Professional Documents
Culture Documents
Module contents
POOLS OF ASSETS
1. LOANS & ADVANCES
2. BILLS
3. OTHER RECEIVABLES
4. DEBTORS
BELONGS TO THE
ORIGINATOR
(SUPPOSE A BANK OR A
FINANCIAL INSTITUION)
CREATION OF SPV
POLLED ASSETS ARE
BEING TRANSFERRED TO
THE SPV FOR
CONSIDERATION
SHARES / SECURITIES
ARE SOLD FURTHER TO
VARIOUS INVESTORS
SHARES / SECURITIES
PAID BY THE SPECIAL
PURPOSE VEHICLE
Special indicators
It gives certain rights to the person in lawful
possession of such an instrument which no other
instruments can ever give
It represents money to a great extent; and
Does not get tainted by any defect in title at the source so
long as its acquisition is lawful Ex: if the maker of the
instrument commits fraud or forgery the bona fide payee
of the instrument is not affected
It passes by delivery like cash
Person in lawful possession of it can sue in his own name
Promissory Note;
Bill of Exchange; and
Cheque.
Application
Hundis;
Rukka
Hundi
The saving clause does not render the act
altogether inapplicable to hundis
local custom overrides the statute provided
It is established by the party relying on it; and
Such local usage is not specifically nullified by the
instrument specifically (indicating the intent of the parties)
Promissory notes
an instrument in writing 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 Sec. 4
two parties
DRAWER
DRAWEE
Pratap Singh
s/o Biswas Singh,
Resident of 222, 72 cross, 4th Main,
Rajajinagar, 6th Block,
Bangalore-560 012
Anand R. Patil,
s/o Ramappa Chendrashekhar Patil,
Resident of No. 227 Pratap Chendra Nilaya
College Road,
Dharwad-580 001.
Anand R. Patil,
s/o Ramappa Chendrashekhar Patil,
Resident of No. 227 Pratap Chendra Nilaya
College Road,
Dharwad-580 001.
Essentials
Writing
No particular form of writing
Pen, pencil, typed, etc.,
May be on paper or cloth etc.,
Undertaking to pay
Essential is express promise to pay
No Promissory notes
Mr. X, I owe you Rs.100
I have received Rs.100 which I borrowed of you, and I have
to be accountable to you for the same with interest
Deposited with me Rs.100 to be returned on demand
Good examples
Rs.1000 balance due to you I am still indebted and do
promise to pay
Received from X Rs.1000 which I promise to pay on
demand with interest
I do acknowledge myself to be indebted to X in Rs.1000 to
be paid on demand for value received
unconditional
Unconditionality is essential to achieve the
objective of certainty of promissory note
It is indispensable statutory requisite [Black v Pilcher
(1909)25 TLR 497]
Notes that are payable on contingency are not
negotiable
Examples
I promise to pay X, Rs.5000 in installments with a
proviso that no payment shall be made after my
death
I promise to pay X, Rs.500 on As death, provided he
leaves me sufficient money to pay the said sum
I promise to pay AB, Rs.500 out of money due to me
from XY as soon as XY pays
I promise to pay on demand at my convenience
Other formalities
Must be stamped
Although not obligatory
Generally dated
And the place of delivery is mentioned
Bill of Exchange
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 of NI Act
Essentials
Must be in writing
Must contain an order to pay
Order contained in the bill shall be unconditional
Must be signed by the drawer
Drawee must be certain
Sum payable must be certain
Order to pay money and money only
The payee must be certain
Three parties
DRAWEE/
ACCEPTOR
DRAWER
PAYEE
Anand R. Patil,
To
Bhavesh Solanki,
College Road,
Dharwad-580 001.
Parties
Pro Note two
BOE three
cheque
Cheque is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise
on demand and it includes the electronic image of
the truncated cheque and a cheque in the
electronic form
- Sec. 6 of NI Act
There are two explanations
Explaining a cheque in the electronic form and a
truncated cheque; and
Clearing house for the purpose of this section
Three parties
DRAWER
BANKER
ORDER IS TO A BANKER
NO NEED OF ACCEPTANCE
PAYEE
Holder and
Holder in Due Course
Meaning
Holder is one who is
Entitled in his own name to the possession of the instrument;
and
Have the right to receive or recover the amount due
thereon from the parties thereto.
