Negotiable Instruments Act

Presentation By R.RAGHAVAN

CHAPTER II
After reading this chapter, you will be conversant with: 1. Meaning and Characteristics of a Negotiable Instrument 2. Types of Negotiable Instruments 3. Parties to a Negotiable Instrument 4. Types of Cheques & Crossing 5. Endorsement

Chapter I (contd)
6. Negotiation 7. Presentment of a Negotiable Instrument 8. Dishonor of a Negotiable Instrument 9. Noting & Protest 10.Problems 11 Summary

Negotiable Instruments Act, 1881

Introduction: In olden days, people learnt a method of trading and exchanged goods through barter system. It is a known system where goods were exchanged for goods only,without any intervention of money. After introduction of money as an exchange for goods,people realized the application and usage of money and thus it helped to grow trading activity by leaps & bounds.

Introduction (contd)
When the trade increased many fold,the number of transactions also increased. As a solution to this,the negotiable instruments are into usage in most of the transactions. Negotiable instrument is a piece of paper which entitles a person to a sum of money & is transferable from person to person by delivery or by endorsement & delivery. Thus the Act N.I. Act was brought into use in 1881.

N I Act
According to the Act, a Negotiable Instrument means a Bill of Exchange or Cheque or a Promissory Note payable to either to order or to bearer. Act clearly mentions only these three instruments.

Characteristics of a negotiable instrument

1. Freely transferable: The property in a negotiable instrument passes from one person to another by delivery if the instrument is payable to bearer & by endorsement & delivery if it is payable to order. 2. Title of holder free from all defects: A person taking an instrument bonafide & for value known as the holder in due course gets the instrument free from all defects in the title of the transferor. 3. Recovery: A holder in due course can sue on a negotiable instrument in his own name for the recovery of the amount. All prior parties are liable to him. A holder in due course can recover the full amount on the instrument.

Characteristics of Negotiable Instruments

4. Notice of tranfer : It is not necessary for the transferee of the negotiable instrument to give any notice of transfer to the party liable to pay on the negotiable instrument. 5. Number of transfer : The negotiable instruments can be transferred to any number of times till they are at maturity.

Characteristics of a negotiable instrument (Contd.)

6. Presumptions: Certain presumptions apply to all negotiable instruments unless the contrary is proved: (a) Consideration Every negotiable instrument is presumed to have been made, drawn, accepted, endorsed, negotiated or transferred for consideration. (b) Date Every negotiable instrument bearing a date is presumed to be have made or drawn on that date.

Characteristics of a negotiable instrument (Contd.)

(c) Time of acceptance When a bill of exchange has been accepted it is presumed that it was accepted within a reasonable time of its date & before its maturity. (d) Time of transfer Every transfer of negotiable instrument is presumed to have been made before its maturity. (e) Order of endorsements The endorsements appearing upon a negotiable instrument are presumed to have been made in the order in which they appear.

Characteristics of a negotiable instrument (Contd.)

(f) Stamp When an instrument is lost it is presumed that it was duly stamped. (g) Holder a Holder in due course Every holder is presumed to be a holder in due course. (h) Proof of protest In a suit on an instrument, which has been dishonoured, the court on proof protest presumes the fact of dishonour unless & until such fact is disproved. (i) Rights Holder in due course is not affected by certain defenses', which might be available previous holder. E.g. fraud to which he is not a party.

TYPES OF NEGOTIABLE INSTRUMENTS

BEARER INSTRUMENTS: A negotiable instrument is payable to bearer when it is expressed to be so payable. A person who is the lawful holder of a bearer instrument can obtain payment on the instrument. ORDER INSTRUMENTS : An order instrument is one which is expressed to be payable on order and when expressed to be payable to a particular person,it does not contain any words prohibiting transfer .

Types of Instruments (contd)

INLAND INSTRUMENTS : An Inland instrument is one which is drawn or made in India upon any person resident in India,even though made payable in a foreign country. FOREIGN INSTRUMENTS: A foreign instrument is one which is not an Inland Instrument. Must be drawn outside India & made payable outside or Inside India & drawn in India & made payable outside India & drawn on a person resident outside India.

Types of Negotiable Instruments (contd)

DEMAND INSTRUMENTS : An instrument like Promissory note or a Bill of Exchange wherein time for payment is specified or is payable at sight is an instrument payable on demand.

AMBIGUOUS INSTRUMENTS : Sec.17 An instrument which in form is such that it may either be treated by holder as a bill or as a promissory note,like when the drawer and the drawee are the same person or drawee is a fictitious person the holder can choose to treat the instrument either as a bill or PN.

Ambiguous Instrument(contd.)
To illustrate an example : A draws a bill on B and negotiates it himself. B is a fictitious drawee. The holder may treat the bill as a note made by A.

Types of negotiable instruments (contd)

INCHOATE OR INCOMPLETE INSTRUMENTS: When one person signs and delivers to another, a stamped instrument either blank or incomplete, he gives prima facie authority to the holder to make or complete for any amount specified therein,not exceeding the amount covered by the stamp. Such an instrument is called an Inchoate instrument.

INCHOATE INSTRUMENT (contd)

Example : A owes B Rs.5000. He gives a blank acceptance on a bill sufficiently stamped to cover any amount upto Rs.2000. B endorses the bill to H, a holder in due course. H who fills up the amount as Rs.2000 can recover the amount.

Inchoate Instrument (contd)

The following points in connection with Inchoate instrument should be noted. The person gives a blank instrument with authority to the holder to complete it with appropriate amount upto the value of the instrument. Delivery of such paper is essential. The person signing & delivering the inchoate instrument is liable to both a holder & a holder in due course. However,there is a difference in their respective rights. The holder of such an instrument cannot recover the amount in excess of the amount intended to be paid by the signor. The holder in due course can however, recover any amount on such instrument provided the stamp affixed on the instrument covers it.

Types of Negotiable instruments (contd)

ACCOMMODATION BILL: A bill which is drawn,accepted or endorsed without consideration is called an Accommodation Bill. The party lending his name to oblige the other party is known as accommodating party and the party so obliged is called the party accommodated. An accommodation bill can be negotiated after maturity provided it is for consideration. TRADE BILLS : When a bill is drawn,accepted or endorsed for consideration it is called a genuine trade bill .

