Model Q The Negotiable Instruments Act 1881

Model Q. & Ans for Judicial Service Main Exam on The Negotiable Instruments Act, 1881 Q.
1 What is Promissory Note? Make distinction between Cheque and Bill of Exchange. Ans Promissory Note: Vide S -4 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. In Rangaswami Vs Govindswami AIR 1981 the Madras H.C has observed that The question, whether a particular document is a promissory note or not, has to decided with reference to (a) (b) (c) (d) (e) The description of the document; The language of the instrument taken as a whole. The circumstances under which the document came to the executed; The intention of parties manifest on the face of the document; and The surrounding circumstances. All these factors have a cumulative bearing on a proper construction of the documents to determine whether it is a promissory note or not. Ingredients of Promissory Note: There are: (1) (2) (3) (4) In writing An undertaking to pay Signed by the maker Unconditional undertaking to pay
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S.K. Shukla
S.S. Law Academy, Civil & judicial, B-2, B-3-4, Ansal Building (Basement); Dr. Mukherjee Nagar, Delhi-09
(5) (6) (7) (8)
Certain maker Certain payable Sum Promise to pay only money. Certain payee. Deference between Cheque and Bill of Exchange:
(1) (2) (3) (4)
A cheque requires no acceptance, while acceptance is must for bill of exchange A cheque is intended for immediate payment on demand without any days of grace, while in certain cases, in a bill of exchange grace days are allowed. In the case of a cheque the drawee must always be a specified banker, while in the case of a bill of exchange anybody can be a drawee. If the cheque is not duly presented to the banker, the drawer will not be discharged, while a bill of exchange must be duly presented for payment otherwise the drawer will be discharged.
Q. 2 Discuss the competency of minor and legal representative of a deceased person to become party to a negotiable instrument under N.I. Act. Ans S -26 Says A minor may draw, indorse, deliver and negotiate such instruments so as to bind all parties except himself. A minor is never liable upon a negotiable instrument in any capacity. i.e. as a drawer or acceptor, even though the bill is given by him towards the price of necessaries supplied to him. He himself cannot incur any liability on the instrument by reason of making, accepting or indorsing it. The instrument is not bad, it is good, but the minor will not be held liable on it. In Sulochana Vs Pandiyan Bank Ltd, AIR 1975 Madras H.C. 70 . it was contended that the promissory note executed by the defendant along with his minor daughter was not valid in law, but the Madras H.C held that although it is true that no liability could be enforced against the minor
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executants, but the first defendant, who was also a party to the document could not escape his liability. Even where a minor becomes a party by misrepresenting his age, he will neither be liable, nor there be any estoppel against him from disclosing his real age. S -25 Says 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 assents received by him as such. S -2 (11) CPC defines legal representative as a person, who in law represents the estate of a deceased person and includes any person who intermeddles with the estate of the deceased and when a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued. In K. Subbanna Vs K. Subbarayudu AIR 1926 Mad 390 it was held that the term illegal representative in S -29 includes executors and administrators. In H.B Warden Vs Ratanbhai AIR 1933 Bom 444 (DB) A pronote was headed Estate of late Mr. B.H. warden. It was executed by the defendants who were described as executors of the estate and it was signed by them as executor of the estate the late B.H. Warden it was held that there was no express limitation of liability to the extent of the assets received by the defendants as executors and that they were personally liable under it. U/S -29 the liability should be expressly limited and not merely impliedly. Q. 3 Discuss the liability of drawer, on dishonor of cheque. What remedy is available to payee in case of dishonor of cheque? Ans S -138 N.I. Act Says 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, for 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
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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. 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 notice in writing, to the drawer of the cheque within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and The drawer of such cheque fails to make the payment of the said amount of money to the payer or as the case maybe to the holder in due course of the cheque, within 15 days of the receipt of said notice. Thus essential requirements to attract S -138 are the following (a) (b) (c) The cheque or an amount is issued by the drawer to the payee/complainant on a bank account maintained by him. The said cheque is issued for the discharge in whole or in part of any debt or other liability. The cheque is returned by the bank unpaid on account of insufficient amount to honour the cheque or it exceeds the amount arranged to be paid from that account by an agreement made with the bank. The cheque is presented to bank within 6 months from the date on which it is drawn or within the period of its validity, whichever is earlier. Within 30 days demand notice is issued by the payee or the holder in due course on receipt of information by him from the bank regarding the dishonor of the cheque.
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(b)
(c)
(d) (e)
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(f)
