Negotiable instrument part-4

P.91. 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. Whether 'D' can recover the amount of the cheque from 'A's banker. Decide.

Sol: As per section 131, if banker receives payment for a customer of a cheque crossed generally or specially in the name of that banker in good faith and without negligence, he shall not incur any liability to the true owner of the cheque just because he (i.e. bank) has received payment for customer. This would be so even if the title to the cheque was defective. Thus, Banker will not be liable if it has only collected the payment.

P.92. On a Bill of Exchange for Rs.10,000, X's acceptance to the Bill is forged. A takes the Bill from his customer for value and in good faith before the Bill becomes payable. State with reasons whether A can be considered as a 'holder in due course' and whether A can receive the amount of Bill from X.

Sol: The Negotiable Instruments Act makes no specific provision in respect of forgery. Hence, common law provisions apply. As per common law, a forgery is nullity of law and it passes no title to holder. It is not a mere defect in title but complete absence of title, which cannot be cured. Section 58 of Negotiable Instruments Act does not give protection against forgery, though it gives protection against offence or fraud. Hence, a person does not get good title even if he obtains Bill bona fide and for value, if the signature was forged. Hence, A is not holder in due course and cannot get amount from X.

P.93. X, by inducing Y, obtains a Bill of Exchange from him fraudulently in his (X) favour. Later, he enters into a commercial deal and endorses the bill to Z towards consideration to him (Z) for the deal. Z takes the Bill as a holder in due course. Z subsequently endorses the bill to X for value, as consideration to X for some other deal. On maturity, the bill is dishonoured. X sues Y for recovery of money. With reference to the provisions of Negotiable Instruments Act, decide whether X will succeed in the case.

Sol: Section 58 of Negotiable Instruments Act provides that when an instrument is obtained by fraud, offence or for unlawful consideration, possessor or endorsee cannot receive the amount of Instrument. Hence, normally, X would not be entitled to sue Y as X has obtained instrument through fraud.

However, as per section 53, a holder who derives title from holder in due course has all rights of a holder in due course. Since X derives his title from Z (who is a holder in due course), X has all rights of Z.

Second part of section 58 also makes it clear that even if a negotiable instrument is obtained by means of an offence or fraud or for unlawful consideration, the possessor or endorsee is entitled to receive the amount from the maker, if he is a holder in due course or claims through a person who was a holder in due course. Hence, X can sue Y as he is deriving his right from Z, who is holder in due course. Hence, X will succeed.

P.94. State whether the following shall amount to a valid acceptance:

1. An oral acceptance;
2. Acceptance by mere signature of the drawee without the addition of the word ‘Accepted’ on the negotiable instrument.

Sol:

1. It is one of the essential elements of a valid acceptance that the acceptance must be written on the bill and signed by the drawee. An oral acceptance is not sufficient in law. Therefore, an oral acceptance does not stand to be a valid acceptance.
2. The usual form in which the drawee accepts the instrument is by writing the work “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.

As the law prescribes no particular form for acceptance, there can be no difficulty in construing an acknowledgement as an acceptance but it must satisfy the requirements of Section 7 of Negotiable Instrument Act i.e. it must appear on the bill and must be signed by the drawee (Manackchand v. Chartered Bank, AIR 1961 and 653). knowledge of yours.

P.95. An acceptor accepts a “Bill of Exchange” but write on it “Accepted but payment will be made when goods delivered to me is sold.” Decide the validity.

Sol: Acceptance may be either general or qualified. An acceptance is said to be general when the drawee assents without qualification order of the drawer. The qualification may relate to an event, amount, place, time etc. (Explanation to Section 86 of the Negotiable Instruments Act 1881). In the given case, the acceptance is a qualified acceptance since a condition has been attached declaring the payment to be dependent on the happening of an event therein stated.

As a rule, acceptance must be general acceptance and therefore, the holder is at liberty to refuse to take a qualified acceptance. Where, he refuse to take it, the bill shall be dishonoured by non-acceptance. But, if he accepts the qualified acceptance, even then it binds only him and the acceptor and not the other parties who do not consent thereto. (Section 86)

P.96. State whether a bill can be said to have accepted by B in each of the following cases:

1. B delivers the bill confirming orally that he has accepted the bill.
2. B delivers the bill after writing the words 'accepted' only.
3. B delivers the bill without writing words 'accepted' but after putting his signature on the face of the bill.
4. B delivers the bill without writing the words 'accepted' but after putting his signatures on the back of the bill.
5. B's agent delivers the bill after putting his signature as an agent of the bill.
6. B puts his signature on the bill and dies. Subsequently, the bill was delivered by B's heirs.
7. B puts his signatures on the bill and informs the drawer that he has accepted the bill but does not deliver the billto the drawer.

