Report Lbrf

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INTRODUCTION There are certain documents that are freely used in commercial transactions and monetary dealings. These documents, if they satisfy certain conditions, are known as ‘negotiable instruments’. The word ‘negotiable’ means “transferable from one person to another in return for consideration” and ‘instrument’ means a “written document by which a right is created in favour of some person.” Thus, a negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery. A negotiable instrument is a method of transferring a debt from one person to another. A bill may be dishonoured by non-acceptance (since only bills require acceptance) or by non-payment. A promissory note and a cheque are dishonoured by non-payment only. A cheque is a bill of exchange drawn upon a specified banker and payable on demand (Sec. 6). A cheque is a species of a bill of exchange: but it has the following two additional qualifications, viz. (1) It is always drawn on a specified banker, and (2) It is always payable on demand. There are two types of cheques, Open cheques and Crossed cheques. In this project we will primarily focus upon Crossed cheques & the consequences of dishonor of cheques under section 138 of NI Act 1981. Page | 1

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very important document.

Transcript of Report Lbrf

INTRODUCTION

There are certain documents that are freely used in commercial transactions and monetary dealings. These documents, if they satisfy certain conditions, are known as negotiable instruments. The word negotiable means transferable from one person to another in return for consideration and instrument means a written document by which a right is created in favour of some person. Thus, a negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery. A negotiable instrument is a method of transferring a debt from one person to another.

A bill may be dishonoured by non-acceptance (since only bills require acceptance) or by non-payment. A promissory note and a cheque are dishonoured by non-payment only.

A cheque is a bill of exchange drawn upon a specified banker and payable on demand (Sec. 6). A cheque is a species of a bill of exchange: but it has the following two additional qualifications, viz.

0. It is always drawn on a specified banker, and

0. It is always payable on demand.

There are two types of cheques, Open cheques and Crossed cheques.

In this project we will primarily focus upon Crossed cheques & the consequences of dishonor of cheques under section 138 of NI Act 1981.

NEGOTIABLE INSTRUMENTS ACT 1881

The term negotiable instrument as such is not defined in the Negotiable Instruments Act. Sec. 13, however, says that a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer. Any other instrument, which satisfies the conditions of negotiability, can be added to the list of negotiable instruments.

Characteristics of NI

The characteristics of a negotiable instrument are as follows:

1. Freely transferable: The property in a negotiable instrument passes from one person to another by delivery, if the instrument is payable to bearer, and by indorsement and delivery if it is payable to order.

1. Title of holder in due course free from all defects: A person taking an instrument bona fide and for value, known as a holder in due course, gets the instrument free from all defects in the title of the transferor. He is not in any way affected by any defect in the title of the transferor or of any prior party.

1. Recovery: The holder in due course can sue upon a negotiable instrument in his own name for the recovery of the amount. Further he need not give notice of transfer to the party liable on the instrument to pay.

1. Presumptions: Certain presumptions apply to all negotiable instruments, unless contrary is proved. These presumptions are dealt with in Secs. 118 and 119 and are as follows:

3. Consideration. Every negotiable Instrument is presumed to have been made, drawn, accepted, indorsed, negotiated or transferred for consideration. This would help a holder to get a decree from a Court without any difficulty.

3. Date. Every negotiable instrument bearing date is presumed to have been drawn on such date.

3. Time of acceptance. When a bill of exchange has been accepted, it is presumed that it was accepted within a reasonable time of its date and before its maturity.

3. Time of transfer. Every transfer of a negotiable instrument is presumed to have been made before its maturity.

3. Order of indorsements. The indorsements appearing upon a negotiable instrument are presumed to have been made in the order in which they appear thereon.

3. Stamp. When an instrument has been lost, it is presumed that it was duly stamped.

3. Holder presumed to be a holder in due course. Every holder of a negotiable instrument Is presumed to be a holder in due course.

3. Proof of protest. In a suit upon an instrument, which has been dishonoured, the Court, on proof of the protest, presumes the fact of dishonour until such fact is disproved.

The above presumptions are rebuttable by evidence. If anyone challenges any of these presumptions, he has to prove his allegation. Again, these presumptions would not arise where an instrument has been obtained by any offence, fraud or unlawful consideration.

Different types of NI

Negotiable Instruments may be:

1. Negotiable by Statute; or

1. Negotiable by custom or usage.

1. Instruments negotiable by Statute: The Negotiable Instruments Act mentions only three kinds of negotiable instruments (Sec. 13). These are: promissory notes, bills of exchange and cheques. These instruments are negotiable by Statute.