Parties to Negotiable Instrument

Parties involved in various negotiable instruments at a glance: PARTIES TO A PROMISSORY NOTE : a) Maker b) Payee c) Holder d) Endorser e)Endorsee

PARTIES TO A BILL OF EXCHANGE : a) Drawer b) Drawee c) Payee d) Acceptor e) Holder f) Endorser g) Endorsee h) Drawee -in -case of need PARTIES TO A CHEQUE: a) Maker b) Drawee (Bank) c) Payee d) Holder e) Endorser f) Endorsee

Parties to Negotiable Instrument (Contd.)

1.

The person,who makes a promissory note and promise to pay the amount mentioned in it,is called the MAKER. The person who makes or a draws a bill of exchange or cheque is called the DRAWER.
Maker/Drawer :

2. Drawee : The person on whom a bill of exchange or cheque is drawn is called the DRAWEE. In case of a cheque,drawee is always a bank. A bill is required to be accepted by the drawee and once the drawee accepts the bill,he becomes Acceptor. A cheque does not require any acceptance as it is always payable on demand.

Parties to Negotiable Instrument (Contd.)

3. Payee : The person whose name is

mentioned in the negotiable instrument,to whom money is to be paid,is known as the PAYEE. In case of a Bill or Cheque:drawer and payee may be the same person.
4. Holder :A person who has right to possess the negotiable instrument in his own name and to receive the amount mentioned in it, is called the HOLDER. He is either the original payee or endorsee.

Parties to Negotiable Instruments (contd)

Endorser : Endorser is a person who endorses the negotiable instrument to another person. Endorsee : Endorsee is a person to whom the negotiable instrument is endorsed. Drawee in case of need : When in a bill of exchange,the name of another drawee is mentioned in addition to the original drawee,such a person is called as DRAWEE IN CASE OF NEED. His name can be mentioned in the bill by the drawee or by the
Endorser.

Parties to Negotiable Instruments (contd)

Acceptor for honour : When the drawee refuses to accept the bill of exchange ,or refuses to furnish better security when demanded by the notary,any such person may accept the bill with the consent of the holder,in order to safeguard the honour of the drawer or any other endorser, and bind himself by such acceptance. Such a person is known as ACCEPTOR FOR HONOUR. Any person may voluntarily become a party to a B/E as an Acceptor for Honour.

Parties to a Negotiable Instrument (contd)

Holder in due course: Before a person can be called as holder in due course, he must fulfill the following conditions: 1.He must be a holder : It means he must be entitled to have possession of the instrument in his own name under a valid legal title and to recover the amount mentioned in it from the parties who are liable to pay.

Parties to a Negotiable Instrument (contd)

He must be holder for valuable consideration: He must have acquired the instrument for consideration,which is valuable and lawful. A person who acquires title to the instrument by way of gift,is not a HOLDER IN DUE COURSE. He must have become the holder of Negotiable instrument before its maturity.

Special Rights and Privileges of a Holder in Due Course

A holder in due course enjoys the following rights and privileges: 1. He obtains a better title to the instrument than that of a true owner.

2. The defective title of the previous endorsers (if

any) will not adversely affect his rights. 3. He can pass on a better title to others since,once the instrument passes through his hands,it is purged of all defects.

Privileges of a H D C (contd)
To cite an example: P obtained a promissory note from Q by fraud for Rs.5000 and endorses it to R a holder in due course. R can recover amount from Q and defence of fraud cannot be pleaded against R by Q. But P cannot RECOVER amount from Q in this case.

Privileges of H D C (contd)
4. Privileges in case of Inchoate Stamped Instruments: In case of inchoate stamped instrument,if the holder or payee fills more amount than that was authorised,he cannot recover that excess amount filled, however, he can recover the actual authorised amount. But if such instrument is transferred to a H D C, he can recover the whole amount mentioned in the instrument.

Privileges of H D C (contd)
To cite an Example: P signs his name on a blank stamped instrument. He gives the paper to Q to fill it up as a promissory note for Rs.500 only. But Q fradulently fills the paper for Rs.2000. Q thereafter,gives it to R for Rs.2000 who takes it without knowledge of fraud. Here R is a holder in due course and P is liable to pay him full amount i.e.rs.2000.

Privileges of a H D C (contd)
5. Liability of prior parties : All prior parties to a negotiable instrument are liable to a holder in due course until the instrument is duly satisfied. Liability of all such prior parties is joint and several. The prior parties may include the maker or drawer ,acceptor and endorsers etc.

Privileges of H D C (contd)
6. Privileges in case of conditional delivery of instrument.. Example: as collateral security .. In such a case, ownership rights in an instrument are not transferred to the endorsee, if such negotiable instrument is transferred to a H D C, the H D C can recover the amount on the instrument

Privileges of H DC (contd)
7. Estoppel against denying validity of the Instrument
When the H D C files a suit for recovery of the amount, against the maker of a promissory note or drawer of a B/E or an acceptor of B/E, in such a case the maker or the drawer of negotiable instrument cannot escape their liability on the ground that the instrument was invalid when it was made or drawn. It means that the maker or drawer is estopped (i.e.stopped or prevented)from denying the original validity of the instrument.

Distinction between Holder & Holder in due course

HOLDER Meaning: Holder is a person,who is entitled to the possession of the instrument and receive or recover the amount due thereon from the parties. Consideration: In case of a holder consideration is not necessary. HOLDER IN DUE COURSE

A holder in due course is a holder who has taken the instrument in good faith and for value , and also before its maturity.

In this case,consideration is a must. Without giving consideration, a person cannot be a Holder in due course. Holder in due course must acquire the instrument before maturity.

Maturity: A holder may acquire the instrument even after maturity.

Distinction betweenHolder & Holder in due course (contd)

TITLE The holder cannot acquire a better title than that of his transferor. Holder in due course acquires a better title than that of his transferor. His title is free from all defects.

Right against prior parties: Holder can recover the amount from the maker and the transferor but he can not recover the amount from all the prior parties. Notice of defective title: Holder may have notice of defective title but he should not be party to that defect or fraud.

Holder in due course has a right to recover the amount from any of the prior parties until the instrument is duly discharged.

Holder in due course should not have any knowledge of the defective title of the transferor. Besides this, there should be no cause to believe

Promissory Note
Definition 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 of money only to, or to the order of, a certain person, or to the bearer of the instrument. The person who promises to pay is called the maker. The person who is promised the payment is called the payee. A promissory note is also called a pro-note or simply note;.

Promissory note (contd)

Illustrations: 1. I promise to pay B or order Rs.500. 2. I acknowledge myself to be indebted to B in Rs.1000 to be paid on demand for value received.

