shown courts should not interfere and grant injunctions restraining banks from paying drafts issued by them and presented by the payee or a lawful holder in due course.
25 Inserted by s 2 of Act 25 of 1930.
26 See the Cheques Act 1957,s 1(2)(b).
27 Sanyasalingam v The Exchange Bank of India and Africa Ltd AIR (1948) Bom 149.
28 (1959) 61 Bom LR 1127.
29 Birbhum Central Co-operative Bank Ltd v Pioneer Bank Ltd AIR 1956 Cal 615 [LNIND 1956 CAL 89] relied on in Palai Central Bank Ltd In Re AIR 1962 Ker 210, and State Bank of India v Jyoti Ranjan Mazumdar AIR 1970 Cal 503 [LNIND 1970 CAL 83].
30 AIR 1970 Ker 74 [LNIND 1968 KER 198], (1972) Ker LT 518 (DB).
Parties not consenting discharged by qualified or limited acceptance.Khergamvala: Negotiable Instruments Act
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86. Parties not consenting discharged by qualified or limited acceptance.
If the holder of a bill of exchange acquiesces in a qualified acceptance, or one limited to part of the sum mentioned in the bill, or which substitutes a different place or time for payment, or which, where the drawees are not partners, is not signed by the drawees, all previous parties whose consent is not obtained to such acceptance are discharged as against the holder and those claiming under him, unless on notice given by the holder they assent to such acceptance.
Explanation.-An acceptance is qualified-
(a) where it is conditional, declaring the payment to be dependent on the happening of an event therein stated;
(b) where it undertakes the payment of part only of the sum ordered to be paid;
(c) where, no place of payment being specified on the order, it undertakes the payment at a specified place, and not otherwise or elsewhere; or where, a place of payment being specified in the order, it undertakes the payment at some other place and not otherwise or elsewhere;
(d) where it undertakes the payment at a time other than that at which under the order it would be legally due.35
(1)GENERAL AND QUALIFIED ACCEPTANCE
An acceptance is general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance, in express terms, varies the effect of the bill as drawn. The instances of qualified acceptance given in the Explanation to the section are not exhaustive. In particular, an acceptance is said to be qualified which is:
(i) Conditional
An acceptance which makes the payment by the acceptor dependent upon the happening of an event therein stated. If the holder acquiesces in a conditional acceptance, it binds him as well as the acceptor, but not the other parties to the bill not consenting thereto. For example:
(i) ‘Accepted, payable when in funds.’36
(ii) ‘Accepted, payable on giving up bills of lading for clover per SS Amazon.’37
(iii) ‘Accepted, payable when a cargo consigned to me is sold.’38
(ii) Partial
An acceptance which undertakes to pay only part of the amount for which the bill is drawn. Acceptance of part of the sum due, if acquiesced in by the holder, discharges all prior parties not consenting to such an arrangement. For example: ‘A bill drawn for Rs 1,000 and accepted as follows: Accepted for Rs 500 only’.
Page 2 of 3Parties not consenting discharged by qualified or limited acceptance.
An acceptance which undertakes to pay only at a specified place and not elsewhere, or to pay at a place different from the place mentioned in the bill and not elsewhere. An acceptance to pay at a particular place is only a general acceptance, unless it expressly states that the bill is to be paid there only and not elsewhere, in which case, it is qualified.
Where there is no place mentioned in the instrument itself, if the acceptance makes the money payable at a particular place, it is treated as a general acceptance. In Bank Polski v Mulder ,39 bills were drawn in Dutch florins on a London firm payable in Amsterdam. It was held that the acceptances were general as it was not specified that the bills were payable in Amsterdam only and not elsewhere. For example:
(i) ‘Accepted, payable at Blankshire Bank.’ This is a general acceptance.
(ii) ‘Accepted, payable at the Union Bank and not elsewhere.’ This is a qualified acceptance.
(iv) Qualified as to Time
An acceptance, which makes the money payable under a bill at a time different from that mentioned in the order of the drawer. The qualification as to time may be introduced in an acceptance by a promise to pay at a time shorter or longer than mentioned in the order. For example:
(i) A bill is drawn payable three months after date. The acceptance is as follows: Accepted, payable at six months after date.
(ii) A bill was accepted in this form: accepted on the condition of its being ‘renewed’ till 22 November 1844. This was held to be an acceptance qualified as to time, on which the holder might insist against the acceptor, and that the word ‘renewed’ might be read to mean an extension of the time when the bill was to become payable.40
(v) Acceptance by Some of the Drawees and Not by All
Where a bill is drawn on two or more drawees and is accepted by one or more, but not by all of them, the acceptance is said to be qualified. However, if the drawees are partners, one or more can accept on behalf of the other or others and the acceptance is said to be general.
For example, a bill is drawn on A, B and C who are not partners, and is accepted by A only. B and C refuse to accept. This is a qualified acceptance.
If the acceptor of a bill desires to qualify his acceptance, he must do so on the face of the bill and in clear and unequivocal terms, so that a person taking the bill cannot fail to notice that it is accepted subject to an express qualification.41
(2)EFFECT OF A QUALIFIED ACCEPTANCE
The holder of a bill is entitled to an absolute and unqualified acceptance and is not bound to take a qualified acceptance. If he cannot get an unqualified acceptance, he may treat the bill as dishonoured, and after giving due notice of dishonour, pursue his remedies against prior parties. If, however, the holder elects to take a qualified acceptance he does so at his own peril, and discharges all prior parties unless he obtains their consent to such acceptance. The holder must give notice of the qualified acceptance to all the prior parties, and if on receipt of such notice, the drawer and the prior indorsers notify their consent to such acceptance, they will be liable in case the bill is dishonoured. If any of them do not assent, the holder, by taking a qualified acceptance discharges them or any of them who do not consent.
35 See the Bills of Exchange Act 1882,ss 19 and 44(1) (2).
Page 3 of 3Parties not consenting discharged by qualified or limited acceptance.
Effect of material alteration.Khergamvala: Negotiable Instruments Act
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87. Effect of material alteration.
Any material alteration of a negotiable instrument renders the same void as against any one who is a 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;
Alteration by indorsee.-And any such alteration, if made by an indorsee, discharges his indorser from all liability to him in respect of the consideration thereof.