1. Instruments negotiable by custom or usage: There are certain other instruments which have acquired the character of negotiability by usage or custom of trade. In India, Government promissory notes, bankers drafts and pay orders, Hundis, delivery orders and railway receipts for goods, have been held to be negotiable by usage or custom.

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 order of, a certain person, or to the bearer of the instrument (Sec. 4). The person who makes the promissory note and promises to pay is called the maker. The person to whom the payment is to be made is called the payee.

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 (Sec. 5). There are three parties to bill of exchange, viz. the drawer, the drawee and the payee. The person who gives the order to pay or who makes the bill is called the drawer. The person who is directed to pay is called the drawee. When the drawee accepts the bill, he is called the acceptor. The person to whom the payment is to be made is called the payee.

Cheque

A cheque is a bill of exchange drawn upon a specified banker and payable on demand (Sec. 6). A cheque is a species of a bill of exchange: but it has the following two additional qualifications, viz.

(1) It is always drawn on a specified banker, and

(2) It is always payable on demand.

All cheques are bills of exchange but all bills of exchange are not cheques. A cheque must have all the essential requisites of a bill of exchange. It must be signed by the drawer. It must contain an unconditional order on a specified banker to pay a certain sum of money to or to the order of a specified person or the bearer of the cheque. But it does not require acceptance as it is intended for immediate payment.

Other ways to Classify NI

The negotiable instruments may be classified as - Bearer and Order instruments.

Bearer instruments. A negotiable instrument is payable to bearer

(1) when it is expressed to be so payable, or

(2) when the only or last indorsement on the instrument is an indorsement in blank.

Any person who is in lawful possession of an instrument payable to bearer, as a holder, is entitled to enforce payment due on it. He may, when he receives money, be required to acknowledge receipt of money on the instrument by signing on it.

A promissory note and a bill of exchange cannot be made payable to bearer on demand as restrictions imposed by the Reserve Bank of India Act, 1934.

Order instruments. A negotiable instrument is payable to order

(1) when it is expressed to be payable to order, e.g., Pay to A or order or Pay to the order of A. In both these cases, the bill is payable to A or his order at his option.

(2) when it is expressed to be payable to a particular person. and does not contain words prohibiting or restricting its transfer, e.g., Pay A one hundred rupees.

Instruments payable on demand

A cheque is always payable on demand and it cannot be expressed to be payable otherwise than on demand (Sec. 6). A promissory note or bill of exchange is payable on demand

(a) when no time for payment is specified in it (Sec. 19) ; or

(b) when it is expressed to be payable on demand, or at sight or on presentment. The words on demand are usually in a promissory note, the words at sight are in a bill of exchange.

In a promissory note or bill of exchange, the expressions at sight and on presentation mean on demand (Sec. 21).

Time instruments

A bill or note which is payable (a) after a fixed period, or (b) after sight. or (c) on a specified day, or (d) on the happening of an event which is certain to happen, is known as a time instrument. If the event is such as is bound to happen, even though the actual time of its happening is uncertain as, for example, the death of a certain person, there is a valid bill or note.

Parties to a NI and their capacity

The parties to a bill or exchange, a promissory note and a cheque are as follows:

Parties to a bill of exchange (1) Drawer, (2) Drawee, (3) Acceptor, (4) Payee, (5) Holder, (6) Indorser, (7) Indorsee, (8) Drawee in case of need, and (9) Acceptor for honour.

Parties to a promissory note (1) Maker, (2) Payee, (3) Holder, (4) Indorser, and (5) Indorsee.

Parties to a cheque (1) Maker, (2) Drawee, (3) Payee, (4) Holder, (5) Indorser, and (6) Indorsee.

Maker, drawer: The person who makes a promissory note is called the maker. The person who makes or draws a bill of exchange or cheque is called drawer.

Drawee, acceptor: The person on whom the bill of exchange is drawn and who is directed to pay is called the drawee. In case of a cheque, the drawee is always a banker. In case of a bill of exchange, the drawee becomes the acceptor when he accepts the bill. i.e., signs his assent upon the bill and delivers the same or gives notice of such signing to the holder or to some person on his behalf. A cheque does not require acceptance as it is intended for immediate payment.

Payee: The person named in the bill, note or cheque, to whom or to whose order the money is to be paid, is called the payee. In a bill or cheque, the drawer may himself be the payee. Where the payee named in a bill is a fictitious or non-existing person, the bill is treated as payable to bearer.

Indorser: The person who indorses the bill, note or cheque to another is called the indorser.