Case	Decision	Reason
(a) (b) (c) (d) (e) (f) (g)	No No Yes Yes Yes [Sec. 27] No [Sec. 46] Yes [Sec. 46]	The acceptance must be in writing. The acceptance has not been signed by the drawee. The acceptance has been signed by the drawee. The use of the word 'accepted' is not compulsory. The acceptance is on the bill. It is immaterial whether the accep­tance is on the face or back of the bill. The acceptance may also be signed by a duly authorised agent. The acceptance would not complete until there is delivery thereof. The acceptance has completed on giving notice of acceptance.

P.97. State whether presentment for acceptance is necessary in each of the follow­ing cases:

1. A bill payable on demand. knowledge of yours.
2. A bill payable 30 days after date.
3. A bill payable on 1st Jan. 1997.
4. A bill payable 3 months after sight.
5. A bill payable 3 months after presentment.
6. A bill in which there is an express provision that it shall be presented for acceptance before it is presented for payment.
7. Where the drawee cannot after reasonable search be found.
8. Where the drawee is a fictitious person.
9. Where the drawee is a person incapable of contracting.

Sol: First state the provisions relating to ‘presentment for acceptance.’

Presentment is necessary in: (d), (e), (f).

Presentment is not necessary in: (a), (b), (c), (g), (h), (i).

P.98. State whether presentment for payment is necessary to charge the drawer of instrument in each of the following alternative cases:

1. A promissory note payable on demand and is not payable at a specified place.
2. A promissory note or bill of exchange payable at a specified period after date of sight thereof.
3. A bill is not payable at a specified place and the acceptor cannot after due search be found.
4. A bill is payable at a specified place and neither the acceptor nor any person authorised to pay is present at suchplace during the usual business hours.
5. If the drawer cannot suffer any damage for want of presentment.

Sol: First state the provisions relating to ‘presentment for acceptance.’

Presentment is necessary: (b).

Presentment is not necessary: (a), (c), (d), (e).

P.99. A signs a blank stamped paper and places it in his drawer from where it was stolen, completed and negotiated. Is A liable to a holder in due course of such instrument?

Sol: A person cannot be held liable on an instrument for merely having signed the same unless it is accompanied by its delivery. To constitute and create any obligation, delivery of the instrument is a must. Therefore, A will not be liable to the holder in due course of such instrument.

P.100. A bill is dishonoured by non-acceptance. The bill is endorsed to 'A'. 'A' endorses 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 endorsed to 'C', who takes it with notice of dishonour. Decide, with reasons, whether 'C' is entitled to accept the bill in the capacity of a holder in due course.

Sol: To constitute a holder in due course, Section 9 of the Negotiable Instruments Act requires the holder to have obtained the instrument in good faith.

However, Section 53 provides that a holder of a negotiable instrument, who derives title from a holder in due course, will also acquire the status of holder in due course.

If a document reaches the hands of holder in due course, it will be cleansed of all defects and it remains good even if the subsequent holder has the notice past defects provided that he was not a party to them. Thus, 'E' shall get a good title to the bill.

P.101. A draws a bill of exchange on B for Rs.1,000 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.500 and as an accommodation to the plaintiff as to the residue. Can A recover Rs.1,000?

Sol: No. Consideration absent in part. Can recover only Rs.500.

P.102. A issues a cheque for Rs.25,000/- in favour of B. A has sufficient amount in his account with the Bank. The cheque was not presented within reasonable time to the Bank for payment and the Bank, in the meantime, became bankrupt. Decide under the provisions of Negotiable Instruments Act, 1881, whether B can recover the money from A?

Sol: Section 84(1) provides that cheque should be presented to Bank within reason­able time. If cheque is not presented within reasonable time, meanwhile the drawer suffers actual damage, the drawer is discharged to the extent of such actual damage. This would be so if the cheque would have been passed if it was presented within reasonable time. As per section 84(2), in determining what is reasonable time, regard shall be had to (a) the nature of the instrument (b) the usage of trade and of bankers, and (c) facts of the particular case.