The provisions of this section are subject to those of sections 20, 49, 86 and 125.42
(1)SCOPE
Any material alteration of a negotiable instrument renders the same void against any one who is a party thereto at the time of making the alteration and does not consent thereto, unless, it was made in order to carry out the common intention of the original parties.43
Halsbury’s Laws of England elaborates the scope, effect and applicability of material alteration:44
598. A writing proposed to be executed as a deed may be altered by erasure, or inter lineation or in any other way before it is so executed, and any alteration so made before execution does not affect the validity of the deed. Any alteration, erasure or interlineation appearing upon the face of a deed is presumed, in the absence of evidence to the contrary, to have been made before the execution of the deed.
599. If an alteration (by erasure, inter lineation or otherwise) is made in a material part of a deed, after its execution by or with the consent of the party thereto or person entitled thereunder, but without consent of the party or parties liable thereunder, the deed is thereby made void. The avoidance, however, is not ab initio or so as to nullify any conveyance effect which the deed has already had, but only operates as from the time of such alteration, and so as to prevent the person, who has made or authorised the alteration, and those claiming under him, from putting the deed in suit to enforce against any party bound thereby, who did not consent to the alteration, any obligation, convenant or promise thereby undertaken or made.
Therefore the essentials for the application of s 87 are:
(i) Alteration which is material;
(ii) Alteration is made after the promissory note is executed;
(iii) Absence of consent of a party, liable under the instrument;
(iv) Alteration does not incorporate the common intentional of the parties.
(2)ALTERATION OF DOCUMENTS
If an alteration (by erasure, interlineation or otherwise) is made in a material part of a deed, after its execution, by or with the consent of any party to or person entitled under it, but without the consent of the party or parties liable
under it, the deed is rendered void45 from the time of the alteration so as to prevent the person who has made or authorised the alteration, and those claiming under him, from putting the deed in a suit to enforce against any party bound by it, who did not consent to the alternation, any obligation convenant or promise thereby undertaken or made.46 The rule is based on sound policy and may be defended on two grounds, first, that no man shall be permitted to take the chance of committing a fraud without running any risk of loss by the event when it is detected, and, secondly, that by the alteration, the identity of the instrument is destroyed, and to hold one of the parties liable under such circumstances would be to make for him a contract to which he never agreed.47 The principle of law embodied in s 87 of the Act is essential to the integrity and sanctity of contracts. It is intended to prevent fraud and deter men from tampering with written securities. It is repugnant to the policy of law to permit the holder of a negotiable instrument to attempt a fraud of this kind with impunity.48
The same consequences follow where an alteration is made by a stranger while the instrument is in the custody of a party, for a person who has the custody of an instrument is bound to preserve it in its integrity.49 In the case of negotiable instruments, this rule has been adopted to its full extent by ss 87, 88 and 89 of the Act. In the case of negotiable instruments, the rules as to alteration of documents in general must be taken subject to the provisions of the Act.
A bank note issued by the appellant in Hong Kong and payable to bearer on demand was accidentally mutilated. The bank declined to pay on presentation of a document which was proved at the trial to have been patched together from the fragments. This document, though it did not show the number of the note, showed clearly the other main features. The court held that as identity of the document as a note of the bank was established and it contained all the elements necessary to render it valid and effectual as a negotiable instrument, the bank was liable to pay the holder. An alteration to vitiate an instrument does not apply to one accidentally made.50
(a) Alteration Must be Material
It is not that any and every alteration that avoids the instrument. To have that effect, the alteration must be in a material particular.51
Generally, an alteration is material which, in any way, alters the operation of the instrument and the liabilities of the parties thereto, whether the change be prejudicial or beneficial. Any alteration is material that alters the business effect of the instrument if used for any business purpose.52 So, any change in an instrument which causes it to speak a different language in legal effect from that which it originally spoke, or which changes the legal identity or character of the instrument, either in its terms or the relation of the parties to it, is a material alteration.53 A material alteration is one which varies the rights, liabilities, or legal position of the parties as ascertained by the deed in its original state, or otherwise varies the legal effect of the instrument as originally expressed, or which may otherwise prejudice the party bound by the deed as originally executed.54 It takes in, not only a case where certain thing, which is already written, has been altered but also a new insertion that did not form part of the document originally executed.55 The alteration should not be innocuous or superfluous, but one that shakes the foundation of the instrument so that it cannot be said to be the one to which, the executant was a concurring or contracting party.56 It is not necessary that it should adversely affect the party who raised the plea of material alteration.57
A plaintiff, who was guilty of a material alteration of a promissory note in his favour cannot enforce the same, nor can he fall back on the original consideration or invoke the provisions of s 65 of the Indian Contract Act 1872 to sustain his claim.58
(i) Instances of Material Alteration
It has been held that the alterations in the following particulars are material:
(i) Alteration of the date of the instrument,59 for eg, where a holder of a bill or note alters the date of the instrument to accelerate or postpone the time of payment.60 It is wrong to assume that the date of the promissory note is merely a description. It indicates the time when the promissory note was executed. In most cases, the date is very material in calculating the date of the performance of the contract and more often fixing the period of limitation within which the plaintiff will have to institute the suit on the foot of such promissory note.61 The insertion of the date in a promissory note without the maker’s consent is a material alteration.62 However, in Bhaskaran Chandrasekharan v Radhakrishnan ,63 the Division Bench of Kerala High Court held that putting date on undated cheque does not amount to material alteration as it can be
Page 3 of 7Effect of material alteration.
presumed that there is an implied consent for putting the date as and when required by the beneficiary and to get it encashed.
(ii) Alteration of the sum payable,64 for eg where a bill for Rs 500 is altered into a bill for Rs 3,500.65 Even correction in the amount written in figures amounts to material alteration.66
(iii) Alteration of the time of payment,67 for eg where a bill payable three months after date is altered into a bill payable three months after sight.68
(iv) Alteration of the place of payment,69 for eg, where a bill is accepted payable at the Union Bank, and the holder, without the consent of the acceptor, scores out the name of the Union Bank and inserts that of the Hudson Bank.70
(v) Where a place for payment in added without the acceptor’s consent.71
(vi) Alteration of the rate of interest, for eg, where a note payable with ‘lawful interest’ is altered into one payable with interest at six percent.72 The blank space in a promissory note with regard to the rate of interest was filled by the promisee, without the promisor’s consent, as one percent per month. The court held that it was a material alteration vitiating the note.73
(vii) Alteration by addition of a new party,74 for eg, the addition of a new maker to a joint and several promissory note without the consent of the existing makers.75
(viii) Alteration of an order cheque to a bearer cheque, except by or with the consent of the drawer.
