The Negotiable Instruments Act, 1881 - 2 | Law Optional Notes for UPSC PDF Download

Presentment - Section 61 to Section 67

Presentment for Acceptance

• Only Bills of exchange require presentment for acceptance.
• A Bill of exchange should be presented within a reasonable time, on a business day, and during business hours to the drawee for acceptance.
• Following bills must be presented for acceptance:
  • A bill payable after sight - Presentment is necessary to fix the maturity of the bills.
  • Express condition - A bill with an express condition should be presented for acceptance before payment.
• If not presented for acceptance, the bill is dishonored due to non-acceptance, and no party is liable.

Bills of Exchange should be presented to Whom for Acceptance?

• The drawee or his agent should be the persons to whom a bill of exchange should be presented.
• If there are multiple drawees, the bill must be presented to each of them.
• If the drawee is deceased, the legal representatives of the drawee should receive the bill.
• For an insolvent drawee, the bill must be presented to the official receiver or assignee.
• If needed, the bill should be presented to a drawee in case of necessity.
• The acceptor for honor is also a party to whom the bill can be presented.

Drawee's Time for Deliberation

• Holder of the bills of exchange should allow 48 hours for the drawee to accept the bill.

Presentment for Payment

• Promissory notes, bills of exchange, and cheques must be presented for payment to the maker, acceptor, or drawee.
• In case of default in presentment, the other parties are not liable to the holder.

Hours for Presentment

• Presentment for payment should be made during regular business hours and within banking hours if at a banker's.

When Presentment is Unnecessary

• Presentment for payment is unnecessary in certain cases, such as when the maker intentionally prevents it or when the instrument is dishonored at the due date for presentment.
• Examples include situations where the maker has agreed to pay without presentment or has made part-payment without it.

Presentment for Acceptance

• Not required in cases where the drawee cannot be located after a reasonable search or where the drawee is fictitious.
• Also unnecessary in cases of irregular presentment leading to refusal on other grounds or when the drawee is incapable of contracting.

Payment and Interest

To discharge the maker or acceptor, payment of the amount due on a promissory note, bill of exchange, or cheque must be made to the holder of the instrument.

Interest Rate in Negotiable Instruments

• In negotiable instruments where the interest rate is specified, it should be adhered to.
• For instance, in a negotiable instrument like a promissory note, the interest rate mentioned must be followed.
• This ensures clarity and obligation between the parties involved.

Rate of Interest Determination in Absence of Specification

• When the interest rate is not specified in a negotiable instrument, a standard rate of 18% per annum is typically considered.
• For example, if a loan agreement fails to mention the interest rate, the legal presumption is usually 18% per annum.
• This standard rate serves as a guideline for such situations.

Discharge from Liability

• Discharge from liability denotes the cessation of responsibility or obligation among parties.
• It signifies the point at which the liability of the involved parties comes to an end.

Modes of Discharge of Instrument

Parties in a negotiable instrument can be discharged from liability through various methods:

• 1) Cancellation, Release, or Payment:
  • Cancellation of the acceptor's name or any other party's name on the instrument leads to discharge.
  • For instance, striking off the name of the acceptor or another party releases them from obligations.
  • Payment by the primarily liable party also results in the discharge of the instrument.
• 2) Allowing Drawee More Than 48 Hours:
  • If the drawee is given more than 48 hours to accept a bill of exchange, parties not consenting are discharged from liability.
  • For example, if the drawee is granted additional time to accept a bill, previous parties are released from obligations.
• 3) Delay in Presenting Cheques:
  • A delay in presenting a cheque can result in discharge if the drawer suffers damages due to the delay.
  • When a cheque is not promptly presented, the drawer may be exempt from liability for resulting damages.
• 4) Forgery of Endorser's Signature:
  • Even in the case of forged endorsements, the bank can be discharged from liability.
  • For instance, if the signature of an endorser on a cheque is forged, the bank may not be held liable.
• 5) Qualified Acceptance:
  • If the holder agrees to a qualified acceptance, parties not consenting to it are discharged unless they assent.
  • When a bill of exchange is accepted with conditions, parties must agree to avoid discharge from liability.
• 6) Material Alteration:
  • Any significant alteration of a negotiable instrument renders it void for parties not consenting to the change.
  • Material alterations affect the validity of the instrument and discharge liability for non-consenting parties.
• 7) Discharge of Bank:
  • Section 89 states that a bank is discharged through payment in due course when alterations are not evident from records.
• 8) Acceptance of Bill of Exchange/Promissory Note:
  • Section 90 specifies that when the acceptor of a bill of exchange or maker of a promissory note becomes the holder on or after maturity, the instrument is discharged.