Sec. 8
Holder The holder of a promissory note, bill of
exchange or cheque means any person entitled in
his own name to the possession thereof and to
receive or recover the amount due thereon from
the parties thereto.
Where the note, bill or cheque is lost or destroyed, its
holder is the person so entitled at the time of such
loss or destruction
Sec. 9
Holder in due course means any person who for
consideration became the possessor of a
promissory note, bill of exchange or cheque, if
payable to bearer, or the payee or indorsee
thereof, if payable to order, before the amount
mentioned in it became payable, and without
having sufficient cause to believe that any defect
existed in the title of the person from whom he
derived his title
Ingredients of s.9
1.
2.
3.
4.
Consideration
Negotiable instrument contains a contract hence
to be supported by valid consideration
A person who takes a bill or note without
consideration cannot enforce it
However
For the free circulation the following are to be
noted
Consideration is presumed if the defendant intends to set
up the defence that value has not been given the
burden lies upon him
In simple contract only a person who can sue is one from
whom the consideration moves; but in case of Negotiable
instruments if there be a consideration for it, it does not
matter from whom it moves
Before maturity
Once an instrument reaches its maturity, it has
exhausted its life and is no more negotiable No
one can become its holder in due course [Sec. 59]
negotiation after that maturity is out of the usual and
ordinary course of dealing, that circumstance is sufficient
of itself, to excite so much suspicion that the indorsee
can stand in no better position than that of the indorser
An extreme instance
If the instrument is not withdrawn from circulation,
even after it is paid off; and a person bona fide
comes in possession of the same (and it is endorsed
to him for value)
He is a holder in due course and is entitled for
payment
See S B Asirvatham v G Palaniraju Mudaliar, AIR
1973 Mad. 349
Good faith
subjective test
court has to see the holders own mind; and
the only question is did he take the instrument honestly?
objective test
the court has to go beyond the holders mind and see
whether he exercised as much care in taking the security
as a reasonably careful person ought to have done; and
The subjective test requires honesty, due care and
caution.
1758 Theruleofhonestyasgoodfaithoriginated
1758 MillervRace,(1758)1SmLC524wasdecided
1824to1836 theruleofhonestywasreplacedbyduecareandcaution
1824 GillvCubit
1836 ruleofhonestywasreinstated
1836 GoodmanvHarvey[perLordDenmanCJ]
BillsofExchangeAct,1882(sec.90)putthecontroversytorest
Athingisdeemedtobedoneingoodfaithwhereitisinfactdone
honestly,whetheritisdonenegligentlyornot
Goodfaithashonestyestablished
In Miller v Race [(1758) 1 Sm LC 524]
Goodfaithasduecare&caution
Gill v Cubit
In this case a bill broker had instructed his assistant to
discount bills for anyone of familiar features. A stolen
bill was brought to him by a person having a
respectable appearance and whose features were
familiar;
He discounted it without enquiring his name or
address; The question was whether he had acted in
good faith?
Court felt that it is the duty of the court to lay down
such rules as will tend to prevent fraud and robbery
and not give encouragement to them.
And therefore no person should take a security of this
kind from another without using reasonable caution.
Testofhonestyreestablished
In Goodman v Harvey, Lord Denman CJ, said
I believe we are all of the opinion that gross negligence
only would not be a sufficient answer, where the party has
given the consideration for the bill. Gross negligence may
be evidence of mala fides, but it is not the same thing. We
have shaken off the last remnant of the country doctrine.
Where the bill has passed to the plaintiff without any proof
of bad faith there is no objection to his title.
Reaffirmation
Proposition was confirmed by the House of Lords;
and
Later on codified in the Bills of Exchange Act, 1882,
Sec. 90
A thing is deemed to be done in good faith where it is in
fact done honestly, whether it is done negligently or not.
Finalposition
To defeat the title of a holder for value there must
be bad faith or dishonesty it must be shown that he
had either knowledge or suspicion of something
wrong
Ordinarily he need not inquire but if circumstances
are clouded with suspicion he must not take without
inquiry
TheIndianposition
Sec. 9 of the Indian act does not use the words
good faith
It provides that
without having sufficient cause to believe that any
defect existed in the title of the person from whom he
derived his title
Khergamwalas viewpoint
However, under the Act, the words used in sec. 9
are without having sufficient cause to believe
therefore, the legislature seems to have
intended to make due care and caution on the
part of the holder, a test of his bona fides and
that mere good faith on his part would not
suffice. Accordingly, it seems negligence on
the part of a holder at the time of taking a
negotiable instrument, would disentitle him to
the rights of a holder in due course. There will
be sufficient cause to believe in the existence
of defects if the holder was in fact negligent or
careless, though he was acting honestly and in
good faith.