(ix) Alteration in the signatures76 of the drawer or the original payee.77
(x) Addition or alteration or change of the name of the payee therein without the consent of the drawer.78
(xi) Subsequent affixing of stamps,79 without the promisor’s knowledge, to a note which was executed on an unstamped paper.80 Likewise, additional stamping of an insufficiently stamped note is a material alteration.81
The instances given above are not exhaustive. Erasure of an ‘account payee’ crossing, though not recognised by the Act, may be a material alteration.82
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.83
(3)Alteration Not Vitiating The Instrument
In the following cases, the alteration of a negotiable instrument shall not vitiate the instrument:
(i) An alteration, though in a material part, will not avoid the instrument, if it is made before the instrument is issued or before the instrument has become available against any party thereto.84
(ii) Where an alteration is made for the purpose of correcting a mistake,85 for eg, where a bill was dated 1832 instead of 1823, and subsequently the agent of the drawer corrected the mistake.86
(iii) An alteration made to carry out the common intention of the original parties,87 for eg, where the drawer of a negotiable instrument draws a bill but forgets to use the words ‘or order’, the subsequent insertion of these words will not vitiate the instrument.88 An alteration is not material which is carried out to incorporate intention of parties, already apparent on the face of deed.89
(iv) If the alteration is made with the consent of the parties, the instrument is binding on them.90 The issue whether the alteration was with consent or not is a question of fact to be determined at trial by leading evidence.91
(v) Alterations, which are not material, will not avoid the instrument. Thus, an alteration in the month of promissory note from March to April was held not to be material since the suit was filed within the limitation period from March itself.92
Bills of exchange, payable a specified number of days after sight, drawn on the appellants, were indorsed for value to the respondents, who duly stamped them, and after acceptance, noted in the corner of each bill, the date for presentation. The parties to the bills having mutually agreed that the dates of payment should be postponed, the
Page 4 of 7Effect of material alteration.
respondents altered the dated so noted, but without making any alteration in the bills as originally drawn. On presentation for payment on the extended dates, the appellants dishonoured the bills. The court held that there had been no discharge of the bills by material alteration, and accordingly, the appellants remained liable.93
The erasure of an indorsement on the back of a promissory note in respect of a payment by the maker would not be a material alteration invalidating the note, since such indorsement is not a part of the instrument.94
The holder of a promissory note is not affected by a material alteration in the instrument when the alteration has been made by a stranger; without the consent of the holder and without any fraud or laches on his part.95 In the case of material alteration by a stranger, the pertinent question is whether or not the instrument was in the custody of the holder at the relevant time.96
(4)Effect Of Alteration
The effect of making a material alteration without the consent of the party bound by it is exactly the same as that of cancelling the deed.97 If there is any material alteration in the cheque which renders it void, no criminal prosecution under s 138 can be launched based on such a cheque.98 Thus, a material alteration discharges all the parties who are liable on the instrument at the time of the alteration, and who do not consent to such alteration. However, an alteration does not in any way affect the liability of persons becoming parties subsequent to the alteration. An unsubstantial alteration in an instrument which is to the benefit of the surety does not discharge the surety from the liability.99
While considering the presumption of s 139, the Kerala High Court in Capital Syndicate v Jameela ,1 has held that when the signatures in the cheque are admitted by the drawer even if the other entries in the cheque are disputed a presumption under s 139 would arise that the cheque was issued in discharge of a legally enforceable debt.
As a general rule a holder who cannot recover upon an altered instrument cannot recover upon the consideration that he gave for it. A lender, who materially altered the debtor’s promissory note executed and delivered at the time the loan was made, was held to have lost his right of action against the debtor, not only on the note but also on the basis of the loan.2 The section expressly provides for the case of an alteration by an indorsee, and state that such an alteration discharges the indorser in respect of the consideration. Even though an alteration may be assented to by all the parties, where an instrument is materially altered, it becomes a new instrument and requires a new stamp.
(5)Alteration Authorised By The Act
The last paragraph of the section subjects it to the provisions of certain other sections of the Act which are:
(i) filling blanks in inchoate instruments (s 20);
(ii) conversion of blank indorsements into indorsements in full (s 49);
(iii) qualified acceptance (s 86); and
(iv) crossing of cheques (s 125).
The above provisions form an exception to s 87. Thus, even though these alterations may be material since they are permitted by the Act, they do not render void the instrument.
(6)Burden Of Proof
In Subba Reddy v Ramana Reddy ,3 it has been laid down that where an instrument appears to be materially altered the law naturally casts heavy burden on the plaintiff to explain the alteration and show when it was made. Ordinarily the party who presents a negotiable instrument which is an essential part of his case in an apparently altered and suspicious state, must fail from the mere infirmity or doubtful complexion of the instrument unless he can satisfactorily explain the existing state of document.4 It is true that this wholesome rule is not without its exceptions. If there be, for eg, independently of the instrument, corroborative proof, strong enough to rebut the presumption which arises against an apparent and presumable falsifier of evidence, there must however be an explanation and such a strong proof to rebut the initial presumption. It is relevant to note that the presumption under
Page 5 of 7Effect of material alteration.
the English law is that in the case of deeds signed and sealed, alterations were made before execution, but no such presumption exists in the case of negotiable instruments.
A writing which is intended to be under hand only can be altered by erasure, interlineation, or otherwise, before it is signed, but it lies upon the party who puts the instrument in suit to explain an alteration and show when it was made.5 The burden is on the plaintiff to show that the alteration was not improperly made.6 A person who is in custody of a document subsequent to its execution, should there be any alteration, has to discharge the burden of establishing that it is not altered.7
Where signatures on promissory notes are admitted, the burden of proof shifts upon the defendant to show that there is material alteration in the promissory note.8
The saving clause ‘unless it is made for carrying out common intention …’ is not attracted without pleading and proof.9 But failure of parties to raise specific pleas in that respect should not deter the court in considering how the law should be applied to proved facts.10
In Krishnakutty v Velayudhan and others,11 the Kerala High Court held that a plaintiff cannot claim a decree against second defendant alone on the basis of the admission by the second defendant of his signatures on promissory note which is a joint one imposing a joint liability and which contains the forged signatures of first defendant.