Indorsee: The person to whom the bill, note or cheque is indorsed is called the indorsee.

Drawee in case of need: When in a bill or in any indorsement thereon the name of any person is given in addition to the drawee to be referred to in case of need, such person is called a drawee in case of need. In English Law, he is called a referee in case of need. The name of the drawee in case of need may be given in the bill by the drawer at the time when it is drawn or by some subsequent indorser. The resort is to be had to the drawee in case of need only when the bill is dishonoured by non-acceptance or non-payment. Where a drawee in case of need is named in a bill of exchange or in any indorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee in case of need (Sec. 115).

Acceptor for honour: A stranger, as a general rule, cannot accept a bill. But if a bill is dishonoured by non-acceptance, the holder may however allow any other person to accept it for the honour of the drawer or any one of indorsers. The person so accepting the bill is called acceptor for honour.

CAPACITY OF PARTIES

A person competent to contract as per Indian Contract Act, 1872, can become party to a negotiable instrument. His capacity to incur liability as a party to a bill of exchange, promissory note or cheque is co-extensive with his capacity to contract. If a party who makes, draws, accepts, indorses, delivers or negotiates a promissory note, bill of exchange or cheque is incompetent to do so, the agreement is void as against him. But this in no way diminishes the liability of the other competent parties thereto.

Minors: As a minors agreement is void, he cannot bind himself by becoming a party to a negotiable instrument. But he may draw, indorse, deliver and negotiate a negotiable instrument so as to bind all parties except himself. That is, he may operate as a channel to convey title and liability but not to originate it. Further the instrument does not become void merely because a minor is a party to it. It remains binding on all the other parties to it. A minor is not personally liable on a bill or note given by him for necessaries supplied to him. It is only his estate, which is liable for such a bill or note.

Persons of unsound mind: Agreements of lunatics, idiots and drunken persons like those of minors are void provided that, at the time of execution of such instruments, they were incapable of forming a rational judgment as to the effects of such Instruments.

Corporations: A corporation or a joint stock company forms an exception to the general rule that the capacity to incur liability on a negotiable instrument is co-extensive with capacity to contract. A corporation, being an artificial creation of law, possesses only those powers, which its Memorandum or Articles confer upon it. If it exceeds its powers and executes a bill or note, the instrument is void and incapable of ratification even by the unanimous assent of all its members. On such a bill or note even a bona fide holder in due course cannot make the corporation liable.

A trading company, unless prohibited by its Memorandum or Articles, has implied power to bind itself by negotiable instruments. But a non-trading company cannot do so, unless it is expressly authorised by its Memorandum or Articles.

Agents: A person capable of contracting may make, draw, accept, indorse, deliver and negotiate a bill, note or cheque either himself or through a duly authorised agent acting in his name. But a general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or indorsing 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 (Sec. 27).

Partners: In a trading firm, each partner has prima facie authority to bind his co-partners by drawing, signing, making, indorsing, accepting, transferring, negotiating bills, notes, and cheques in the name and on account of partnership. But a person merely describing himself as a partner cannot bind the firm. The partner of a non-trading firm has no such implied authority.

Hindu Joint Family: The manager or Karta of a Hindu joint family represents the family in all dealings with the outside world. He has an implied authority on behalf of the family to contract debts and pledge the credit of the family and borrow money on a note or bill where he carries on family business. Such a note or bill is binding on all the members of the joint family and can be enforced against them. The minor members are equally liable to the extent of their share, though they are not personally liable.

Legal representatives: A legal representative is entitled to all the instruments of the holder after the death of the latter.

CROSSING OF CHEQUES

There are two types of cheques, Open cheques and Crossed cheques.

A cheque which is payable in cash across the counter of a bank is called an open cheque. When such a cheque is in circulation, a great risk attends it. if its holder loses it, its finder may go to the bank and get payment unless its payment has already been stopped.

A crossed cheque is one on which two parallel transverse lines with or without the words & Co. are drawn. The payment of such a cheque can be obtained only through a banker. Thus crossing is a direction to the drawee banker to pay the amount of money on a crossed cheque generally to a banker or a particular banker so that the party who obtains the payment of the cheque can be easily traced.

Types of Crossing: There are two types of crossing, viz., (1) general crossing, and (2) special crossing. Another type of crossing known as restrictive crossing has developed out of business usage.

1. General crossing: A cheque is said to be crossed generally where it bears across its face an addition of (i) the words and company or any abbreviation thereof, between two parallel transverse lines, either with or without the words not negotiable; or (ii) two parallel transverse lines simply, either with or without the words 'not negotiable' (Sec. 123).