RightsandPrivilegesof
holderinduecourse
Thesectionmaybeillustrated
Suppose A signs his name on the blank but
stamped instrument. He gives the paper to B
with authority to fill it up as a promissory note for
Rs. 250 only. But B fraudulently fills the paper for
Rs.1000, the stamp put upon it being sufficient
to cover the amount. He then hands it to H for
Rs.1000, who takes it without notice of fraud
A will be bound to pay the full amount to H,
because under this section it does not lie in the
mouth of the signer to say that in filling the
instrument his authority has been exceeded.
Sec.20andcheques
Sec. 20 does not squarely apply to cheques
because they are not required to be stamped
The court does not apply S. 20 to incomplete
cheques. [C T Joseph v I V Philip, AIR 2001 Ker 300].
Definition
"Cheque is an instrument in writing containing an
unconditional order, addressed to a banker, sign by
the person who has deposited money with the
banker, requiring him to pay on demand a certain
sum of money only to or to the order of certain
person or to the bearer of instrument."
Section 6 of the Indian Negotiable Instrument Act of
1881 defines the Cheque as A Bill of Exchange
drawn specially on a specified Banker and not on
expressed to be payable otherwise than on
demand...
Specimen of Cheque
Essentials of Cheque
It is an Instrument in writing, i.e., it must be written in
Ink and not by pencil.
It must be Drawn on Particular Bank. It is drawn by a
customer who has deposited money with the Bank.
It must not contains any conditions.
It must be signed by the Account holder.
It is always payable on demand.
It must contain an order to pay certain sum of
money
A Cheque is payable to a Specified Person Only
Types of Cheque
Bearer Cheque
Order Cheque
Open Cheque
Crossed Cheque
Anti-Dated Cheque
Post-Dated Cheque
Stale Cheque
Mutilated Cheque
Bearer Cheque
The words or bearer printed on the cheque, & it is
not cancelled, then the cheque is called a bearer
cheque.
A bearer cheque is made payable to the bearer i.e.
it is payable to the person who presents it to the
bank for encashment.
In simple words a cheque which is payable to any
person who presents it for payment at the bank
counter is called Bearer cheque
Order Cheque
The word "or order" is written on the face of the cheque,
the cheque is called an order cheque.
Such a cheque is payable to the person specified
therein as the payee, or to any one else to whom it is
endorsed (transferred).
Open Cheque
When a cheque is not crossed, it is known as an
Open Cheque or an Uncrossed Cheque.
These cheques may be cashed at the bank and
the payment of these cheques can be obtained at
the counter of the bank or transferred to the bank
account of the bearer.
An open cheque may be a bearer cheque or an
order cheque.
Crossed Cheque
Crossed cheque means drawing two parallel lines
on the left corner of the cheque with or without
additional words like Account Payee Only or Not
Negotiable.
A crossed cheque cannot be en-cashed at the
cash counter of a bank but it can only be credited
to the payees account. This is a safer way of
transferring money then an Uncrossed or open
cheque.
Anti-Dated Cheque
Cheque in which the drawer mentions the date
earlier than the date on which it is presented to the
bank, it is called as anti-dated cheque.
Such a cheque is valid up to three months from the
date of the cheque drawn.
Post-Dated Cheque
Cheque on which drawer mentions a date which is
yet to come (future date) to the date on which it is
presented, is called post-dated cheque.
For example
If a cheque presented on 10th Jan 2012 bears a
date of 25th Jan 2012, it is a post-dated cheque.
The bank will make payment only on or after 25th
Jan 2012.
Stale Cheque
If a cheque is presented for payment after three
months from the date of the cheque, it is called
stale cheque. After expiry of that period, no
payment will be made by banks against that
cheque.
A stale cheque is not honored by the bank.
Mutilated Cheque
When a cheque is torn into two or more pieces and
presented for payment, such a cheque is called a
mutilated cheque. The bank will not make payment
against such a cheque without getting confirmation
of the drawer.