42 See the Bills of Exchange Act 1882,s 64.
43 Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); folld in Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
44 Third edn, vol 11, p 367, paras 598 and 599.
45 State Bank of India v Kerala State Co-operative Marketing Federation (1995) 2 KLJ 621 (DB) (Ker); Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); Bhaskaran Chandrasekharan v Radhakrishnan (1999) ISJ (Banking) 109 (DB) (Ker), Bhaskaran Chandrasekharan v Radhakrishnan (1998) 1 Ker LT 881; Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker).
46 Loonkara Sethia v Iran E John AIR (1977) SC 336 [LNIND 1976 SC 380]; folld in Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
47 Gour Chandra v Prasanna Kumar (1906) ILR 33 Cal 812 p 816: Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); folld in Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
48 Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker) Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker)
49 Davidson v Cooper (1844) 13 M&W 343.
50 Hongkong &; Shanghai Banking Corpn v Lo lee Shi [1928] AC 181 .
51 Subba Reddy v Ramana Reddy AIR 1966 Andh Pra 26, Subba Reddy v Ramana Reddy (1966) APLT 114.
52 Aldous v Cornwall [1888] LR 3 QB 513; Suffell v Bank of England [1882] 9 QBD 555 .
53 Gour Chandra v Prasanna Kumar (1906) ILR 33 Cal 812; Kalianna Gownder v Palani Gownder AIR 1970 SC 1942 [LNIND 1969 SC 344].
54 Loonkaran Sethiya v Ivan E John AIR 1977 SC 336 [LNIND 1976 SC 380]; Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); Bhaskaran Chandrasekharan v Radhakrishnan (1999) ISJ (Banking) 109 (DB) Ker, Bhaskaran Chandrasekharan v Radhakrishnan (1998) 1 Ker LT 881; T Kalavqthy v Veera Export (2002) 1 BC 247 [LNIND 2000 MAD 1099]; Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker) Ramachandran v Dinesan (2006) I BC 526 (Ker).
55 T Kalavqthy v Veera Export (2002) 1 BC 247 [LNIND 2000 MAD 1099].
56 Seth Dhanoomal Parsram v P Kuppuraj AIR 1977 Mad 274 [LNIND 1976 MAD 74].
57 Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); folld in Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
58 Rangaswami v Doraiswami Reddi (1957) ILR Mad 987; relied on in Narayan Prasad v Ghanshyamlal AIR 1961 MP 62 [LNIND 1960 MP 27].
59 State Bank of India v Kerala State Co-operative Marketing Federation (1995) 2 Ker LJ 621 (DB) (Ker); Bhaskaran Chandrasekharan v Radhakrishnan (1999) ISJ (Banking) 109 (DB) (Ker), Bhaskaran Chandrasekharan v Radhakrishnan (1998) 1 Ker LT 881; Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker).
60 Outhwaite v Luntly (1815) 4 Camp 179; A Subba Reddy v N Ramana Reddy AIR 1966 Andh Pra 67, A Subba Reddy v N Ramana Reddy (1966) APLT 114.
61 Subba Reddy v Ramana Reddy (1966) APLT 114, Subba Reddy v Ramana Reddy AIR 1966 Andh Pra 26.
62 Jayantilal Goel v Zubeda Khanum AIR 1986 AP 120 [LNIND 1985 AP 49] and Sesharal Bajna v VC Subramanian AIR 1983 Mad 368 [LNIND 1983 MAD 314]; BPDL Investments (Pvt) Ltd v Maple Leaf Trading International (Pvt) Ltd (2006) III BC 482 (Del).
63 Bhaskaran Chandrasekharan v V Radhakrishnan (2000) 101 Comp Cas 115 (DB), Bhaskaran Chandrasekharan v V Radhakrishnan (1999) ISJ (Banking) 109 (DB) (Ker), Bhaskaran Chandrasekharan v V Radhakrishnan (1998) 1 Ker LT 881; Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker).
64 State Bank of India v Kerala State Co-operative Marketing Federation (1995) 2 Ker LJ 621 (DB) (Ker); Bhaskaran Chandrasekharan v Radhakrishnan (1999) ISJ (Banking) 109 (DB) (Ker), Bhaskaran Chandrasekharan v Radhakrishnan (1998) 1 Ker LT 881; Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker)
65 Scholfield v Earl of Londesborough [1896] AC 514 .
66 Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
67 State Bank of India v Kerala State Co-operative Marketing Federation (1995) 2 Ker LJ 621 (DB) (Ker); Bhaskaran Chandrasekharan v Radhakrishnan (1999) ISJ (Banking) 109 (DB) (Ker), Bhaskaran Chandrasekharan v Radhakrishnan (1998) 1 Ker LT 881; Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker).
68 Long v Moore (1790) 3 Esp 155.
69 State Bank of India v Kerala State Co-operative Marketing Federation (1995) 2 Ker LJ 621 (DB) (Ker); Bhaskaran Chandrasekharan v Radhakrishnan (1999) ISJ (Banking) 109 (DB) (Ker), Bhaskaran Chandrasekharan v Radhakrishnan (1998) 1 Ker LT 881; Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker).
74 Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
75 Garner v Walsh (1855) 5 E&B 83; Flanagan v The National Bank Ltd (1938) Ir LT LXXII 63. However for a different view see ex p Yates (1858) 2 De G&;J 191.
76 Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
77 State Bank of India v Kerala State Co-operative Marketing Federation (1995) 2 Ker LJ 621 (DB) (Ker); Bhaskaran Chandrasekharan v Radhakrishnan (1999) ISJ (Banking) 109 (DB) (Ker), Bhaskaran Chandrasekharan v Radhakrishnan (1998) 1 Ker LT 881; Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker).
78 State Bank of India v Kerala State Co-operative Marketing Federation (1995) 2 Ker LJ 621 (DB) (Ker); Bhaskaran Chandrasekharan v Radhakrishnan (1999) ISJ (Banking) 109 (DB) (Ker), Bhaskaran Chandrasekharan v Radhakrishnan (1998) 1 Ker LT 881; Capital Syndicate v Jameela (2003) 2 JCC (NI) 152 (Ker).
79 Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 Kerala, Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
80 Thommen Thommen v Usmiakhan (1967) Ker LJ 80; Chellamma v Padmanabhan Nair (1970) Ker LR 682.
82 J Ladies Beauty v State Bank of India AIR 1984 Guj 33 [LNIND 1983 GUJ 145].
83 Clause (2) to s 89 inserted by Amendment Act 2002.
84 Downes v Richardson (1822) 5 B & Ald 674; Subba Reddy v Ramana Reddy (1966) Andh Pra LT 114, Subba Reddy v Ramana Reddy AIR 1966 Andh Pra 26.
