In this article, Premvati Dhaka pursuing M.A, in Business Law from NUJS, Kolkata discusses legal steps to take when a Negotiable Instrument is dishonoured.
Definition
The Negotiable Instruments Act was in force in India in the year 1881. Prior to this legislation, the provision of the English Negotiable Instrument Act was in force in India. And, the present Act is also like based on the English Act with the modification. Later the Act operates on subject provision of Section 31 and 32 of the Reserve Bank of India Act 1934.
Negotiable Instrument is an inclusive term and it includes a promissory note, bill of exchange or cheque payable moreover to order or to bearer. If such practices may be omitted by any words in the body of the tool, which designates and purpose that the legal relations of the parties thereto shall be governed by this Act.
- Negotiable tools are allocated to order which is expressed to be so payable or which is specified to be payable to a specific, and does not include disputes barring allocation or signifying an purpose that it shall not be convenient.
- Negotiable Instruments to bearer which is articulated to be so allocated.
- Negotiable tools, also initially or by consent, is articulated to be payable to the order of a specified individual, and not to him or his demand, it is however billed to him or his instruction at his possibility.
A negotiable tool may be made allocated to two or more recipients together, or it may be made allocated in the substitute to one of two, or one or some of numerous recipients.
Revised Negotiable Instruments Bill, 2015
The government has strategic the negotiable instruments (Revision) Bill, with an opinion to revising the act. It has been elevated by numerous investors like Creditors, Industry, Associations, Financial Institutions. And would also disregard the current authenticities of Cheque clearance with new system indication of Cheque Truncation System (CTS). In new system of Cheque Truncation system clearance occurs only through glance at copy in electronic form and cheques are not moved physically to the delivering branch, but are established between the facility branches of the drawee and recipient banks.
New provision positions that the holder of the cheque can file an illegal grievance before a judge where he be inherent in and offered the cheque. For him it’s not necessary to go where the cheque was delivered.
The Rule – Introduction Section 142(2) in the principal act,
The Offence under section 138 shall be questioned into and tried only by a court within local jurisdiction.
- Cheque is distributed for gathering over an account, the recipient bank in due course, as the case may be, upholds the account is situated.
- If the cheque is prevailing by receiver or holder in due course over his form, the branch of the drawee bank upholds the account is positioned.
Structures of Negotiable Instrument
Relaxed Transferability: On every occasion, we handover any stuff to somebody, we need to have the on-paper allocation deed, get it listed, pay the stamp duty etc. But for Cheque such regulations are not compulsory to do while relocating a negotiable instrument. The allocation of rights is altered when allocated to the deliverer by legal authorization and distribution to when allocated to order. Not compulsory to give the notice to the previous holder.
Heading: It must be complete and moral on the transferee in decent confidence and for a thought. Which means that an individual who in receipt of a negotiable instrument has a definite and clear title to the instrument. And, receiver shouldn’t have the information of the previous holder having any flaw in his heading. He is also known as holder in due sequence.
Absolute Demand: It must be a clear capacity or instruction for each sum.
Compensation: Negotiable tool must have the convinced of amount cash only and nothing else. i.e., he cannot make a capacity note on securities, properties or things.
Essential is in lettering: It must be in lettering this contains computer printout, design, script, typing etc.
The period of amount must be persuaded: Tool must be payable at a time, if the time is not stated than it is not a negotiable tool. If the period of amount is linked to the termination of a separate, however, a negotiable tool as decease is certain though the period thereof is not.
Signature: All the negotiable instrument must have the valid signature of its maker; without the signature of the maker or drawer it becomes invalid.
Distribution: Distribution is vital, any negotiable instrument such as Cheque or promissory note is not complete until it spreads to the payee. For example, if you matter a cheque in the name of your sister but it is not instrument till it is handed over to your sister.
The Recipient must be convinced individual: The period ‘individual’ includes specific, body of business, director or chairman of an institution. The payee can also be more than one person. Favor of the negotiable instrument is made must be named or described with rational inevitability.
Notice of allocation: Giving sign of allocation of a negotiable tool to the party accountable to pay is not required.
Presumptions: To all negotiable instruments certain presumptions are applied. I.e., Consideration between the transferor and the transferee. Every negotiable is presumed to have made accepted, negotiated, endorsed or consideration for transfer.
Stamping: This is required as per the Indian Stamp Act 1899, the value of Stamp depends upon the nature of transaction and value, at the time of their payment.
Payable to Order or bearer: It must be payable either to order or Bearer.
Number of Transfer: It can be transferred indefinitely till they are at maturity.
Exchange: They are considered as substitutes for money and accepted in exchange of goods because cash be gained at any point of time. It is legal tender payment of certain money
Presumptions: Certain conjectures put on to all negotiable tools, for instance thought is supposed to have accepted between the transferor and the transferee.
Method for suits: In India a distinct procedure is if for suits on promissory notes and bills of exchange.
Quantity of allocation: These tools can be moved forever till they are at maturity.
Instruction of indication: These tools are in script and employed by the parties, they are used as evidence of the fact of ineptness because they have special instructions of indication.