Where a cheque is crossed generally, the drawee banker shall not pay it unless it is presented by a banker.

(1)(2)(3)

and company& Co.

(4)(5)(6)

Not Negotiable Not Negotiable & Co. N/N & Co.

2. Special crossing: Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, the cheque is deemed to be crossed specially (Sec. 124). Transverse lines are not necessary in case of a special crossing. The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears across the face of the cheque or between the transverse lines, if any.

(1)(2)(3)

Bank of India Bank of IndiaCanara Bank & Co.

(4)(5)

Bank of India Not Negotiable Bank of India for A/c of Payee

3. Restrictive crossing: In addition to the two statutory types of crossing discussed above, there is another type which has been adopted by commercial and banking usage. In this type of crossing the words A/c Payee are added to the general or special crossing. The words A/c Payee on a cheque are a direction to the collecting banker that the amount collected on tile cheque is to be credited to the account of the payee. A/c Payee cheques are negotiable.

(1)(2)(3)

A/c Payee A/c payee Bank of India

Not Negotiable A/c of Radhey Shyam

Not Negotiable Crossing (Sec. 130). The effect of the words not negotiable on a crossed cheque is that the title of the transferee of such a cheque cannot be better than that of its transferor. The addition of the words not negotiable does not restrict the further transferability of the cheque. It only takes away the main feature of negotiability, which is, that a holder with a defective title can give a good title to a subsequent holder in due course. Anyone who takes a cheque marked not negotiable takes it at his own risk.

DISHONOUR OF CHEQUE U/S 138 OF NI ACT 1881

Dishonour of cheque for insufficiency, etc., of funds in the account: Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both:Provided that nothing contained in this section shall apply unless-

(a) the cheque has been, presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) the payee or the holder in due course. of the cheque as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, tothe drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteendays of the receipt of the said notice.

Explanation.-For the purposes of this section, debt or other liability means a legally enforceable debt or other liability.

INGREDIENTS OF OFFENCE UNDER SECTION 138

1. The cheque should have been issued for the discharge , in whole or part, of any debt or other liability

2. The cheque should have been presented within a period of six months or within its validity period whichever is earlier.

3. The payee or holder in due course should have issued a notice in writing to the drawer within 30 days of the receipt of information by him from the Bank regarding the return of the cheque as unpaid.

4. After receipt of the said notice from the holder in due course, the drawer should have failed to pay the cheque within 15 days of receipt of the said notice

GROUNDS FOR DISHONOUR OF CHEQUE

Funds Insufficient:

Section 138 describes the above ground of insufficient funds in the account of the drawer of the cheque in the following words:

The amount of money standing to the credit of the account of the drawer on which the cheque is drawn is insufficient to honour the cheque, or

1. The cheque amount exceeds the amount that can be paid by the bank under an arrangement entered into between the bank and the drawer of the cheque.

2. Account Closed: It is an offence under section 138 of the Act Closure of account would be an eventuality after the entire amount in the account is withdrawn It means that there was no amount in the credit of that account on the relevant date when the cheque was presented for honouring the same

3. Stop Payment instructions:

Once the cheque has been drawn and issued to the payee and the payee has presented the cheque, stop payment instructions will amount to dishonour of cheque.

4. Refer to drawer:

.. makes out a case under section 138 of the Negotiable Instruments Act, 1881 which expression means that there were not sufficient funds with the bank in the account of the respondent

5. Not a clearing member:

Cheque returned with endorsement not a clearing member. To attract the provisions of section 138 NI Act, the cheque should be presented with the bank on which it I drawn- If the cheque is not presented to the bank on which it is drawn, then provisions of sec 138 would not be attracted. If bank on which the cheque is drawn is not a clearing member of the Reserve Bank of India unpaid return of the cheque would not attract section 138.

6. Effect of other endorsements:

It has been repeatedly held by courts that manifest dishonest intention of the drawer resulting in dishonour of the cheque would lead to prosecution under section 138 Negotiable Instruments Act regardless of the actual ground of dishonour.

BIBLIOGRAPHY

Notes by Prof.Santanu Mitra.

http://indiankanoon.org/doc/1823824/

http://jaassam.gov.in/pdf/article/Article-54.pdf

http://www.vakilno1.com/legal-faq/dishonour-of-cheque-section-138-of-the-negotiable-instruments-act.html

http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/dishonour-of-cheques-supreme-court-clarifies-territorial-jurisdiction.html?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

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