85 Subba Reddy v Ramana Reddy (1966) Andh Pra LT 114, Subba Reddy v Ramana Reddy AIR 1966 Andh Pra 26.
86 Brutt v Pickard (1824) Ry & M 37.
87 BPDL Investments (Pvt) Ltd v Maple Leaf Trading International (Pvt) Ltd (2006) III BC 482 (Del).
88 Byrom v Thompson (1839) 11 A&E 31; Subba Reddy v Ramana Reddy (1966) Andh Pra LT 114, Subba Reddy v Ramana Reddy AIR 1966 Andh Pra 26.
89 Official Assignee v H Basavanna AIR (1963) SC 754 [LNIND 1962 SC 173]; N Rengasamy v S Ganesan (2005) 3 Bank CLR 352 (Mad).
90 BPDL Investments (Pvt) Ltd v Maple Leaf Trading International (Pvt) Ltd (2006) III BC Delhi.
91 Veera Export v T Kalavqthy (2002) 1 BC 278 SC.
92 Subramanian v K Prakash (2002) 1 BC 110
93 Pestonji &; Co v Cox &; Co (1928) ILR 52 Bom 589.
94 Shivalingappa v Puttapa AIR 1971 Mys 273.
95 Gourochandro v Krushnacharana AIR 1941 Mad 383.
96 Anirudhan v Thomco’s Bank Ltd (1963) 33 Comp Cas 185.
97 Loonkara Sethia v Iran E John AIR (1977) SC 336 [LNIND 1976 SC 380]; reld in Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
98 Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
99 Official Assignee v H Basavanna AIR 1963 SC 754 [LNIND 1962 SC 173]; N Rengasamy v SGANESAN (2005) 3 Bank CLR 352 (Mad).
1 (2003) 2 JCC (NI) 152 (Ker).
2 Suresh Chandra v Satish Chandra AIR 1983 All 81; Laduram Marwari v Bansidhar Marwari AIR 1937 Pat 572.
3 (1966) Andh Pra LT 114, AIR 1966 Andh Pra 26.
4 See Mussamut Khoob Conwar v Baboo Moodnarain Singh (1836-37) 1 Moo Ind App 1 p 17.
5 Halsbury’s Laws of England, third edn, vol 11, para 622, p 379.
6 Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); folld in Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
7 Jayantilala Goel v Zubeda Khanum AIR 1986 120 (AP); A Subba Reddy v Neelapa Reddi AIR 1966 Andh Pra 267; Tummala Tirumala Rao v Pemmasani Laxmaiah (2005) I BC 125 (AP) para 20.
8 K Mani v Elumalai (2004) 3 Bank CLR 760 (Mad); see also Naicker v Sigamani (2002) 1 Mad LJ 830 (Mad); Chidambaram v PT Ponnusamy (1997) 1 LW 843 (Madras); P Talamali Chetty v Rathinasamy (1977) 2 Mad LJ 147 (Mad).
9 PLS Chettiar v PLU Chettiar AIR 1974 Mad 4 [LNIND 1972 MAD 360]; Tummala Tirumala Rao v Pemmasani Laxmaiah (2005) I BC 125 (AP) para 20.
10 Jawahar Trading Corpn v Ramadas (1989) 2 Ker LT 932 (Ker); folld in Ramachandran v Dinesan (2005) 1 JCC (NI) 89 (Ker), Ramachandran v Dinesan (2005) II CCR 457 (Ker), Ramachandran v Dinesan (2005) III CCR 491 (Ker), Ramachandran v Dinesan (2006) I BC 526 (Ker).
11 (2005) III BC 430 (Ker); the decision reported in Madan Pillai v Adhinarayana Pillai AIR 192 Mad 929 (which held otherwise) was refused to be followed in Santhu Mohideen Piallai v Jamaludin Labbai AIR 1928 Madras 1092 which was in turn approved in Kumaraswami Desikar v Dhiraviam Pillai AIR 1935 Mad 40 [LNIND 1934 MAD 267].
Acceptor or indorser bound notwithstanding previous alteration.Khergamvala: Negotiable Instruments Act
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88. Acceptor or indorser bound notwithstanding previous alteration.
An acceptor or indorser of a negotiable instrument is bound by his acceptance or indorsement notwithstanding any previous alteration of the instrument.12
The section was not necessary as the alteration affects only the liability of persons who are parties to the bill previous to the alteration, and not that of subsequent parties.13
Payment of instrument on which alteration is not apparent.Khergamvala: Negotiable Instruments Act
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89. Payment of instrument on which alteration is not apparent.
14[(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 person or banker liable to pay, and paying the same according to the apparent tenor thereof, at the time of payment and otherwise in due course, shall discharge such person or banker from al liability thereon; and such payment shall not be questioned by reason of the instrument having been altered, or the cheque crossed.
15[(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.]16
(1)PAYMENT OF ALTERED INSTRUMENTS
The section affords protection to a person who pays an altered note bill or cheque. However, in order to be able to claim the protection, the following conditions must be fulfilled:
(i) The alteration should not be apparent;
(ii) the payment must be made in due course; and
(iii) the payment must be by a person or banker liable to pay.
The section has been amended to provide for the amendment in the definition of cheque so as to provide for electronic image of a truncated cheque. The section provides that 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. Where there is any difference in apparent tenor of such electronic image and the truncated cheque, it shall be a material alteration. In such a case, 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. If the bank fails to discharge this duty, the payment made by it shall not be regarded as good and it shall not be afforded protection.
If the alteration is apparent, ie noticeable on reasonable scrutiny, and when it is such as would be noticed by an intending holder, who scrutinises the document with reasonable care, then the person paying cannot be said to make the payment in due course, so as to enable him to set up such payment to relieve himself of any liability to the other parties on the instrument.17 It is for the holder to show that the alteration is not apparent.
In Bank of Maharashtra v Automotive Engineering Cwo ,18 the material alterations on the cheque in question could not be detected by visual scrutiny and the drawee-branch paid it according to its apparent tenor. The Supreme Court held that the bank was under no obligation to subject the cheque to a further scrutiny under an ultraviolet-ray lamp which would have disclosed the forgery. Though the branch was located just outside Mumbai city in an industrial area, where such forgery was rampant, it was not equipped with the lamp, which was inexpensive. The court pointed out that it had not been established that invariably the other branches of the bank or other banks had
Page 2 of 2Payment of instrument on which alteration is not apparent.
been following a practice of scrutinising all cheques, or those exceeding a particular amount, under ultraviolet-ray lamps by way of extra precaution.