The drawer will get discharge, but the holder of the cheque will be treated as creditor of the bank, in place of drawer. He "Will be entitled to recover the amount from Bank. I [section 84(3)].

In the above case drawer i.e. A has suffered damage as cheque was not presented by B within reasonable time. Hence, A will get discharged but B will be the creditor of bank for amount of cheque and can recover the amount from bank.

P.103. Problem 3: C issues a cheque for Rs.15 without writing the word 'only' and gives it to D. D adds the words 'hundred only' after fifteen and adds two zeros after figure 15 as there is sufficient space for making these additions. The bank pays Rs. 1,500 to D who absconds. Is the bank liable to C for excess payment. knowledge of yours.

Sol: The problem relates to material alteration. In this regard, Section 87 of the Negotiable Instrument Act provides that "any material alteration of a negotiable instrument renders the same void as against anyone who is party thereto at the time of making such alteration and does not consent thereto". So, when a cheque is altered, as in the present case, a banker who makes the payment cannot debit the customer's account. However, Section 89 grants protection to a paying banker where the alteration is apparently not noticeable (similar to the given case) and the payment is made in due course as per Section 10. Thus, assuming that the bank made the payment in due course, it will enjoy protection under Section 89 and will not be liable to the customer (i.e. C).

P.104. A cheque was drawn by a customer on his Bank, marked 'Payee's Account only'. The cheque on the face of it was tampered by some one and converted into a bearer cheque. The bank was negligent in making payment to a bearer instead of payee. State with reference to provisions of Negotiable Instruments Act whether the Bank is liable to pay the amount to the customer.

Sol: Section 85 of Negotiable Instruments Act provides that banker is discharged if he makes payment in due course, if cheque payable to order is purported to be endorsed by or on behalf of payee. However, if there is obvious discrepancy between name of payee and his endorsement, bank will not be protected. Paying bank gets protection only when payment is 'in due course' and in accordance with apparent tenor of the cheque.

In this case, it is clear that payment made by Bank was not in due course in accordance with apparent tenor. Bank was negligent and will be liable to compensate the customer.

P.105. J stole a number of cheques belonging to G, indorsed them to himself and paid them into his account with C Bank. In each case, the money was immediately credited to his account and he was either allowed to withdraw the money or his overdrafts wiped out before the cheques could be cleared. G sues the bank for wrongful conversion of funds. Will he succeed?

Sol: Yes. The circumstances show that the banker was working as a holder and not as an agent. So bank is guilty of mistake and protection under the act will no be available.

P.106. A was a managing director and shareholder of a company. The cheque payable to the company were endorsed by him to himself in the capacity as managing director and deposited in personal account with B Bank. The bank collected the money and allowed him to withdraw. The company soon went into liquidation and the liquidator sues the bank for recovery of the money of the cheques payable to the company but credited to the account of A. Will he succeed?

Sol: Yes. Bank is guilty of negligence.

P.107. 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’, forgoes his name and pays the cheque into his own bank. Whether ‘D’ can recover the amount of the cheque form ‘A’s banker. Decide.

Sol: The problem is based upon the privileges of a ‘holder in due course’. Section 42 of the Negotiable Instrument Act, 1881, states that 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, relived from liability to any holder in due cause claiming under an indorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer. In this problem, P is not a fictitious payee and D, the drawer can recover the amount of the cheque from A’s bankers [North and South Wales Bank B. Macketh (1908); Town and Country Advance Co. B, Provincial Bank].

P.108. A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged C’s endorsement and collected proceeds to the cheque through his Bankers. B the drawer wants to recover the amount from C’s Bankers.Decide in the light of the provisions of Negotiable Instruments Act, 1881-

1. Whether B the drawer, can recover the amount of the cheque from C’s Bankers?
2. Whether C is the Fictitious Payee?
3. Would your answer be still the same in case C is a fictitious person?

Sol: According to Section 42 of the Negotiable Instruments Act, 1881 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 instrument by the same hand as the drawer’s signature, and purporting to be made by the drawer.

The word ‘fictitious payee’ means a person who is not in existence or being in existence, was never intended by the drawer to have the payment. Where drawer intends the payee to have the payment, then he is not a fictitious payee and the forgery of his signature will affect the validity of the cheque.