Both the above instruments are VALID promissory notes.

Essential elements of a promissory note

1. Written instrument The promissory note must be in writing. It is not necessary that word promise should be used,but the words used must clearly show an intention on the part of maker to give unconditional undertaking to pay. 2. Undertaking to Pay A promissory note contains an express undertaking or promise to pay. A mere acknowledgement of debt is not a promissory note. For instance, Mr. A signs an instrument reading Mr. X, I owe you Rs.1,000/- is not a promissory note. The promise to pay need not be expressed in any particular form of words, but the language used must be such that an express undertaking to pay may be fairly deduced there from.

Promissory note (contd)

The following instruments signed by A are not Promissory Note: 1. Mr.B, I.O.U. Rs.100 2. I am liable to B, in a sum of Rs.500 to be paid by instalments. 3. I am bound to pay the sum of Rs.500 which I received from you.

Essential elements of a promissory note (Contd.)

2. Undertaking to Pay (Contd.) Thus, a receipt for money, even though containing terms of repayment, does not constitute a promissory note. An implicit undertaking is not enough; there must be an express undertaking to pay. For instance, received from Mr. X a sum of Rs. 1000 to be repaid in full after the expiry of two months with interest @ 12 percent per annum, is not a promissory note. A promissory note will generally read as I, A, agree to pay to Mr. X, a sum of Rs. 1,000/-, after two months from date with interest @ 12% p.a.

Essential elements of a promissory note (Contd.)

3. Undertaking must be unconditional The promise or undertaking to pay must be unconditional, or subject to a condition which is certain to happen e.g. death of a person. Thus, if A signs an undertaking to pay to Mr. X, Rs. 1000 after the death of Mr. Y, it will be valid pro-note. But, if the undertaking reads as I promise to pay Mr. X, Rs. 1000, after the goods arrive at Bombay is not a promissory note, since it is not certain whether the goods will arrive or not. Illustration: A executed a promissory note stating . I PROMISE TO PAY RS.1000 TO B,30 DAYS AFTER HIS MARRIAGE WITH C. It does not constitute as a promissory note as it is probable that B may not marry C.

Essential elements of a promissory note (Contd.)

4. Promise to Pay Money only An instrument containing a promise to pay something other than money or something in addition to money, is not a promissory note. A promissory note must be payable in some money (i.e. legal tender) only. The sum of money payable must also be certain. If the instrument contains agreement to pay in kind,then it cannot be considered as a Promissory Note. To illustrate an example: I promise to deliver to B 1000 bags of wheat, is not a Promissory note as there is no promise to pay in money.

Essential elements of a promissory note (Contd.)

5. Parties to the instrument must be certain The person who is going to receive money is called payee. In a promissory note there must be a payee ascertained by name. A promissory note cannot be made payable to the maker himself, because the same person cannot be both,the promisor and the promisee.

Essential elements of a promissory note (Contd.)

6. Stamping : A promissory note must bear sufficient stamp as required by the Indian Stamp Act. 7. Bank note or CURRENCY NOTE is NOT a Promissory Note: These notes are expressly excluded from the definition of a promissory note because they are treated as money only. 8. Rate of Interest : Rate of Interest may be mentioned in a promissory note and in such a case,interest must be paid at the rate from the date of the instrument.

Specimens of Promissory Notes

(1)

Rs. 5,000/-

On demand I promise to pay ABC, the sum of Rs. 5,000/(Rupees five thousand) only with interest at 9 per cent annum for the value received. Place : Mumbai Date : 1st March, 2000 XYZ

Specimens of Promissory Notes

(2)

Mumbai Rs. 5,000/1st March, 2000 On demand I promise to pay ABC the sum of five thousand rupee only.
XYZ

Specimens of Promissory Notes

(3)

Rs. 5,000/Mumbai 1st March, 2000 Three months after date, I promise to pay ABC the sum of five thousand rupees. XYZ

Bill of Exchange
Definition Sec 5: A bill of exchange is an instrument in writing containing an unconditional order, signed by the marker, 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. Essential Elements The essential elements of a bill of exchange are similar to those of a promissory note and the rules which apply to notes are, in general, applicable to bills of exchange also. Following are essentials of a bill of exchange:

Bill of Exchange (Contd.)

1. A bill of exchange must be in writing and may be in any language, and in any form. 2. A bill must contain an order to pay. The order to pay need not be expressed in any particular form of words; it may be in the form of a request, but it must be imperative. The order must be such as to require the person specified therein, to pay the money in all events. Merely to give him an authority to pay the money is not sufficient. 3. The order must be unconditional as mentioned in promissory note. 4. The order must be to pay money only and the amount of money ordered to be paid must be certain.

It must contain an order to pay

To, Date 2 Jan 2004 Mr. A 241, Sadashiv Peth, Pune 411030 Pay Mr. B or Order the sum of Rs. 1,000/-, three months after date if u please. Sd/Stamp C

It is not a bill of exchange as it is not unconditional order

The order to pay must be Unconditional

To, Date 2 Jan 2004 Mr. A 241, Sadashiv Peth, Pune 411030 Pay Mr. B or Order the sum of Rs. 1,000/-, three months after date on settlement of account. Sd/Stamp C

It is not a bill as a condition is attached as to settlement of account. Hence, not valid bill of exchange.

It must contain an order to pay a definite amount of money

To, Date 2 Jan 2004 Mr. A 241, Sadashiv Peth, Pune 411030 Pay Mr. B or Order the sum of Rs. 1,000/-, three months after date with interest. Stamp Sd/C

It is not a valid bill of exchange as the rare of interest is not given hence definite amount of money cannot be ascertain.

It must contain an order to pay money and money only

To, Date 2 Jan 2004 Mr. A 241, Sadashiv Peth, Pune 411030 Pay Mr. B or Order the sum of Rs. 1,000/-, along with ten bag of sugars. Stamp C Sd/-

It is not a valid promissory note because it is not only of money but of sugar along with money. Hence, it is not a valid bill of exchange.

Bill of Exchange (Contd.)

5. A bill of exchange, generally speaking, requires three parties, viz. the drawer, the drawee and the payee. The person who makes the bill is called the drawer, the person on whom the bill is drawn is called the drawee and the person to whom the amount is ordered to be paid is called the payee.