The drawer of said cheque fails to make the payment of the said cheque amount of the money to the payee or the holder in due course within 15 days of the said notice. The debt or liability against which the cheque was issued is legally enforceable. In G. Rukkumani Vs K. Rajendran 2001, Cri.L.J 3120 (mad) it was held that The offence U/S -138 of the N.I. Act is a statutory offence. This section excludes mens rea by creating strict liability. It does not say that there should be a direct nexus between the person who commits the act and the offence. S -140 of the Act, in clear terms excludes the defence that the drawer had no reason to believe when he issued a cheque that it may be dishonoured on presentment for the reason stated in S -138 of the Act. The exclusion of mens rea as a necessary ingredient of an offence U/S -138 of the N.I. Act is very explicit. Thus in the light of the provision made U/S -138 of the N.I. Act, the liability of drawer of a cheque is strict liability. He is wholly liable for his acts, irrespective of mens rea, as it is explicit from the section 140 of the N.I. Act which explicitly excludes the defence that the drawer had no reason to believe when he issued a cheque that it may be dishonoured on persentment for the reasons stated in S -138 of the Act. Thus if a cheque is disnoured, the drawer is liable to pay the amount mentioned in cheque to payee, otherwise he will liable to be sued and on conviction, he may be punished with imprisonment upto 2 years or with fine which may extend to twice of the amount of the cheque or with both. The remedy available to payee of cheque is that he in case of dishonor of cheque, shall send a demand notice to the drawer, within 30 days of dishonor of cheque for the amount mentioned in the cheque in question. If his demand is not redressed by the drawer of cheque in question, the payee may sue the drawer, after lapse of 15 days from the date of receiving of notice by drawer, and within 30 days of arising cause of action.
(g)
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Q. 4 - When the liability of an instrument is discharged. Ans Section 82 to 90 N.I. Act deals with the provisions discharging the instruments liability. Under the provisions mentioned U/Ss -82 to 90 N.I. Act, the liability of an instrument is discharged under the following circumstances: (1) (2) Where a bill is intentionally cancelled by the holder or his agent and the cancellation is apparent thereon, the bill is discharged. The holder can discharge the maker, acceptor or indorser by a separate agreement or may do so by conduct, which has effect of discharging a party from his liability. Parties to an instrument are discharged from liability when the amount due on the instrument is paid. Payment can be made by party to the instrument and he can recover the amount from the party primarily liable. If the holder of a bill allows the drawer more than 48 hours, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder. 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 substitute a different place or time for payment or which, where the drawees are not partners is not signed by all the drawees, all previos parties are disicharged as against the holder unless on notice given by the holder, they assent to such acceptance. If the holder of a cheque fails to present it for payment within a reasonable time of its issue and before he actually presents the cheque something happens which prevents the banker from paying the cheque, then the drawer of the cheque is discharged as against the holder, provided that he had sufficient balance to meet the cheque when it ought to have been presented. 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 alternation
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(3)
(4)
(5)
(6)
(7)
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and does not consent thereto, unless it was made in order to carryout the common intention of the original parties. (8) If a bill of exchange which has been negotiated is, at on or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished. That is, when a bill of exchange comes back to the acceptor, through the process of negotiation and he becomes its holder at or after maturity, all liability on the instrument comes to an end.
Q. 5 Narrate the provisions regarding jurisdiction of Court to entertain a complaint under N.I. Act. Ans Offence U/S -138 of N.I. Act would not be completed with the dishonor of the cheque. It attains completion only with the failure of the drawer of the cheque to pay the cheque amount within the expiry of 15 days as provided U/S -138. It is well settled that the offence U/S -138 of the Act can be completed only with the concatenation of a number of acts. Following are the acts which are components of the said offence: (1) (2) (3) (4) (5) Drawing of the cheque; Presentation of the cheque to the bank Returning the cheque unpaid by drawee bank Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount; Failure of the drawer to make payment within 15 days of the receipt of the notice. It is not necessary that all the above five acts should have been perpetrated at the same locality. It is possible that each of those five acts could be done at 5 different localities. But concatenation of all the above five is a sine qua non for the completion of the offence U/S -138 of N.I. Act. In this context a reference to S -178(d) of Cr.P.C is useful, which says:
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Where the offence consists of several acts done in different local area, it may be inquired into or tried by a court having jurisdiction over any of such local areas. So where the five different acts take place in five different localities any one of the courts exercising jurisdiction in one of the five local areas can become the place of trial for the offence U/S -138 N.I. Act. i.e. the complainant can choose any one of those courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done. But in Harnam Electronics Pvt. Ltd Vs National Panasonic India Pvt. Ltd 2009, Apex Court has held that mere issuance of a notice from a particular place would not confer territorial jurisdiction on the Courts at that place to entertain a complaint under N.I. Act as merely issuance of notice does not give rise to a cause of action. Q. 6 Whether a complaint U/S -138 N.I. Act can be dismissed at the threshold on the ground that legal notice was not properly served on the accused before filing the complaint and case of the complaint is that the accused managed an endorsement on the envelop containing notice to the effect that the house was lying locked? Ans S -138 of the Act does not require that the notice should be given only by post. On the part of the payee he has to make a demand by giving a notice in writing. Giving notice is different from receipt of notice. Giving is process of which receipt is the accomplishment. It is for the payee to perform the former process by sending, the notice to the drawer at the correct address. S -27 of General Clauses Act provides that where any Central Act or Regulation made after the commencement of this act, authorizes or requires any document to be served by post, whether the expression, serve or either of expressions give or send or any other expression is used, then unless a different intention appears, the service shall be deemed to be effected by properly addressing, preparing and posting by registered post, a letter containing the document and unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post. Nonetheless the principle incorporated in S -27 can profitably