Crossing of Cheque
Crossing of a cheque means "Drawing Two Parallel
Lines" across the face of the cheque. Thus, crossing
is necessary in order to have safety.
Crossed cheques must be presented through the
bank only because they are not paid at the
counter.
Crossing is a popular device for protecting the
drawer and payee of a cheque.
Types of Crossing :1. General Crossing
2. Special or Restrictive Crossing
General Crossing
There are two transverse parallel lines, marked across its
face, or
The cheque bears an abbreviation "& Co. "between
the two parallel lines, or
The cheque bears the words "Not Negotiable"
between the two parallel lines, or
The cheque bears the words "A/c. Payee" between
the two parallel lines.
Material Alteration
Any alteration made in the cheque is Material
Alteration.
These cheque are not honored by Banks, for
making This as a valid cheque then the drawer has
to sign at every correction made.
Alterations' Like:
Date,
Amount,
Payee Name,
Converting order into bearer cheque, etc.
Altered Cheque
Endorsement
Signature included on the front or back of a
cheque acknowledging that both parties have
agreed to exchange the specified amount on the
document.
The signature or account information included on
the back of a cheque acknowledges that the
intended recipient received the document and
deposited it.
To cash a cheque, the issuer and the recipient must
endorse the document.
Negotiation of an instrument is the process by which
the ownership is transferred from 1 person to
another person.
Contd
There are 2 parties in Endorsement
Endorser
Endorsee
Endorser
The Person who signs the instrument with an
instrument of transferring his ownership.
Endorsee
The person in whos favor the instrument is
transferred.
Effect of Dishonour
Notice of dishonour: when a negotiable instrument
is refused acceptance or payment notice of such
refusal must immediately be given to parties to
whom the holder wishes to make liable. Failure to
give notice of the dishonour by the holder would
discharge all parties other than the maker or the
acceptor(Section 93).
Mode of notice: the notice may be oral or written. It
may be in any form but it must inform the party to
whom it is given either in express terms or by
reasonable intendment that the instrument has
been dishonoured and in what way it has been
dishonoured and that the person served with the
notice will be held liable thereon.
Liabilityofparties
Liabilityofacceptorormaker
Sec. 32
The liability of the acceptor of a bill of
exchange and of the maker of a promissory
note is the same
They are liable to pay the instrument on its
maturity
In default, they become liable to
compensate any subsequent party for the
loss caused to him by the dishonour
Liabilityofthedrawerofthebill
Sec. 30
The drawer of a bill of exchange is primarily liable
until the bill has been accepted by the drawee
After the acceptance the acceptor becomes
primarily liable
Thus the liability of the drawer of a bill can be put in
terms of the following propositions
by drawing and issuing the bill he engages that,
it shall be accepted and paid by the drawee
according to its apparent tenor; and
that if it is dishonoured either by nonacceptance or by non-payment, he shall
compensate the holder or every endorser who
has been compelled to pay the loss suffered by
him
Drawerofacheque
The drawer of a cheque gives a guarantee to the
holder that, it shall be paid by the banker when it is
duly presented for payment
If the cheque is dishonored, the drawer is liable to
compensate the holder provided that he has
received notice of dishonor
however
The liability of the drawer of a cheque is primary
and not secondary
This is so because the holder of a bill can sue the
acceptor, but the holder of a cheque has no
remedy against the banker
His remedy is only against the drawer
Criminalliability(drawerofacheque)
Ss. 138 to 147
The amendment of 1988 added a new
chapter to the Act
Vide Sec. 4 of Banking, Public Financial
Institutions and Negotiable Instruments Laws
(Amendment) Act,1988 [Act 66 of 1988]
Came into effect on 01.04.1989
First edition Ss. 138 to 142
Latest addition Ss. 143 to 147 [vide
Amendment Act of 2002]
Ingredients(sec.138)
1. The cheque should have been issued in
discharge of a legally enforceable debt or
liability;
2. The cheque should have been dishonored
within the period of its validity;
3. The cheque should have been dishonored for
want of funds in the account of the drawer;
4. The payee or holder of the cheque should
have issued, within a specified time limit, a
notice in writing to the drawer demanding the
amount of cheque; and
5. The drawer must have failed to make
payment within 15 days of receipt of the
notice.