The drawer, drawee and payee must be certain

To, Date 2 Jan 2004 Mr. Superman 241, Sadashiv Peth, Pune 411030 Pay Mr. James Bond or Order the sum of Rs. 1,000/-, three months after date. Stamp Sd/Mr. Ghost

It is not promissory note because all the three parties are fictitious persons.

Bill of Exchange (Contd.)

6. The bill must be signed by the drawer. 7. A bill of exchange should contain the date, place of its making and the place where it is payable, consideration, etc. as usual. 8. A bill must be appropriately stamped. 9. A bill cannot be originally made payable to bear on demand. However, the original payee may indorse the bill in blank, to make it payable to the bearer. 10. A bill of exchange being an order upon the drawee, is not binding on him unless he accepts it by signing on the bill. If the bill is not accepted it does not become invalid but is only dishonoured.

Specimens of bill of exchange

(1) Rs. 5,000/Mumbai 1st March, 2004 Three months after date pay to ABC, or order the sum of five thousand rupees for value received.

To, PQR, Lentin Road, Mumbai. Signed XYZ

Various Types of Bills of Exchange

1. Demand Bill : A Bill of Exchange may be drawn payable either on demand or after a certain period of time. A bill expressed to be payable on demand,at sight or on presentment is treated as bill payable on demand. A demand bill when presented to the drawee is to be paid immediately and the documents related thereto are delivered to the drawee agsinst his receipt.

Various types of B/E (contd)

The following instruments are payable on demand: A Bill of Exchange or Promissory Note in which no time for payment is specified or a cheque. A B/E expressed payable on demand,at sight or on presentment.

Various types of B/E (contd)

Usance Bill :

Usance bills are those bills which fall due for payment after some period of time. It may be made payable on expiry of a fixed period after its date or after sight. Bill payable after date : date of maturity is to be calculated from the date as mentioned in the Bill. Bill payable after sight : date of maturity is to be calculated from the date of acceptance of the bill.

Distinction between Demand Bill & Usance Bill:

DEMAND BILL Due for payment immediately after presentation. Does not attract stamp duty USANCE BILL Due for payment after a certain specified fixed period of time. Attracts stamp duty

Bank normally purchases demand bill

Bill does not require acceptance. Days of grace are not allowed. Documents are delivered against full payment.

Usance Bill is discounted .

Usance bill has to be accepted. Three days of grace are allowed unless it is specifically disallowed. The Collecting Bank,agsainst acceptance delivers documents of Usance bill by the drawee or his agent.

Types of B/E (contd)

2. Clean & Documentary Bill : A clean bill is one not accompanied by the relative doument of title to goods concerning the trade transaction. Seller may draw a clean bill representing advance payment to be received by him or the balance amount to be received in a trade transaction.

Types of B/E
Documentary Bill: A documentary bill is accompanied by the relative documents of title to goods such as bill of lading,railway receipt, motor receipt etc. Bank has control over the goods mentioned in the documents.

Between Promissory Note and Bill of Exchange

Though same rules apply for both promissory note and bill in many situation, some points of differences make them distinct. They are:

Promissory Note & Bill of Exchange distinguished

Distinction
No. of Parties Commitment to Pay

Promissory Note
Two, maker and payee. An unconditional promise to pay.

Bill of Exchange
Three-drawer, drawee, payee. An unconditional order to pay by the drawer directing a certain person to pay a certain sum of money. Secondary and conditional for maker of a bill, because he becomes liable to pay only when the acceptor fails to pay.

Nature of Liability

Primary and absolute for maker of a note because himself promises to pay.

Acceptance

Since it is to be signed by the maker himself who is liable to pay no need of acceptance.

Requires acceptance of the drawee before it is presented for payment.

Distinction
Position of the Marker

Promissory Note
Marker will have immediate relation with the payee. Never paid to the bearer. No need to give a notice to the marker.

Bill of Exchange
Drawer will have immediate relation with acceptor not the payee. Can be paid to the bearer on demand. Notice must be given by the holder of the bill to all the prior parties.

Payable to Bearer Dishonor Notice

CHEQUE
Definition: Sec 6: A cheque is a bill of exchange drawn on a specified banker and not expresses to be payable otherwise than on demand. The main characteristics of the cheque can be summarised as under: NEGOTIABILITY : A cheque is a negotiable instrument. PAYMENT PARTIES : A cheque is always payable on demand. : It has three parties namely.

A cheque (contd)
Drawer Bank. Drawee drawn. : person who draws the cheque on a

: A bank on whom the cheque is

Payee : A person to whom the payment is to be made by the drawee.

Essentials of a cheque
From the definition of cheque, it is clear that there are two essential, requirements peculiar to a cheque: 1. A cheque should fulfil all the essential

requirements of a B/E. 2. A cheque can be made payable to bearer or to order but it is always payable on demand. 3. A cheque must be signed by the drawer. 4. It must contain an unconditional order made to the specified banker to make payment of a certain amount.

Essentials of a cheque (Contd.)

5 Amount mentioned in a cheque may be made payable to the particular person or to the order or to the bearer. 6.A cheque requires no acceptance in the ordinary course of business as it is intended for immediate payment. 7. If the cheque is validly drawn & drawer has sufficient funds, Banker must pay the amount when presented. 8. The signature of drawer must tally with the specimen signature kept in the Bank. 9. A cheque must be dated. If date is not mentioned, Bank may refuse to make payment.

Essentials of a cheque (Contd.)

10. A post-dated cheque is valid but in such a case it is payable on or after the specified date.

11.

A cheque must be presented within six months after the due date. In case of cheques issued by Central Govts..validity period of 3 months is mentioned.

15. In a cheque,drawee is always a bank,drawer is a person who has an account in the bank & payee is a person on to whom the amount of cheque is made payable.

Distinction between Bill of Exchange & a cheque BILL OF EXCHANGE 1) Parties: A Bill of Exchange may be drawn on any person including a Banker. CHEQUE A cheque is always drawn on a Banker.

2)

Bearer on demand: B/E payable to bearer on demand is absolutely void and illegal.

A cheque drawn payable to bearer on demand is perfectly valid.

3)

Acceptance by the drawee: B/E A cheque does not require any requires acceptance by the drawee acceptance by the drawee before before he can be made liable upon payment can be demanded. it. Need of stamp: B/E must be properly stamped. Grace days: three days of grace allowed while calculating maturity date. Crossing: B/E cannot be crossed. A cheque does not require any stamp. Since a cheque is always payable on demand, it is not entitled to any days of grace. Cheques may be crossed.