Dishonour of Bill of Exchange/Promissory Note

Dishonour Classification

• Dishonour by Non-Acceptance (applicable only for Bill of Exchange)
• A bill is dishonoured by non-acceptance in various scenarios:
  • When the drawee fails to accept within 48 hours.
  • When presentment for acceptance is excused and the bill remains unaccepted.
  • When the drawee is unable to contract.
  • When the drawee is a fictitious person or cannot be found after a reasonable search.
  • When the acceptance is a qualified one.
• Dishonour by Non-Payment
• A promissory note, bill of exchange, or cheque is dishonoured by non-payment when the maker, acceptor, or drawee defaults in payment.

Dishonour by Non-Payment - Section 92

• An instrument is dishonoured by non-payment when the party primarily liable defaults in payment.

Notice of Dishonor - Sections 93 & 94

• Party Responsible for Giving Notice
• When an instrument is dishonoured by non-acceptance or non-payment, the holder or a party remaining liable must provide notice.
• To Whom Notice is Given
• Notice must be given to parties intended to be charged with liability, such as the drawer and endorsers.
• Effect of Non-Service of Notice
• If notice of dishonor is not sent to a prior party entitled to it within a reasonable time, that party is discharged from liability.

Mode of Service of Notice

• Notices can be sent by post to the business place or residence of the concerned party.

Exceptions for Notice of Dishonor

• No notice of dishonor is required in specific situations:
• When there is no intention to hold a prior party liable.
• When the prior party has been discharged.
• When the drawer and drawee are the same.
• When the drawer is fictitious.
• When the prior party has indorsed 'without recourse'.
• When the party entitled to notice cannot be located after a reasonable search.
• When the party obligated to give notice is unable to do so due to reasons like death, serious illness, or other accidents.
• When the prior party is incompetent.

Noting - Section 99

• If a promissory note or bill of exchange is dishonored, the holder can have this noted by a notary public, specifying the date and reason for dishonor.

Protest - Section 100

• After dishonor, the holder can have the dishonor noted and certified by a notary public, termed as a protest.

Protest for Better Security

• If the acceptor's credit is jeopardized before maturity, the holder can demand better security and have it noted by a notary public, known as a protest for better security.

Protest of Foreign Bills - Section 104

• Foreign bills of exchange must be protested for dishonor as required by the law of the place they are drawn.

Crossing a Cheque

Meaning of Crossing a Cheque

• It involves drawing two parallel lines on the cheque's corner, instructing the banker to credit the amount to the named person's account instead of paying over the counter.
• This instruction ensures payment only through the banker, enhancing security for the payee or their order.

The Concept of Cheque Crossing

• Development of Crossed Cheques: The practice of crossing cheques evolved gradually as a method to safeguard against cheque misuse. When a cheque is crossed, the payment is directed to the payee's bank rather than being handed over directly to the individual presenting it at the counter. This mechanism ensures that the payment reaches the intended payee.

Authorized Persons for Crossing Cheques

• The drawer of a cheque
• The holder of a cheque

Crossing can be done generally or specially. If a cheque is initially uncrossed, the holder can cross it, and the bank in whose favor the cheque is crossed specially may further cross it in favor of another bank, acting as an intermediary.