Applying the above, answers to the questions asked can be as under:

1. In this case B, the drawer can recover the amount of the cheque from C’s bankers because C’s title was derived through forged endorsement.
2. Here C is not a fictitious payee because the drawer intended him to receive payment.
3. The result would be different if C is not a real person or is a fictitious person or was not intended to have the payment.

P.109. A cheque was dishonoured at the first instance and the payee did not initiate action. The cheque was presented for payment for the second time and again it was dishonoured. State in this connection whether the payee can subsequently initiate prosecution for dishonour of cheque.

Sol: Supreme Court in Sadanandan Bhadran Vs. Madhavan Sunil Kumar case held that on a careful analysis of Section 138 of the Negotiable Instruments Act, 1981 it is seen that a cheque is said to be dishonoured when it is returned by the bank unpaid for any of the reasons mentioned therein. The said proviso lays down three conditions for the applicability of the above section. They are:

1. the cheque should have been presented to the bank within six months of its issue or within the period of its validity whichever is earlier;
2. the payee should have made a demand for payment by registered notice after the cheque is returned unpaid (within 30 days of receiving information that cheque was dishonoured); and
3. the drawer should have failed to pay the amount within 15 days of the receipt of notice.

Prosecution under section 138 can be launched only when all the 3 conditions are satisfied.

So far as the first condition is concerned, clause (a) of the proviso to Section 138 does not put any restriction upon the payee to successively present a dishonoured cheque during the period of validity. It is common for a cheque being presented again and again within its validity period in the expectation that it would be encashed. The question whether dishonour of the cheque on each occasion of its presentation gives rise to a fresh cause of action, the following facts are required to be proved to successfully prosecute the drawer for an offence under Section 138:

1. that the cheque was drawn for payment of an amount of money for discharge of a debt/liability and the cheque was dishonoured;
2. that the cheque was presented within the prescribed period; knowledge of yours.
3. that the payee made demand for payment of the money by giving a notice in writing to the drawer within the stipulated period; and
4. that the drawer failed to make the payment within 15 days of the receipt of the notice.

If one has to proceed on the basis of the generic meaning of the term' cause of action', certainly each of the above facts would constitute a part of the cause of action, but it is significant to note that clause (b) of Section 142 gives a restrictive meaning in that it refers to only one fact which will give rise to the cause of action and that is failure to make the payment within 15 days from the date of receipt of the notice.

Therefore, the holder / payee of a cheque can initiate prosecution for an offence under Section 138 for its dishonour for the second time, if he had not initiated such prosecution on the earlier cause of action.

P.110. A finance company after having issued a cheque in favour of a depositor informs the depositor not to deposit cheque as well as informs the bank to stop payment. Examine with reference to the provisions of Negotiable instruments Act whether it is an offence under the Act.

Sol: Section 138 of Negotiable Instruments Act provides for penalty of imprisonment and fine if cheque issued by him bounces for insufficiency of funds.

After issue of cheque, drawee can give instructions to bank to stop payment of a cheque. This is termed as countermanding of payment. In such case, it was argued that there is no offence. This would have provided an escape route to unscrupulous people and made the section 138 a 'dead letter'.

Hence, in Modi Cements Ltd. Vs. Kuchil Kumar Nandi case, it was held that the drawer will be liable even if he issues 'stop payment' instructions after issue of cheque.

In Goa Plast Pvt. Ltd. Vs. Chico Ursula D'Souza, it was held that the drawee will be liable even if 'Stop Payment' instructions to Bank are issued before the cheque was due for payment.

P.111. Describe, in brief, the main amendments incorporated by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 in Sections 138, 141 and 142 of the Principal Act i.e. the Negotiable Instruments Act, 1881.

Sol: Amendments in the Negotiable Instruments Act, 1881

The main amendments made through the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 in Sections 138, 141 and 142 of the Negotiable Instruments Act, 1881 are as follows:

Section 138:

1. To increase the punishment as prescribed under the Act from one year to two years.
2. To increase the period for issue of notice by the payee to the drawer from 15 days to 30 days [Proviso(b) to Section 138].

Section 141: To exempt those directors from prosecution under Section 141 of the Act who are nominated as directors of a company by virtue of their holding any office or employment in the Central Government or State Government or a Financial Corporation owned or controlled by the Central Government, or the State Government, as the case may be [Proviso to Section 141(I)].

Section 142: To provide discretion to the court to waive the period of one month, which has been prescribed for taking cognizance of the case under the Act [Proviso to Section 142(b)].

knowledge of yours