4) 5)

6)

Distinction between a B/E & Cheque (contd)

BILL OF EXCHANGE Notice of Dishonour: Notice of dishonour is required to be given to the drawer. CHEQUE No such notice is necessary. But if criminal action is to be initiated against the drawer for dishonour of a cheque,notice u/s 138 is essential.

Noting & Protest: A BE may be noted or protested for dishonour. Discharge from liability: The drawer of a bill of exchange is discharged from liability,if it is not properly presented for payment.

A cheque is not required to be noted or protested for dishonour.

But the drawer of a cheque will not be discharged by delay of the holder in presenting it for payment.

Types of Cheques:
Cheques are mainly of two types: I. Open cheques and II. Crossed cheques I. Open / Bearer Cheque: An open or bearer cheque is one which is payable to the payee or the holder, in cash across the counter of the drawee bank. Such a cheque is, therefore, prone to a great risk. If the cheque is lost or stolen, the finder may go to the bank and get it encashed, unless the payment had already been stopped. A system of crossing the cheques was, thus, introduced to avoid any contingency and ensure that only the rightful holder gets the payment.

Types of Cheques: (Contd.)

II. Crossed Cheque: A crossed cheque is one, which bears on its face two parallel transverse lines, usually on the top left hand corner of the cheque. The payment of a crossed cheque can be obtained only through a banker through which it is presented.

Types of Crossing
a) General Crossing A cheque is said to be crossed generally when two parallel transverse lines are drawn, with or without the words and company account payee only, or not negotiable or any abbreviation thereof., between the lines, but there is not the name of any bank. When a cheque is crossed generally, the drawee bank shall not pay it unless it is presented by a banker. Specimens of general crossing

Types of Crossing
EFFECT OF GENERAL CROSSING : It gives a direction to the paying Bank. This type of cheque cannot be paid at counter, and gives protection & avoids fraudulent withdrawals. Liability of the paying bank : It is the liability of paying bank to verify proper payment in proper account.

Types of Crossing (contd)

The words & Co. are written on the cheque when the drawer does not know name of the payees Bank though they do not form a necessary part of the crossing. By crossing a cheque generally,the Bank is directed not to make payment except through another Bank.

Types of Crossing (Contd.)

b) Special Crossing A cheque is said to be crossed specially, when the lines of crossing carry the name of a banker, with or without any additional words, in between the lines. The payment of a specially crossed cheque can be obtained only through the particular banker whose name appears in between the lines, or through its agent bank for collection. EFFECT OF SPECIAL CROSSING: It prevents the fraudulent transactions and misappropriation.

It is direction to the paying bank to pay the amount to the account holder of that bank,but not to others.

Effects of Special Crossing (contd)

If a cheque specially crossed on a particular bank and if such a cheque is presented by another bank,the paying bank should refuse the payment. In case of special crossing,the bankers name and payees name are mentioned & the bank is well acquainted with the payees name and signature. If there is any forgery, he can easily detect it.

Types of Crossing (contd)

NOT NEGOTIABLE CROSSING : The words Not Negotiable do not mean not transferable. The cheque Not negotiable crossed can also be transferred like any other cheque. But it gives more protection than General Crossing & Special Crossing. It is like a warning upon the paying and collecting Bankers. It is a danger signal saying: .. Take care, this cheque may be stolen.

Types of crossing (contd)

OBJECT: The true owner is protected by this type of crossing. If it is stolen,the finder cannot cash it so easily. The good title cannot be passed to him. He will be compelled to return it to the true owner. His right is preserved safely against any subsequent holder.

Types of crossing (contd)

Effects: It gives more protection & safe to the holder of the cheque. A third person cannot cash it so easily. It can be transferred like any other cheque. If the banker is negligent and transfers the amount of that cheque to another account,he will be held responsible & will be liable to make the compensation to the sufferer.

Types of Crossing(Contd.)

Example : Not Negotiable crossing W drew a blank cheque crossed not negotiable and handed it over to his agent to fill in the amount and the name of the payee. The agent fraudulently completed the cheque and transferred to one P, in payment of a debt of his own. Held, the agent had no title to the cheque and as such P had no better title to the cheque.

Types of Crossing (Contd.)

d) Account Payee Only Crossing Theoretically speaking a cheque crossed account payee only remains transferable. In practice, however, the transferee will find it difficult to get the cheque collected for him. Account payee only crossing is a direction to the collecting banker that the proceeds of the cheque shall be received only for the payee and credited to his account. If the banker receives the proceeds of such a cheque for and on behalf of any person other than the payee, the banker will be guilty of negligence. Thus, a cheque crossed account payee only becomes non-negotiable for all practical purposes i.e.in practice, Bank refuses to accept A/c payee crossed cheques with any endorsement thereon.

Types of crossing (contd)

Effect: It is merely in the form of direction to the receiving bank that the drawer desires to pay the particular cheque into bank which keeps account of the payee. It gives further protection to the cheque. The collecting bank should credit the cheque only to the mentioned a/c of the payee.

Types of crossing (contd)

Not Negotiable and A/c Payee Crossing: Safest form of crossing and it has double advantage. The instrument is rendered not negotiable. Making the paying Bank responsible to see that payment is made to the person who is entitled to receive it PLUS A/c Payee crossing directs the Collecting Bank to collect it for the payee only and warns that if the amount is collected for someone else, he may be held liable for damages.

Who May Cross a Cheque?

The following persons may cross a cheque: a) Drawer The drawer of a cheque may cross it generally or specially. b) Holder Where the cheque is open (uncrossed) the holder may cross it generally or specially. Where the cheque is crossed generally, the holder may cross it specially. Where the cheque is crossed generally or specially, the holder may add the words not negotiable. c) Banker - Where the cheque is crossed specially, the banker to whom it is crossed may again cross it especially to another banker, or his agent for collection. This is also known as double crossing and is generally resorted to when the banker in whose favour the cheque is specailly crossed, is not a member of the clearing house or does not have a branch where the cheque is to be paid.

A Cheque-Endorsement

When the maker or holder of a negotiable instrument signs the same,otherwise,than as such maker,for the purpose of negotiation,on the back or face thereof or on a slip annexed, he is said to endorse the same and is called the endorser.

Types of Endorsement
Endorsement in Blank : Mere signature on the back of an instrument not mentioning name of the person. Payable to bearer & can be negotiated by mere delivery. Endorsement in Full : To pay the amount specified in the cheque to a certain person or his order.