Purpose of Cheque Crossing

• To provide protection and security to the cheque owner
• To prevent fraud and misuse of cheques
• To detect fraudulent activities related to cheques

Types of Cheque Crossing

• General Crossing: In general crossing, two parallel lines are drawn on the face of the cheque, usually at the top left corner. The payment can only be received through a bank and not over the counter. It is not mandatory to include the banker's name, allowing the cheque to be encashed by any bank. Additional phrases like "& Company," "Not Negotiable," "A/C. Payee" may or may not be included.
• Special Crossing: Special crossing, also known as Restricted Crossing, involves adding the name of the banker across the face of the cheque. Unlike general crossing, two transverse lines are not compulsory. This type of crossing restricts the payment to a specific banker mentioned on the cheque.

Special or Restrictive Crossing

• Definition: Special crossing on a cheque directs the paying bank to pay the amount only to the account holder of the specified bank, enhancing security.
• Example: If a cheque is specially crossed for Bank A and presented at Bank B, Bank B should refuse payment, providing added protection against fraudulent transactions.
• Additional Information: Special crossing offers more security compared to general crossing.

Account Payee Crossing

• Meaning: When terms like 'Account payee' are written on a cheque, it indicates that the amount should be credited to the payee's account and not paid in cash.
• Example: If a cheque has 'Account payee' crossing, the collecting bank must credit the amount only to the specified account.
• Additional Information: Account payee crossing provides an extra layer of protection to the cheque.

Not Negotiable Crossing - Section 130

• Meaning: Cheques marked 'Not Negotiable' prevent the holder from acquiring a better title than the person who issued the cheque, emphasizing caution for both paying and collecting banks.
• Example: A cheque with 'Not Negotiable' crossing ensures that the holder cannot claim a superior title than the original issuer.
• Additional Information: 'Not Negotiable' crossing provides heightened security compared to general and special crossings.

Instances where a banker is protected from liability

• When a court order prohibits payment.
• When the customer has assigned the credit balance of their account.
• When the holder's title is flawed and the banker becomes aware of it.
• When the customer has requested to close their account.

Protection of liability of the paying banker

• If a cheque payable to order is endorsed by the payee or on their behalf, the drawee is discharged by payment in due course.
• If a cheque is originally payable to bearer, the drawee is discharged by payment in due course to the bearer, regardless of any endorsements.

Payment rules for crossed cheques

• For a cheque crossed generally, the banker must pay it only to another banker.
• For a cheque crossed specially, payment must be made to the specified banker or their agent for collection.

Payment scenarios

• If a crossed cheque is paid in due course, both the paying banker and the drawer are entitled to the same rights as if the cheque amount was received by the true owner.
• If a crossed cheque is paid out of order, the paying banker may be liable to the true owner for any resulting loss.

Non-liability of banker receiving payment

• A banker who receives payment for a customer for a crossed cheque in good faith and without negligence is not liable to the true owner if the title proves defective.

Conditions for banker's protection

• The banker must have received the payment for the crossed cheque.
• The collection must have been made by the bank on behalf of the customer.
• The collecting bank must have acted in good faith.

Dishonour of Cheque

When a cheque is not honored for payment.

Sections 138 to 142 - Dishonor of Cheques

• Deals with dishonor of cheques and outlines criminal penalties for insufficient funds.

Penalty for Dishonour of Cheque

Under Section 138, the drawer may face imprisonment up to 2 years, a fine up to twice the amount of the cheque, or both.

• Conditions for penalties:
  • Cheque dishonored due to insufficient funds in the drawer's account.
  • Cheque issued for a legally enforceable debt or liability.
  • Cheque presented within 3 months of its issuance.

Presumption in favor of holder - Section 139

• It is presumed that the holder received the cheque for debt discharge.

Defense disallowed under Section 140

• No defense if the drawer had no reason to believe the cheque would bounce due to insufficient funds.

Offences by Companies - Section 141

• If a company commits an offense, persons involved are jointly liable.

Procedure before Charging Penalty

Steps:

• Cheque issued by drawer.
• Payee presents it for payment.
• Collecting bank informs payee about dishonor.
• Notice demanding payment within 30 days must be sent by the payee.
• Drawer must make payment within 15 days of notice.
• Complaint by payee within one month of dishonor.