Argument: These tools relate to payment of sure money in legal kind, they are careful as alternates for cash and are acknowledged in conversation off goods because money can be got at any instant by paying a small instruction.
Payable to order or bearer: It must be allocated either to order or bearer
Two kinds of Negotiable Instrument
Instrument Negotiable by Statute
Under section 13 of Negotiable Instruments Act three kinds of negotiable tools –
These are: Bills of Exchange, Promissory Notes and Cheques
Under Section 4 – Promissory note is a tool in marks covering an unrestricted responsibility, employed by the manufacturer, to recompense a positive quantity of cash only to, or to the order of, a certain person, or to the bearer of the tool.
It necessity be in writing: A mere verbal promise to pay is not a promissory note. The way of lettering is insignificant, but it must be in any arrangement that cannot be changed simply.
It must surely a prompt promise or strong considerate to recompense: There must be an express responsibility to pay. A simple salutation is not sufficient.
Under Section 5 – Bill of exchange a tool in lettering covering an unrestricted command, engaged by the maker, guiding an individual to pay a certain amount of cash only to, or to the order of, a certain individual or to the bearer of the tool.
A promise or command to pay is not “restricted”, within the meaning of this section and section 4, because of the time for sum of the quantity or any payment thereof being articulated to be on the gap of a certain period after the incidence of a stated incident which, according to the normal anticipation of manhood, is sure to occur, although the time of its happening may be undefined.
Under section Section 6 – Cheque is a bill of exchange drawn on a stated financier, and not spoken to be owed then than on request”.
A cheque is a negotiable instrument used for making the payment to payee. Account Payee and crossed cheque are issued to a payee which cannot be transferred to any other. Cheque needs to be uncashed by depositing into payee’s bank account. “Drawer” is the cheque issuer and “Payee” is the person to whom the cheque is drawn. “Drawee” is the bank who is directed to pay the amount.
However, case of cheque bounces lesser compared to earlier days due to more online payment i.e., RTGS, NEFT, IMPS etc. Sometimes large amount bearing cheques remain unpaid and are returned by banker on which they are drawn.
A cheque is bill of exchange with two more experiences, namely,
It is always drawn on a stated financier, and (ii) it is always owed on request. So, all cheque are bill of exchange, but all bills are not cheque. A cheque must content all the necessities of a bill of exchange; that is, it must be employed by the drawer, and must comprise.
A bill of exchange drawn on a stated financier, and not articulated to be owed then than on request
- Contains the electronic image of a truncated cheque
- Comprises a cheque in electronic form
- Delivered on a stated banker only
- The sum stated is always sure, and must be clearly declared
- The recipient is always certain.
- Must stand a date
Negotiable tools by Practice or Technique
There are sure other tools which have established the appeal of negotiability by the usage or custom of trade.
Circular notes, Bearer debentures, Dividend warrants, share records with blank transmission deeds, Exchequer bills, Bank notes, share permits, etc.
Models of Non-negotiable tools
- Currency orders
- Deposit receipts
- Share certificates
- Dock warrants
- Postal orders
Discredit of a negotiable tool
When the negotiable tool is violated; the holder must give a sign of dishonor to all the earlier parties to make them accountable. A negotiable instrument can be violated any by nonacceptance or by non-payment. A cheque and a promissory note can only be violated by non-payment but a bill of exchange can be violated any by non-acceptance or by non-payment.
Dishonor by non-acceptance (Section 91)
A little kind of negotiable tools, i.e., bill of exchange, promissory note, or cheque may be desecrated by non-payment by the acceptor thereof. But a bill may also be despoiled by non-acceptance because bill of disagreement is the only negotiable instrument which supplies its presentment for acceptance and non-acceptance thereof, can sum to disgrace.
Dishonor means failure to honor a negotiable instrument. This may be by non-acceptance, when a bill of argument is accessible for receipt and this is declined or cannot be obtained or by non-payment, when the bill is presented for payment and payment is refused or cannot be obtained.
A negotiable tool is made-up to be violated any by non-acceptance or non-payment.
Dishonor by non-payment (section 92)
An instrument is dishonored by non-payment when the party mainly answerable e.g., the acceptor of a bill, the maker of a not or the drawee of a cheque, make default in sum. A tool is also violated for non-payment when a formal presentation of information to a court for payment relieved and the instrument, when overdue, remains unpaid, under section 76 of the Act.
Distinction between dishonor by non-acceptance and by non-payment. If a bill is dishonored by non-acceptance, there is no right of action against the drawee as he is not a party to the bill. The holder of the bill can proceed only against the drawer or endorser, if any, on Dishonor by non-payment the drawee can be sued.
LEGAL ACTION IF CHEQUE DISHONORED
A cheque is a negotiable tool. Crossed and account payee cheques are not accessible by any individual other than the recipient. The cheques have to be placed into the recipient’s bank account.
Lawfully, the writer of the cheque is called ‘drawer’, the individual in whose service, the cheque is drawn is called ‘payee’, and the bank who is focused to compensation the amount is recognized as ‘drawee’.