If the aforesaid conditions are satisfied, the effect of such payment is that the person or banker who pays the note, bill or cheque is not only discharged from all liability on the instrument, but can also debit the person on whose account, the payment was made with the amount so paid.
The provisions of the BE Act in this regard do not exactly correspond with this section. Under English law, in determining whether a banker is liable to his customer for having paid a materially altered cheque, it is to be seen whether there was any contributory negligence on the part of the customers.19
14 Renumbered as by Amendment Act 2002 sub-s (1).
15 Inserted by Amendment Act 2002.
16 See Bills of Exchange Act 1882,ss 64(1)and79.
17 Wollatt v Stanley (1928) 138 LT 620; J Ladies Beauty v State Bank of India AIR 1984 Guj 33 [LNIND 1983 GUJ 145].
18 (1990) 77 Comp Cas 87.
19 Young v Grote (1847) 4 Bing 253; London Joint Stock Bank v Macmillan and Arthur [1918] AC 777 (see notes to s 85).
Extinguishment of rights of action on bill in acceptor’s hand.Khergamvala: Negotiable Instruments Act
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90. Extinguishment of rights of action on bill in acceptor’s hand. If a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished.20
(1)ACCEPTOR AS HOLDER
The rule stated in the section is a deduction from the general principle that a present right and liability united in the same person cancel each other.21 Though payment may be made by any party liable on a bill, in order to obtain a complete discharge of the instrument, payment must be made by the acceptor, for he is the person ultimately liable on it.22 By virtue of the section, a bill of exchange is discharged and all rights of action are extinguished if:
(i) the acceptor takes up the bill by paying the holder;
(ii) the acceptor becomes the holder of the bill at or after its maturity; for a bill negotiated back to its acceptor before maturity may be re-issued by him though he cannot enforce payment against any intervening party to whom he was himself liable. To extinguish all rights of action on the bill, it is necessary that the acceptor should be the holder of it at or after maturity. Release of a drawee before acceptance is inoperative.
(iii) the acceptor becomes the holder of the bill in his own right; for if a bill it negotiated back to its acceptor as executor, administrator or trustee of the holder the bill is not discharged.23
Though the provisions of the section are not extended to promissory notes, precisely the same considerations apply to the maker of a note as to the acceptor of a bill. The maker of a note, like the acceptor of a bill, is the principal debtor, and if he becomes the holder of the note at or after its maturity in his own right, the note would be discharged and all rights of action would be extinguished.24
Dishonour by non-acceptanceKhergamvala: Negotiable Instruments Act
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91Dishonour by non-acceptance
A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where 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.1
(1)WHAT CONSTITUTES DISHONOUR BY NON-ACCEPTANCE
The section deals with the dishonour of bills of exchange by non-acceptance. Such a dishonour may take place in any one of the following ways:
(i) When a bill is duly presented for acceptance, and the drawee, or one of several drawees not being partners, does not accept within 48 hours from the time of presentment, the bill is dishonoured.
(ii) Where the drawee is incompetent to contract, the bill may be treated as dishonoured.
(iii) When the drawee gives a qualified acceptance, the holder may treat the instrument as dishonoured (s 86).
(iv) When presentment for acceptance is excused, and the bill is not accepted, it is said to be dishonoured.
Dishonour by non-acceptance of a bill gives the holder an immediate right of recourse against the drawer and the indorsers. Dishonour by non-acceptance constitutes a material part of the cause of action against the drawer, and therefore, there is no need to wait till the maturity of the bill or to present if for payment.2
Dishonour by non-paymentKhergamvala: Negotiable Instruments Act
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92Dishonour 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 of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.3
(1)DISHONOUR BY NON-PAYMENT
The section deals with the dishonour of bills, notes and cheques by nonpayment. A bill, note or cheque is dishonoured by non-payment when it is duly presented for payment and payment is refused or cannot be obtained. Again, a negotiable instrument is dishonoured by non-payment when presentment for payment is excused and the instrument, when overdue, remains unpaid.
When a cheque was presented to the drawee-bank for payment and the bank returned it unpaid with an endorsement stating that it would be honoured after a certain supply bill of the drawer was realised, it was held that this did not amount to dishonour of the cheque.4 However, the ratio of this decision is not easy to understand.
Where the maker of a promissory note presumably payable on demand avoided a registered postal notice from the holder calling upon him to make payment, it was held that there was a dishonour of the note. It cannot be said that there was no dishonour because the note itself was not presented to the maker. There is dishonour where the maker refuses to meet his liability under the note. If such a refusal is proved, the fact that the note has not been presented to the maker when he declined to honour his obligation is immaterial where the refusal was not based on the plea of non-presentment of the note. The expression ‘dishonour’ is to be interpreted to mean not merely dishonour as contemplated by the section but dishonour in other contingencies as well.5
3 See Bills of Exchange 1882,s 47(1).
4 Silchar Bank Ltd v Pioneer Bank Ltd (1951) 21 Comp Cas 347
5 K Venkatasubbayya v P Ranga Rao Tobacco Co AIR 1972 Andh Pra 72
By and to whom notice should be givenKhergamvala: Negotiable Instruments Act
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93By and to whom notice should be given
When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment, the holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been so dishonoured to all other parties, whom the holder seeks to make severally liable thereon, and to some one of several parties whom he seeks to make jointly liable thereon.