Types of Endorsement (contd)

Conditional Endorsement: The condition can be the happening of a contingent event or make the right of the endorsee to receive the payment depending upon happening of such event.The condition may either be condition precedent or subsequent. The conditions attached to the endorsement do not affect the negotiability of the instrument endorsed.

Types of endorsement (contd)

Restrictive Endorsement : When the right of negotiation is restricted or excluded by the endorsement, it is restrictive. Example: Pay to Mr.XYZ only,then his right to negotiate is restricted. Endorsement Sans Recourse: Adding the words without recourse to me would be that the endorser is excluded from all liability on the instrument.

TRANSFERABILITY OF A NEGOTIABLE INSTRUMENT

One of the important features of negotiable instruments is that its tranasferability. Negotiable instruments are freely transferable from one person to another in one of the following ways: 1. By negotiation under the N.I. Act 2. By assignment of the instrument

NEGOTIATION
Negotiation : Negotiation means the transfer of property in the form of instrument from one person to another in such a manner to convey title make the transferee as holder thereof. If the amount is payable to order,instrument can be by endorsement & delivery,while if payable to bearer, by mere delivery without any endorsement.

Negotiation (contd)
Modes of Negotiation : Two modes of negotiation are: Delivery & Indorsement

Negotiation (contd)
DELIVERY: Delivery means transfer of possession from one person to another. Negotiation is effected by mere delivery or by endorsement & delivery. Mere making & signing of the instrument does not make it operative unless it is delivered.

Negotiation (contd)
Illustrations to understand negotiation by delivery: 1. A makes a promissory note in favour of B in respect of a debt owed by A to B. After As death,the note is found among some of his papers. B cannot recover the amount on this instrument,even if it is delivered to him.

Negotiation: EXAMPLES (contd)

2. A the drawee receives a bill from B, holder. A accepts the bill. However,on learning that the drawer has become bankrupt,he cancels his acceptance and returns the bill to the holder. B cannot recover the amount from A as A had never delivered the accepted bill to B.

Negotiation (contd)

3. A makes a note in favour of B and hands it over to his agent for delivery. B does not acquire a right to the note until it is delivered to him. On the other hand, A can revoke the note any time before it is delivered.

Negotiation (contd)
Neogitation by Delivery: This kind of negotiation takes place when a negotiable instrument is to be paid to a bearer. Transferor does not put his signature on the instrument. Transferor not liable on the instrument if it is dishonoured at maturity.

Negotiation (contd)
Negotiation by Indorsement: This negotiation is for paying an order. The instrument is first indorsed & then delivered to the holder. A person taking such an instrument only acquires the rights of an assignee of an ordinary close-in-action.

PRESENTMENT OF A NEGOTIABLE INSTRUMENT

Presentment means showing an instrument to the drawee,acceptor or maker for acceptance, sight or payment. Three kinds of presentment: Presentment of B/E for acceptance Presentment of promissory notes for sight Presentment of negotiable instruments for payment.

Presentment for Acceptance

Presentment for Acceptance: It is only the bills of exchange that require presentment for acceptance,since promissory notes are drawn by the acceptor himself. A bill has to be presented to the drawee because till he accepts it,he cannot be made liable to pay on it.

Presentment (contd)
Presentment for acceptance necessary in case of the following bills: A bill payable some period after sight since such bills falls due only on the third day after it has been sighted or presented to the drawee. Where the bill expressly stipulates that it must be presented for acceptance before it is presented for payment When the bill is made payable at a place other than the place of residence or business of the drawee.

Presentment (contd)
To cite an example: A draws a bill three months after sight on B. It is essential that this bill should be presented to B for acceptance in order to fix the maturity of the bill. If on presentment, B dishonours the bill by non-acceptance,then the holder can sue all the prior parties to the bill.

Presentment (contd)
Presentment for acceptance is not compulsory where the bill is payable: on demand a certain number of days after date or on a specified date or on the happening of an event,unless it is specifically required in the bill.

Presentment (contd)
PRESENTMENT WHEN EXCUSED: Presentment for acceptance may be excused and the instrument treated as dishonoured when: the drawee cannot after reasonable search be found. where the drawee is a fictitious person or one incapable of contracting. where the drawee becomes bankrupt or is dead. where although the presentment is irregular acceptance refused on some other ground.

DISHONOUR OF A NEGOTIABLE INSTRUMENT

Non-acceptance or non-payment of an instrument results in dishonour of the instruments. Object of notice of dishonour : The object of notice dishonour is to inform the party liable on the instrument about the liability which accrues as a result of the dishonour of the instrument.

Dishonour of N I (contd)
The notice is necessary whatever the nature of the instrument i.e.whether it is payable at sight or on demand.
If the holder neglects to give such notice within a reasonable time from the date of dishonour,all the prior parties liable on the instrument and entitled to notice are discharged.

Dishonour of a negotiable instrument (contd)

Dishonour by Non-acceptance : A bill of exchange is dishonoured by nonacceptance: When the drawee does not accept it within 48 hrs from the time of presentment for acceptance When presentment for acceptance is excused and the bill remains unaccepted.

Dishonour by Non-acceptance(contd)
when the drawee is incompetent to contract when the drawees acceptance is a qualified one. when the drawee is a fictitious person or after reasonable search cannot be found. QUALIFIED ACCEPTANCE : An acceptance is qualified where it is given subject to some condition or qualification. An acceptance is qualified when it is: Conditional as, for example: Accepted payable when in funds, OR ACCEPTED payable when a cargo consigned to me is sold

Note: Where a bill has been dishonoured by non-acceptance,the holder of the instrument acquires an immediate right to proceed against the drawer and other endorsers.

Disonour (contd)
Dishnour by non-payment : 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. An instrument is also dishonoured by nonpayment when presentment for payment is excused and the instrument when overdue remains unpaid.

Dishonour (contd)
Notice of Dishonor : When a negotiable instrument is dishonoured either by non-acceptance or by non- payment, the holder of the instrument or some party liable thereon must give a notice of dishonour to all the prior parties whom he wants to make liable. However,notice dishonoured need not be given to the party who has himself dishonoured the instrument.

Notice of dishonour (contd)

Each party receiving notice of dishonour must,in order to hold any prior party liable to himself,give a notice of dishnour to such party within a reasonable time. Notice of dishonour is so necessary that an omission to give it discharges all parties.