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be imported in a case, where the sender has dispatched the notice by post with the correct address written on it. Then it can deemed to have been served on the sender unless he proves that it was not really served and that he was not responsible for such non-service. Any other interpretation can lead to a very tenuous position as the drawer of the cheque who is liable to pay the amount would resort to the strategy of subterfuge by successfully avoiding the notice. In Central Bank of India Vs Saxon Farms, (1999) 8 SCC 221 As to the object of serving such a legal notice, it has been observed that the object is to give chance to the drawer of the cheque to rectify his omission and also to protect an honest drawer. Service of notice of demand in clause (b) of the proviso to S -138 is a condition president for filing a complaint U/S -138 N.I. Act. In V. Raja Kumari Vs P. Subbarama Naidu AIR 2005 SC 109, Apex Court has observed that burden is on the complainant to show that the accused has managed to get an incorrect postal endorsement made. What is effect of it, has to be considered during trial, as the statutory scheme unmistakly shows that the burden is on the complainant to show the service of notice. Therefore where material is brought to show that there was false endorsement about the non-availability of notice, the inference that is to be drawn has to be judged on the background facts of each case. Q. 7 Discuss the provision of notice of dishonor. When notice of dishonor is not necessary Ans A bill of exchange may be dishonoured either by non-acceptance or by nonpayment. S -91 says that A bill of exchange is said to be dishonoured by nonacceptance, 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.
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S -92 lays down that 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. In both the above cases notice of dishonor should be given by the holder to any prior party or parties whom he wants to hold liable. However S -93 provides that it is not necessary to give notice of dishonor to the party who has himself dishonoured the bill, note or cheque that is maker, acceptor or banker. A notice which is meant for charging a person with liability can be given only by the person having the right to do so or by his duly authorised agent. In Stewart Vs Kennet (1809) 2 Camp 177 NP , it was held that notice of the dishonor of bill of exchange must be given to the drawer and endorsers by the holder himself or by some person authorized by him. Mode of giving notice: S -94 provides that Notice of dishonor may be given to a duly authorised agent of the person to whom it is required to be given or where he had died , to his legal representative, or where he had been declared an insolvent, his assignee. The notice may be written or oral. If it is written, it may be sent by post. The notice oral or written 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 dishonor at the place of business or if 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 miscarried, such miscarriage does not render the notice invalid. S -97 provides that where the party to whom notice is dispatched is dead, but the party dispatching the notice is ignorant, the notice is sufficient. When notice of dishonor is not necessary: S -98 N.I. Act lays down the circumstances where notice of dishonour is not necessary. They are: (a) When the notice is dispensed with by the party entitled thereto;
10 Mo: 9899660723 S.S. Law Academy, Civil & judicial, B-2, B-3-4, Ansal Building (Basement); Dr. Mukherjee Nagar, Delhi-09 S.K. Shukla
(b) (c) (d)
In or to charge the drawer, when he has countermanded payment. When the party charged could not suffer damage for want of notice. When the party entitled to notice cannot after due search be found or the party bound to give notice is, for any other reason, unable without any fault of his own to give it. to charge drawers, when the acceptor is also a drawer. in the case of promissory note, which is not negotiable. When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument.
(e) (f) (g)
Q. 8 What are the estoppels which bind the parties as liable under the N.I. Act? Ans The estoppels which bind the parties as liable under the N.I. Act are as under: (a) Estoppels against denying original validity of instrument : S -120 lays down that no maker of 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. This section only prevents the maker of the note from denying the validity of the instrument as originally made or drawn. It does not bar any defence, which is independent of a plea that the instrument as originally made or drawn was invalid. (b) Estoppels against denying capacity of payer of indorse: S -121 provides that 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 payees capacity, at the rate of the note or bill to indorse the same.