Whethermensrea isnecessary?
such person shall be deemed to have
committed an offence
Thus, if the conditions stated therein are satisfied,
the court has to deem that the offence has been
committed, regardless of the state of mind of the
drawer
Sec. 140 excludes the defence of the belief of the
person about the sufficiency of funds
For offences by companies as envisaged in Sec.
141, also show the exclusion of mens rea
CivilremediesafterChapterXVII
As earlier the civil remedy is always available
Both civil and criminal proceedings against the
drawer can continue simultaneously
Section 138 also provides for civil liability which
provides for fine twice the amount of dishonoured
cheque.
Legallyenforceabledebt
A cheque should presumably have been issued for
payment in discharge, wholly or partly, of a legally
enforceable debt or liability
legallyenforceabledebt
Is a liquidated amount of money owed and
payable to another whether in present or in future
It is pecuniary liability recoverable by action in
respect of money demand
The provision includes not only debt but other
liability as well
The world liability denotes the state of being liable
Presumptionoflegallyenforceabledebt
Sec. 139
The legal presumption that the holder received it
for the discharge of debt or liability
The initial burden (very light one) is on the
complainant
Then the burden shifts upon the drawer
Rebuttalofpresumption(bydrawer)
He may rely upon (generally) circumstantial
evidence
The rebuttal has to be by proof and cogent
evidence and not by mere explanation
Liabilityofthe
drawee(i.e.banker)
ofacheque
Liabilityofthedraweeofthecheque
The drawee of a cheque is always a banker
The bankers duty is only owed to the customer
and not to the payee
Therefore, if the cheque is dishonored the holder
has no remedy against banker [even if the cheque
is been marked good for payment]
Onmarkedcheque
.writers are of the opinion that marking or
certification is neither in form nor in effect an
acceptance. Their Lordships are of the opinion
that the certification relied on as constituting
acceptance of the cheque is not an
acceptance within the meaning of the English
and Indian Acts. It is not necessary to hold that
a cheque can never be accepted; it is enough
to say that it is done in very unusual and special
circumstances No cases is reported in
England or in India of a banker being held
liable or even sued, as an acceptor of a
cheque drawn upon him
-- Lord Wright
Liabilityofunjustifieddishonour
The drawee of a cheque having sufficient funds of
the drawer in his hands properly applicable to the
payment of such cheque must pay the cheque
when duly required so to do, and in default of such
payment, must compensate the drawer for any loss
or damage by such default Sec. 31
ingredients
Sufficient funds
There should be sufficient credit balance in the customers
account
Bankersliability(forwrongfuldishonour)
The banker is liable (only to the drawer and not the
holder) for any loss of damage which might have
occurred to the drawer
Protectiontothe
payingbanker
Threeimportantprovisions
Paymentindue
course(generic)
Sec.10
Protectiontothe
payingbanker
(specific)
Sec.85
Altered
instrumentand
makingpayment
(generic)
PROTECTION
TO THE
PAYING
BANKER
Sec.89
S.10 paymentinduecourse
payment in due course means payment in
accordance with the apparent tenor of the
instrument in good faith and without negligence to
any person in possession thereof under
circumstances which does not afford a reasonable
ground from believing that he is not entitled to
receive payment of the amount therein
mentioned
Ingredients
The payment shall be
In accordance with the apparent tenor of the
instrument
Payment made in good faith
Payment made without negligence
To the person in possession of the instrument; and
No belief that the person in possession of the
instrument is not entitled to receive payment of
the amount in the instrument
s.85 specificprotectiontothebanker
1.
2.
S.89 alteredinstrumentandpayment
Where a cheque is presented for payment which
does not at the time of presentation appear to be
crossed or to have had a crossing which has been
obliterated, payment thereof by a person or banker
liable to pay, and paying the same according to
the apparent tenor thereof at the time of payment
and otherwise in due course, shall discharge such
person or banker from all liability thereon; and such
payment shall not be questioned by reason of the
instrument having been altered, or the cheque
crossed.
Forgedcheque&
bankersliability
Proposition
When the cheque is forged there is no mandate
to the bank to pay
Hence, banker is not entitled to debit the
customers account (on the basis of that forged
cheque)
Additionalproposition
In a joint account if one the signatures is forged
same consequence will follow
As there is no mandate banker cannot debit the
customers account
Thanks