Dishonour (contd)
NOTICE OF DISHONOR WHEN UNNECESSARY: When Notice is Expressly Waived. Waiver may be indicated on the instrument itself. For Example: where the drawer of a bill informs the holder that the bill will be dishonoured on presentment, notice of dishnour is dispensed with.

Notice of dishonour when unnecessary (contd)

Where the Drawer countermands Payment When the party is not likely to suffer any damage for want of notice for want of notice. For example: A has a balance of Rs.200 in his account. Inspite of not having authority to overdraw,he draws a cheque for Rs.800. In this case, NOTICE OF DISHONOUR can be dispensed with.

Notice of dishonour when Unnecessary (contd)

When the party entitled to notice cannot after due search be found. When the party bound to give notice is,for any reason,unable, without any fault of his own,to give it . (such as accidents,sickness of the holder) When one of the Drawers is also an Acceptor .

Notice of dishonour when unnecessary (contd)

When notice of dishonour is waived impliedly.

NOTING & PROTEST

Sec.99 of NI Act, noting means the recording of the fact of dishonour by a notary public upon the instrument within a reasonable time after dishonour. Basically,it is an authentication of a fact of dishonour by an independent person. At the time of authentication of such dishonour,the notary public presents the bill once again,for acceptance or payment and refusal to accept and pay by the drawee is noted on the bill.

Noting & protest (contd)

The following facts are recorded: facts of dishonour date of dishonour reason for dishonour If the instrument is not expressly dishonoured,why the holder treats it as dishonoured. Notarys charges Noting of dishonour of Inland Bills is not compulsory.

Noting & Protest (contd)

PROTEST: When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment,the holder may within a reasonable time,cause such dishonour to be noted and certified by a Notay Public. Such certificate issued by a Notary public is called protest.

Noting & Protest (contd)

The advantages of Protest are: It facilitates documentary evidence of dishonour of the bill to the drawers. Such protest certificate is treated as conclusive proof of dishonour in a court of law. There is a possibility of getting an acceptor for honour.

Noting & Protest (contd)

For example: A bill is drawn on Arvind in Chennai and is payable at Bangalore. In case,the bill is dishonoured by nonacceptance,it may be protested in Bangalore without presenting it once again to Arvind at Chennai.

Chapter III
Notice of dishonour Paying & Collecting Bank Paying Bankers duties Payment of forged cheque

Dishonour of a cheque for Insufficiency of Funds

Sec.138 of N I Act :

On the dishonour of a cheque one can file a suit for recovery of the cheque amount with cost & interest and can also file a Criminal Complaint for punishment to the signatory of the cheque for having committed an offence. However, before filing the said complaint, a statutory notice is liable to be given to the other party.

Sec.138 NI Act .. Bouncing (contd)

Sec. 138 to 141 was added to N I Act in order to accommodate the said provisions. N.I. was amended with the provisions & was passed on Dec.2002. Some of the important features of 2002 amendment are: 1. The period within which the payee should give notice to the drawer has been extended to 30 days instead of 15 days earlier.

2002 amendment (contd)

Stopping payment of post-dated cheque before the due date of its payment is deemed to be an offence under Sec.138 of N I Act. For offences u/s 138 of the NI Act,the maximum period of impriosonment has been enhanced to two two years from one year. Again,to speed up the matter,the trails should be continued from day to day,consistently with the interests of justice and until conclusion.

2002 amendment (contd)

All efforts should be taken to conclude the trial within 6 months from the date of filing of the complaint.
The nominee directors cannot be prosecuted under this Act for dishonour of a companys cheque. This applies to non-executive directors also.

Sec.138 of N I Act (contd)

To proceed legally against the drawer: 1. The cheque should have been issued in partial or full discharge of a legally enforceable debt. Where a cheque is issued as a gift or to discharge a moral obligation or for an illegal/unlawful consideration, Section 138 will not be applicable.

Sec.138 of N I Act (contd)

Illustration : A took a loan from a finance company and asked the company to remit the amount to B. However, before the cheque could be presented for payment,the company was given instructions not to make payment. On presentment,the cheque was dishonoured. B brought a suit against the company for dishonour of the cheque.

Sec.138 of NI Act (contd)

It was held that the suit was not maintainable U/s 138, as the cheque was not issued in discharge of any liability owed by the company to B. .

Sec.138 of N I Act (contd)

3. The cheque should have been dishonoured because of insufficiency of funds in the drawers account on which it is drawn or because the cheque exceeds the amount arranged to be paid from that account by an agreement with the bank.

Sec.138 of NI Act (contd)

Notice to the Drawer: A written demand for payment should be made to the drawer, has been extended to 30 days instead of 15 days earlier. Notice of dishnour of the cheque may be received either from the drawee bank or the collecting bank.

Sec.138 of N I Act (contd)

Filing of written complaint : Within one month from the date on which the cause of action arose under clause of the proviso to Sec.138, a written complaint should be filed by the payee or the holder in due course with a first class judicial magistrate.

Sec.138 of NI Act (contd)

Punishment: A drawee that is found guilty of an offence u/s 138 shall be punishable with imprisonment for a term which may extend upto two years or with a fine,which may extend upto twice the amount of the cheque.

Offences by companies
Sec.141 : If the person committing an offence is a company,then every person who is responsible for such offence as well the company,shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

A Cheque-Material alteration
An alteration is,in any way alters the character or identity of the instrument or the terms or relation of the parties thereto. Thus,any change in an instrument which causes it to speak a different language in legal effect from that which it originally spoke,is a material alteration u/s 88.

Material alteration (contd)

The alteration of a negotiable instrument will not invalidate the instrument in the following cases where it is made: 1. To carry out the common mistakes of parties 2. with consent of parties & before the instrument is issued. 3. To correct a mistake 4. Crossing of cheques,altering a general crossing into special crossing, addition of words:A/c Payee

Material alteration (contd)

5. filling blanks of the instrument 6. conversion of blank endorsement into endorsement in full It is immaterial as to who makes the alteration.

Material Alteration (contd)

Examples of Material Alteration: 1. date 2. the time of payment 3. the place of payment 4. the sum payable 5. Opening a crossed cheque 6. Relationship between parties 7. Converting an orderinto a bearer cheque.

PAYING BANKER
Who is a Paying Banker? When a customer opens an account with a particular branch of bank,the contractual relationship of banker & customer starts. The relationship is mutual and contractual nature and is effected by legal obligations from both sides. The customer deposits amount by cash as well as cheque. Whenever, he needs draws such amount or issues cheques to other persons.