However, cases of cheque spring back are common these times. Rarely cheques bearing big amounts continue unpaid and are repaid by the bank on which they are drawn.
As presently as a cheque is violated, the drawee bank straight queries a ‘Cheque Return Memo’ to the banker of the payee upholding the purpose for non-payment. The payee’s banker then gives the violated cheque and the memo to the payee. The holder or payee can resubmit the cheque in three months of the date on it, if he faiths it will be delighted the second time. Though, if the cheque issuer flops to make an amount, then the payee has the exact to prosecute the drawer lawfully.
The payee may legally litigate the nonpayer/drawer for discredit of cheque only if the sum specified in the cheque is towards release of an obligation or any other responsibility of the nonpayer towards recipient.
If the cheque was delivered as a skill, towards advancing a loan or for illegal drives, then the drawer cannot be impeached in such cases.
Lawful act
As per Section 138 of the Act, the disgrace of cheque is an illegal crime and is disciplinary by custody up to two years or with financial forfeit or with both.
If payee chooses to continue lawfully, then the drawer should be given a chance of recompensing the cheque sum directly. Such a chance must be given only in the form of notice in writing.
The recipient must show the sign to the drawer with 30 days from the date of in receipt of “Cheque Return Memo” from the bank. The notice must be positioning that the cheque sum must be remunerated to the recipient within 15 days from the date of receiving of the notice by the drawer. If the cheque issuer discontents to make a new sum within 30 days of receiving the sign, the payee has the exact to file a banned grievance under Section 138 of the Negotiable Instruments Act.
Though, the grievance should be listed in a judge’s court within a month of the termination of the notice period. It is vital in this case to refer a supporter who is well experienced and accomplished in this area of practice to proceed additional in the stuff. It’s very important to follow the rules and regulations as per the act.
The cheque should have been reimbursed or despoiled because of inadequate assets in the drawer’s account.
After in receipt of the notice, if the drawer doesn’t make the sum within 15 days from the day of in receipt of the notice, then he obligates a wrongdoing disciplinary under Section 138 of the Negotiable Instruments Act.
Penalty & forfeit
On getting the complaint, along with an affirmation and relevant paper track, the court will matter order and get the substance. If found mortified, the debtor can be disciplined with financial consequence which may be double the quantity of the cheque or custody for a term which may be long to two years or both. The bank also has the correct to stop the cheque book ability and close the explanation for replication crimes of bounced cheques.
If the drawer makes sum of the cheque quantity within 15 days from the date of receiving of the sign, then drawer does not obligate any crime. Then, the payee may continue to file a grievance in the court of the jurisdictional judge within one month from the date of finish of 15 days agreed in the sign.
In the case of Dalmia Cement(Bharat) Ltd. V Galaxy Traders and Agencies Ltd.5, the Apex Court referred to the article of Section 138 of the Act. The court detected that the Act was passed and section 138 thereof combined with a stated object of making a distinct capability by counting a strict responsibility so far as the cheque, a negotiable instrument, is concerned. The law connecting to the negotiable instruments is the law of commercial world passed to ease the actions in trade and commerce making founding of giving sanctity to the instruments of credit which could be estimated to be redeemable into cash and effortlessly drivable from one person to one more.
The wrongdoing under section 138 is not a usual crime like offended or killing. It is an offence shaped by a lawful fiction in the law. It is a public obligation altered into an illegal obligation, under limited circumstances by way of an alteration to the Act, which is carried into force only in 1989. Till then, the criminal acts mentioned to in section 138 established only a pure civil obligation. Legally, the legislature thought it fit to deliver for passable protections in the Act to defend truthful drawers from unnecessary annoyance.
Though, the sections 138 to 142 of the alleged Act were, originally missing in dealing with disgrace of cheques. According to this, the Negotiable Instruments Act, 2002, put in the ground, modified sections 138, 141 and 142 and offered new segments 143 to 147 in the said Act.
Conclusion
A negotiable instrument is supposed to be dishonored when the drawee declined to receive it or to make sum upon it. In both cases the holder is entitled to sue in contradiction of the drawer and endorser. Notice of dishonor is given to all parties except maker of note, acceptor of bill or drawee of cheque. Notice of dishonor designates that the instrument has been dishonored and that the person served with the notice will be held liable. Notice of dishonor is not necessary to give where it is distributed with by the party entitled to it, or where the party charged could not suffer damage for want of notice.
References
http://www.indiacode.nic.in/acts-in-pdf/2015/201526.pdf
https://indiankanoon.org/doc/891368/
http://www.investopedia.com/terms/n/negotiable-instrument.asp
http://vle.du.ac.in/mod/book/print.php?id=8403&chapterid=10723
http://ecourts.gov.in/sites/default/files/negotiable%20instruments%20act.pdf
http://ecourts.gov.in/sites/default/files/negotiable%20instruments%20act.pdf
http://thelawstudy.blogspot.in/2015/03/dishonour-of-negotiable-instrument.html
https://www.mbaknol.com/mercantile-law/features-of-negotiable-instruments/
http://mercantilelaws.blogspot.in/2013/01/essential-features-of-negotiable.html