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This estoppels is not available against any person other than the acceptor of a bill or the maker of a note. (c) Estoppels against denying signature or capacity of prior party: S -122 of N.I. Act provides that No indorser of a negotiable instrument shall in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity to contract of any prior party to the instrument. The indorser by his contract of indorsement, contracts with the indorsee that the original parties to the instrument were competent to contract as indorsers and so indorse the instrument. Again the indorser contracts that the signature of all the prior parties through whom de derives his title are genuine. Q. 9 Discuss the liability of company in case of dishonor of cheque. Ans S -141 N.I. Act lays down the liability of a company and its officers for an offence U/S -138 of the N.I. Act. S -141(1) provides that: - If a person committing an offence U/S -138 of the Act, is a company, every person, who at the time, the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company, as well as the company, shall be liable to be proceeded against and punished accordingly. The proviso appended to this sub-section lays down that No such person can be so held liable, if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence. The 2nd proviso of S -141(1) further lays down that Where a person is nominated as a Director of company by virtue of his holding any office or employment in the central government or the state government, as the case may be, he shall not be held liable. S -141(2) provides that Where any offence under the Act has been committed by a company and it is proved that the offence has been committed with the consent or Connivance of, or is attributable to any
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neglect on the part of any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Thus three categories of persons can be brought within the purview of the penal liability U/S -141 of the Act. They are: (i) (ii) (iii) The company which committed the offence. Every one who is in charge of and responsible for the business of the company and Any other person, who is a director or a manager or a secretary or officer of the company with whose connivance or due to whose negligence the company has committed the offence. When a company is the drawer of the cheque, the company is the principal offender and the remaining persons are made offenders by virtue of the legal fiction created by the legislature as per S -141. The actual offence should be committed by the company and then only the other two categories would also become liable for the offence . In Mohd. Isaq Gulsani Vs Rajamouli the S.C has held that the provision of S -141 of the Act, do not contain a condition that the prosecution of a company is sine qua non for prosecution of other persons, but actual offence should have been committed by the company and then alone the other two categories of persons could also become liable for the offence. The liability of the directors, officers etc is vicarious and will flow from the liability of the company/firm, therefore, the company/firm which has committed the offence, has essentially to be impleaded as a party /accused in the complaint, otherwise the complaint will be rendered defective and liable to be dismissed. Thus when the offence was committed by the company, the persons responsible alone cannot be prosecuted, leaving the company.
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Q. 10- Discuss the provisions for taking cognizance under the N.I. Act. Ans Cognizance of offence S -142 N.I. Act says notwithstanding contained anything in the Cr.P.C 1973 (a) No court shall take cognizance of any offence punishable U/S -138, except upon a complaint, in writing, made by the payee or as the case may be, the holder in due course of the cheque; Such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to section 138. Provided that the cognizance of a complaint may be taken by the court after the prescribed period, if the complainant satisfies the court that he had sufficient cause for not making a complaint within such period. (c) That no court inferior to that a metropolitan magistrate or a judicial magistrate of the first class shall try any offence punishable U/S -138. A complaint U/S -142 can be presented by a payee or a holder in due course. The complaint is to be filed in a court within whose jurisdiction (i) (ii) (iii) (iv) The cheque has been drawn The cheque has been presented for collection. Where it received an endorsement of dishonor The cheque is dishonoured. The one month time for filing of the complaint U/S -142 is only with reference to filing of complaint and not with reference to the taking of cognizance. The period of limitation of one month for filing complaint U/S 138 has to be reckoned from the date immediately following the date on which the period of 15 days from the date of receipt of the notice by the drawer expires. The period of limitation to file complaint starts running from the last notice, which is given strictly in terms of S -138. The proviso to
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(b)
clause (b) of S -142, which has been inserted w.e.f. 6-2-2003 lays down that the cognizance of a complainant may be taken by the court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period. In Hem Chand Gangwal Vs Harish kumar Thanwar (2000) 3 M PL J 53 it was held that a civil suit arising out of the dishonor of cheque, is not to be stayed U/S -10 CPC, just only because a criminal prosecution for the same cause is already pending. Res-judicata is not attracted, because a criminal proceeding is not a suit. The possibility of conflicting decisions by civil and criminal court is not a relevant consideration for stay of one of the two proceedings. In Gayatri Vs Clement Mary AIR 2003 Karnataka H.C held that where both civil and criminal proceedings were instituted in respect of the dishonoured cheque and a decree was passed by the civil Court, it was hed that the Courts executing the decree could not adjust or take into account the fine amount already received by the complainant in the criminal case. S -143 provides that all offences under N.I. Act are to be tried by a judicial magistrate of the first class or by a metropolitan magistrate summarily and the provisions of S -262 to 265 of the code of criminal procedure shall apply to such trials.
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Model Q The Negotiable Instruments Act 1881

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Model Q The Negotiable Instruments Act 1881

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Model Q. & Ans for Judicial Service Main Exam on The Negotiable Instruments Act, 1881 Q.

(5) (6) (7) (8)

(1) (2) (3) (4)

(b) (c) (d)

(e) (f) (g)

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