Nothing in this section renders it necessary to give notice to the maker of the dishonoured promissory note, or the drawee or acceptor of the dishonoured bill of exchange or cheque.6
(1)NOTICE OF DISHONOUR
The section prescribes that the holder of a negotiable instrument must first give notice of dishonour, ie, a formal notice that the instrument has been refused acceptance or payment, before he can enforce his rights against other parties. The reason why the law requires prompt notice of dishonour is apparent. The object of giving notice is not to demand payment for the party giving notice, but to warn the party notified of his liability, and in the case of the drawer, to enable him to protect himself as against the drawee or acceptor who has dishonoured his draft. A party to a negotiable instrument is aware that he may be called upon to liquidate his liability. It would be a great hardship if he were compelled to lock up his money indefinitely. If the due date of payment passes by, the law allows him to assume that the instrument has been met in the ordinary course, and his liability is at an end unless, he has, in the meantime, received information that the instrument has been dishonoured. The necessity for such notice becomes apparent from the nature of the obligations undertaken by the several parties to a negotiable instrument. Thus, it was held:
All the contracts raised upon the bill, it is seen, except those with the acceptor, are contracts of suretyship, that is to say, are contracts of indemnity. Probably from this, though perhaps from other more strictly mercantile circumstances as for the purpose of making other preparations or modifications in business, notice of dishonour is by the law merchant made a condition of the liability of the surety. The contracts of indorsements then, between the immediate parties to them, are conditional and by way of indemnity. It follows from this that there could be no valid claim in respect of the indorsement, where there is no liability in respect of it. And the two together are the reasons why a failure by an indorsee to give due notice of dishonour not only disables him from recovering against the immediate indorser, but disables a prior indorser to him from recovering against his indorser or a prior indorser to him. The indorsee who has failed to give notice cannot recover because he has not fulfilled the conditions of his contract. The others cannot recover because they do not require to be indemnified as they cannot be made liable. For example, the indorser to him who has failed to give notice is not liable to him, and therefore cannot claim against his indorser, and so on.7
(2)NOTICE BY WHOM
Notice of dishonour must be given by the holder, or by a person liable on the instrument. However, it is not necessary that the notice should always emanate from the holder, for he is entitled to avail himself of a notice given by any party liable on the instrument.8 Thus, the holder of a bill may, in a suit against the drawer, take advantage of a proper notice of dishonour given by an indorser of the bill, who, at the time of giving such notice, was liable to him on the bill.9 Likewise, notice of dishonour may be given by an agent of the holder or of some party liable on the instrument. In order that a party may give a valid notice of dishonour under the section, it is necessary that he
should himself be liable on the instrument at the time of giving such notice. A notice therefore, given by a stranger is a mere nullity, for a stranger by his officious intermeddling can neither establish any right of the holder nor defeat any discharge or defence of the indorsers.10 Even a notice given by a party to the instrument is invalid, if at the time of giving such notice, he is not liable thereon. Thus, a notice given by an indorser is invalid if he had been discharged from liability on the instrument for want of due notice. The acceptor of a bill can give a valid notice of dishonour for he is a party liable on the bill.
(3)NOTICE TO WHOM
Notice of dishonour to the acceptor of a bill or to the maker of a note or the drawee of a cheque is not necessary in order to render them or any other party liable. They are the parties primarily liable upon the instrument, and it is their duty to provide for the payment of the instrument on the due date and at the proper place. It is they, who dishonour the instrument by non-acceptance or non-payment, and notice to them will merely be notice of a fact that they are aware of.11 Notice of dishonour must be given to all parties, other than the maker or the acceptor or the drawee whom the holder seeks to make liable.
Under s 94, notice of dishonour may be given to a duly authorised agent of the person to whom it is required to be given. Notice may be given to his legal personal representative when the drawer or the indorser is dead. Notice may be given to the assignee when the party to whom notice is required to be given has been declared an insolvent. Where there are two or more parties jointly liable as drawers or indorsers, notice to one of them is sufficient to bind all. It is a matter of importance to make as many persons as possible liable when an instrument is dishonoured. The holder must be alert, and select the persons to whom he wishes to give notice of dishonour. If he gives notice to his immediate transferor, the latter is liable to him, though the transferor can, in turn, give notice to any previous party. However, if the holder notifies the drawer direct by the notice of dishonour, it is good as though given by any of the prior indorsers. If an indorser gives notice, it serves as notice given by the holder, and inures for the benefit of all indorsers prior to himself and subsequent to the party to whom notice is given.
(4)EFFECT OF OMISSION TO GIVE NOTICE OF DISHONOUR
The consequences of omission to give notice of dishonour required by the section, except in cases in which notice is dispensed with under s 98, is to discharge all parties who are entitled to such notice. Unless the holder gives notice of dishonour, he cannot enforce his rights against the other parties. It is a condition precedent to the liability of the drawer under s 30, and of the indorser under s 35, that notice of dishonour should be duly given to them.
In a suit by the payee of a dishonoured hundi against the drawer, the latter contended that he did not receive notice of dishonour, but did not challenge the payee’s assertion that the dishonour was to the knowledge of the drawer. It was held that the drawer could not escape liability on this ground since the purpose of notice is to make a person aware of a fact.12 It is submitted that omission to give notice of dishonour would be fatal to the payee’s claim unless he establishes that the case falls within an exempted category under s 98 as where the drawer could not suffer damage for want of notice, or, knowing the facts, he promises unconditionally to pay the amount due on the instrument. In another case, a customer of the plaintiff-bank deposited an outstation cheque into his overdrawn account. The bank sent the cheque to another bank for collection. It was dishonoured and was thereafter reportedly lost in transit from the collecting bank to the plaintiff-bank, which failed to notify the customer of the non-payment for over three years by when an action by him against the drawer on the cheque was time-barred. It was held that the bank’s negligence prevented it from recovering the amount of the cheque from the customer.13
When a party to a bill is discharged from his liability thereon, by reason of the holder’s omission to perform his duties as to presentment for acceptance or payment, protest, or notice of dishonour, such party, it seems, is also discharged for liability on the debt or other consideration for which the bill was given.14
The provisions of this Act relating to notice of dishonour are applicable to hundis in the absence of any local usage to the contrary.15
6 See the Bills of Exchange Act 1882,ss 48 and 49(1).
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7 Horne v Rouquette (1878) 3 QBD 514 p 518.
8 Chapman v Keane (1835) 3 A&E 193; Harrison v Ruscoe (1846) M&W 231.
9 Lysaght v Bryant (1850) 9 CB 46; Jameson v Swinton (1809) 2 Camp 373.
10 Stewart v Kennett (1809) 2 Camp 177; East v Smith [1847] 16 LJQB 292.
11 Edwards v Dick [1821] 4 B & Ald 242.
12 Baijnath Agarwal v RK Agarwalla AIR 1975 Cal 286 [LNIND 1974 CAL 59].
13 Syndicate Bank v Swaika Chemical Works (1987) 61 Comp Cas 752.
14 Bridges v Berry (1810) 3 Taunt 130; Kuttayan v Palaniappa (1904) 27 Mad 540; Krishnaji v Rajmal (1900) ILR 24 Bom 360; John Chandy v State Bank of Travancore 1973 KLR 361.