PAYING BANKER (contd)

It is the duty of the bank to honour such cheque. The Bank who pays the money back to his customer is PAYING BANK. However,the obligation of paying back the money to his customer or his endorsee is not absolute but conditional. The drawee of a cheque is always paying bank..

Paying Banker (contd)

Sec. 31 of N.I. Act 1881 states : Liability of drawee Bank : 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 duly required so to do, and in default of such payment , must compensate the drawer for any loss or damage caused such default.

STATUTORY PROTECTION TO THE PAYING BANK:

1. Cheque Payable to Order : The paying bank knows the signature of the customer. If a forgery is done by a third party,the paying bank is held liable to pay damages. Duty to verify signature of the customer. However, he is protected if the payee or endorsee makes any forgery signatures.

Statutory protection to Paying Bank (contd)

Because the paying bank does not know the signature of endorsee or payee previous to that cheque. Protection afforded in Sec.85 is mainly intended to an ORDER CHEQUE. Order cheque means having an Endorsement. PAY TO X OR ODER.

Statutory Protection (contd)

When an order cheque is paid,the paying Bank is protected,if any forgery is done by PAYEE OR ENDORSEE. To avail Protection,the essential conditions laid down in Sec.85 are: The cheque must be an order cheque. Such order cheque should have been endorsed by payee or endorsee. That cheque should have been paid in due course.

Protection to Paying Bank (contd)

2. PAYMENT IN DUE COURSE.Sec.1 It is a common saying in banking business that A bankers duty in paying a cheque is discharged by payment in due course. Payment in due course is one made in accordance with the apparent tenor of the instrument that is according to what appears on the face of the instrument to be intention of the parties.

Statutory protection (contd)

A payment cannot be a payment in due course if it is made to a person not entitled to receive it or if it is made before the due date.

Statutory protection (contd)

Concept of Payment in due course requires three essential conditions: 1. Apparent tenor of the instrument: The apparent tenor reflects the real intention of the parties. Just like face is the index of the mind,the instrument is the Index of intention of the parties. Where a Post-dated cheque is presented to the banker,he should not honour it.

Statutory protection (contd)

Because a post-dated cheque indicates that there must be a contract between the maker of the cheque and the payee for a payment at a future date. If the paying bank pays amount on a P D C, it means he violated the tenor of the instrument and such payment cannot be treated as PAYMENT IN DUE COURSE.

Protection to Paying Bank (contd)

Concept of Payment in due course : The paying bank must act in good faith and without negligence. Good faith means honest. At the same time,the bank should act, with diligent and careful manner. No negligence on his part.

Protection to Paying Bank (contd)

Examples of negligence : Payment of a P D C or a stale cheque Payment of a multilated or torned cheque Payment made to a cheque materially altered. Payment made to a cheque forged Payment made to a crossed cheque at counter etc. Paying bank should take all precautions before honouring a cheque & if he fails, no statutory protection can be affored to him.

Protection to Paying Bank (contd)

3. Payment to a person who is entitled to receive payment. Payment of the amount should always be made to the person capable of giving a gooddischarge. Such person is generally the last holder of the bill.

Protection to paying Bank (contd)

Sec.8 Holder 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. The concept of Holder does include Mere Possession of the instrument.. If a person brings a forged cheque or countermand cheque,he cannot be treated as a holder,and if any payment made by the bank to such person,such payment cannot be treated as payment in due course. It is the duty of paying bank to examine & verify or else he will not be entitled to Protection.

Protection to a Paying bank (contd)

Statutory protection is given to BEARER CHEQUE . Holder of a bearer cheque is treated as Payment in due course & protection is affored to the paying bank. Croosed cheques not to make payment at the counter. No protection is available to a paying bank if he pays amount at counter of a crossed cheque.

Protection to Paying bank (contd)

4. Protection to a materially altered cheque: General principle that the cheque should not be materially altered. If there are any alterations,the maker of the cheque should authenticate it. Then only statutory protection available to the paying bank and such payment becomes payment due in course.

Protection to paying bank (contd)

If the material alterations are made by payee or endorsee,the paying bank should not make any payment. If he pays such cheque, no statutory protection will be available,and such payment does not cover Payment in due course.

Protection to Paying Bank (contd)

5. FORGERY : If the cheque is forged with the signature of customer ,the paying bank should refuse to honour. If he honours it, no statutory protection can be afforded to him. If the signatures of payees, endorsees are made, the BANK IS NOT LIABLE. Sec.85 gives statutory protection to paying bank in such cases.

Protection to Paying Bank (contd)

Where money has been paid by mistake on a forged signature,the person who made the payment is entitled to recover the same from the person who received it. Even a holder in due course is not exempted from this rule as there is a difference between a defect in title and absence of title. For example : A forges Bs signature on a note so as to make him the maker. C who takes the note bonafide and for value acquires NO TITLE.

THE COLLECTING BANK

Who is a Collecting Banker? A bank performing the functions of the collection of bills of exchange is called a Collecting Bank. A Bank may collect cheques either as an agent for collection or for himself. As an agent : when a bank collects cheques from his customer and collects them & credits the proceeds to the customers account,it means he acts as an agent for the customer.

The Collecting Bank (contd)

As a holder for value : when he collects the cheques from his customer and pays cash immediately, i.e.purchases a cheque before collection & then sends the cheque for collection,it means he acts as a holder for value. In case of acting as an agent,the bank does not involve any risks. In case of acting as a holder for value,if the cheque is dishonoured for want of funds,forgery etc. the bank is put into loss & risks & becomes liable to the true owner of the cheque for the amount thereof.

The collecting bank- THE STATUTORY PRORTECTION

Sec. 131 gives protection to the collecting bank against a collection of cheque. Essential conditions to avail protection: CROSSED GENERALLY OR SPECIALLY TO HIMSELF: The cheque must be crossed generally or specially to himself. An open cheque does not require the services of the collecting bank.

Protection collecting bank (contd)

when a cheque is crossed means,it should not be paid at the counter If a bank collects an open cheque in which his customer has no title, become liable for conversion. The cheque should be collected for the customer having an account with him. In Good faith : A collecting bank should act in good faith. Good faith means honesty.

Protection collecting bank

Without negligence : There should be no negligence on his part. In the case title to the cheque proves defective. Defective cheque include mutilated,materially altered,torn,forged,without signature of the maker,without amount etc. If he collectsa defective cheque,no protection will be afforded.