Cognizance of Offences under Section 142

• Court takes cognizance of offenses under section 138 if they are in writing.
• Complaint must be filed within a month.
• Offenses under section 138 are tried only by specific courts.

Place of Jurisdiction for Trial of Offense under Section 138

• The court within local jurisdiction based on specific conditions.
• Depends on where the cheque is delivered or presented for payment.

Power of Court to Try Cases Summarily - Section 143

• Magistrate can impose imprisonment up to one year and a fine exceeding five thousand rupees in summary trials.

Power to Direct Interim Compensation - Section 143A

• Court may order the drawer of the cheque to pay interim compensation under certain circumstances.
• Interim compensation not to exceed 20% of the cheque amount.
• Payment deadline for interim compensation is specified.
• Repayment conditions in case the drawer is acquitted.

Offences to be Compoundable - Section 147

• Every offense under the Act is compoundable.

Power of Appellate Court to Order Payment Pending Appeal - Section 148

• Appellate Court may order the appellant to deposit a minimum sum in an appeal against conviction under section 138.
• Amount payable under this section is additional to any interim compensation paid by the appellant under section 143A.
• The mentioned amount must be deposited within 60 days from the date of the order, or within an additional period not exceeding 30 days as directed by the Court upon sufficient cause shown by the appellant.
• The Appellate Court has the authority to release the deposited amount to the complainant at any point during the appeal process.
• If the appellant is acquitted, the Court will instruct the complainant to repay the released amount to the appellant, with interest at the prevailing bank rate published by the Reserve Bank of India at the start of the relevant financial year.

Hundis

Meaning

• Hundis are negotiable instruments written in an oriental language.
• They can function as bills of exchange or promissory notes and are not covered under the Negotiable Instruments Act, 1881.
• They are regulated by customs and local practices, with this Act applying if custom does not address a specific issue in a dispute before the Court.

Types of Hundis

• Shah Jog Hundi: 'Shah' denotes a respected and responsible individual in the market. Shah Jog Hundi is payable only to a reputable holder, unlike a hundi payable to bearer. The payee must be verified as a 'SHAH' before payment.
• Jokhmi Hundi: A 'jokhmi' hundi is drawn against goods shipped on the specified vessel, indicating payment only upon the arrival of the goods. It operates akin to an insurance policy, with payment made in advance and subject to recovery if the ship reaches its destination safely.
• Jawabee Hundi: According to Macpherson, this type of hundi is utilized for remitting money from one location to another. It involves a person desiring to make a remittance, writing to the payee and providing the letter to a banker for endorsement or negotiation.
• Nam Jog Hundi: A hundi payable to the party named in the bill or his order. The payee's name is specifically inserted in the hundi. It can be negotiated like a bill of exchange. Altering it into a Shah Jog hundi is a material alteration that renders it void.
• Darshani Hundi: This hundi is payable at sight, freely negotiable, and its price is regulated by demand and supply. Payable on demand, it must be presented for payment within a reasonable time after receipt.
• Miadi Hundi: Also known as muddati hundi, this type is payable after a specified period of time. Money is typically advanced against these hundis by shroffs after deducting an advance for the period in advance.
• Other Forms of Hundis:
  • Dhani Jog Hundi: Payable to "dhani" i.e., the owner.
  • Firman Jog Hundi: Payable to order, can be negotiated by endorsement and delivery.

National Electronic Funds Transfer (NEFT)

Overview:

• National Electronic Fund Transfer (NEFT) is a nation-wide payment system for transferring funds between bank accounts.

Key Points:

• Individuals, firms, and corporates can transfer funds electronically between bank branches.
• Transactions are generally for smaller amounts.
• Operates on a Deferred Net Settlement (DNS) basis, settling transactions in batches.
• Settlement occurs with all transactions received until a specific cutoff time.

Real Time Gross Settlement (RTGS)

Overview:

• Real Time Gross Settlement (RTGS) systems facilitate real-time and gross transfers of money or securities between banks.

Key Features:

• A safe and secure system for large-value interbank funds transfers.
• Employed for immediate and complete transfer of funds.