Mode in which notice may be givenKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 8 > Of Notice of Dishonour
94Mode in which notice may be given
Notice of dishonour may be given to a duly authorised agent of the person to whom it is required to be given, or where he has died, to his legal representative, or, where he has been declared an insolvent, to his assignee; may be oral or written; may, if written, be sent by post, and may be in any form; but it must inform the party to whom it is given, either in express terms or by reasonable intendment, that the instrument has been dishonoured, and in what way, and that he will be held liable thereon; and it must be given within a reasonable time after dishonour, at the place of business or (in case such party has no place of business) at the residence of the party for whom it is intended.
If the notice is duly directed and sent by post and miscarries, such miscarriage does not render the notice invalid.16
(1)FORM AND MODE OF NOTICE
Notice may be oral or written, or partly written and partly oral. However, written notice is advisable since oral notice is difficult to prove.17 Notice does not mean knowledge, but actual formal notification. Notice of dishonour may be given in person, or through a messenger, or by post. Where posted, the notice of dishonour should be put in the postbox, after affixing thereon the last known address of the person to whom it is to be sent. A mere delivery of the notice to the post-office peon or runner in or
der to post the notice will not suffice. Delay or miscarriage of the notice does not render the notice invalid, and the party giving it is exonerated from liability for omission to give notice.
No special form of words is necessary for a notice of dishonour, and so long as the particulars required by the section are set out in the notice, it is improbable that any exception would be taken to the same on the ground of irregularity, provided it was not likely to mislead the recipient.18
The notice, either by express terms or by reasonable intendment, must inform the party to whom it is given:
(i) that the instrument has bee dishonoured (the instrument should be identified in the notice, otherwise the notice will be invalid);
(ii) in what way the instrument has been dishonoured (the notice should state whether the instrument has been dishonoured by non-acceptance or non-payment); and
(iii) that he will be held liable on the dishonoured instrument.
A mere demand for payment is not a sufficient notice that the instrument, in respect of which the demand is made, has been dishonoured. A refusal to honour on the last day, which is not positive, but indicates an expectation that the acceptor may have funds later in the day, does not justify a notice of dishonour.19 Mere knowledge that the instrument has been dishonoured is not notice. A prior dispensation with notice, as absence of effects, must be specially alleged.20
(2)TIME AND PLACE OF NOTICE
Notice should be given within a reasonable time after dishonour.21 When the person to whom notice is to be given has a place of business, the notice must be addressed to him at his place of business, but if he has no place of business, then it should be sent to his residence. Where the party has a place of business, it is not necessary to
send the notice to his residence as well as to his place of business.22 It is competent to the parties entitled to notice to fix, by previous agreement, a place to which notice of dishonour may be forwarded, and a notice sent to the place specified is valid though it may take a longer time to reach that place than his place of business or residence.23 If the holder does not know of the place of business or residence of the person entitled to notice, he must exercise due diligence to ascertain the place.
16 See the Bills of Exchange Act 1882,ss 49(5) to (12)and(15).
17 The Law Commission in its Eleventh Report has sought to dispense with oral notice.
18 Tindal v Brown (1786) 1 TR 167.
19 Hartley v Case (1825) 4 B&C 339.
20 Cory v Scott (1820) 3 B & Ald 619.
21 See ch 10.
22 Berridge v Fitzgerald [1869] LR 4 QB 639.
23 Shelton v Braithwaite (1841) 8 M&W 252.
End of Document
Party receiving must transmit notice of dishonourKhergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 8 > Of Notice of Dishonour
95 Party receiving must transmit notice of dishonour Any party receiving notice of dishonour must, in order to render any prior party liable to himself, give notice of dishonour to such party within a reasonable time, unless such party otherwise receives due notice as provided by section 93.24
(1)NOTICE BY PARTIES OTHER THAN THE HOLDER
Section 93 provides for notice being given by the holder or some party liable on the bill, and such notice is good and inures for the benefit of every other party, who stands between the person giving the notice and the person to whom it is given. However, since a holder may have omitted to give notice to some prior parties, it is prudent for a person receiving notice to give immediate notice to all prior parties whom he wishes to hold liable. The section requires such notice to be given within a reasonable time. When a party receives a notice of dishonour, he has, after the receipt of such notice, the same period of time for giving notice to prior parties that the holder has after dishonour. If a party had given a day’s notice earlier than necessary, it would not enable the recipient to take an extra day to give notice to a party whom he wants to hold liable.25
24 See the Bills of Exchange Act 1882,s 49(4)
25 Yeoman Credit Ltd v Gregory [1963] 1 All ER 245.
Agent for presentment.Khergamvala: Negotiable Instruments Act
Khergamvala
Khergamvala: Negotiable Instruments Act > Khergamvala: Negotiable Instruments Act > The Negotiable Instruments Act 1881 > (Act XXVI of 1881) > PART I > General > CHAPTER 8 > Of Notice of Dishonour
96 Agent for presentment.
When the instrument is deposited with an agent for presentment, the agent is entitled to the same time to give notice to his principal as if he were the holder giving notice of dishonour, and the principal is entitled to a further like period to give notice of dishonour.26
(1)EFFECT OF AGENT FOR PRESENTMENT
Where a bill, when dishonoured, is in the hands of an agent, he may either give notice of dishonour to the parties liable on the bill, himself or give notice to his principal. He must do so within the same times as if he were the holder, and the principal, upon receipt of such notice, himself has the same time for giving notice, as if the agent were an independent holder. Where different branches of the same bank indorse a bill, each branch is deemed, for the purposes of giving and receiving notice of dishonour, a distinct honour.27 For example:
(i) A bill payable in Mumbai is indorsed in blank by the holder, and deposited with a bank in Ahmedabad for collection. The Mumbai agent of the Ahmedabad bank presents it for payment, and on its dishonour, gives due notice thereof to the Ahmedabad bank. The Ahmedabad bank, on the day after the receipt of this notice, gives notice to its customer, who in turn gives similar notice to his indorser. The indorser has received due notice.
(ii) C indorses a bill to the Liverpool branch of D bank. The Liverpool branch sends it to the Manchester branch, and the Manchester branch indorses it to the head office in London, who presents it for payment. The head office sends notice of dishonour to the Manchester branch, the Manchester branch sends notice to the Liverpool branch, which gives notice to C. As regards time is each branch to be considered a distinct party.28
(iii) X pays a bill supra protest for the honour of C, an indorser, who resides at Burgse and on the same day posts the bill to C. C by return of post sends the bill back to X who at once gives notice of dishonour to the drawer. Although six days have elapsed since the dishonour, the notice is in time, and X can sue the drawer.29
