BANKING & INSURANCE

LAW
NEGOTIABLE
INSTRUMENTS ACT, 1881

- Khyati Nayak
 CONTENT OUTLINE :
2. Negotiable Instruments Act 1881 – Promissory Notes, Bills of Exchange & Cheque.
How to Negotiate Instruments, Concept of Transferability & Holder in Due Course

Section 4, Section 5, Section 6, Section 9, Section 118 of the Negotiable Instruments Act

Basic Reading
Banking and Negotiable Instruments Act by R.N Chaudhary, Central Law Publication

3. Understanding Cheques
Discussing General Crossing, Special Crossing and the importance of Non- Negotiable Crossing.

Section 123, 124 and 130

Basic Reading:
Banking and Negotiable Instruments Act by Avtar Singh Reference Reading ; https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8704&Mode=0

4. Dishonour of Cheques and Legal Procedure

Section 138, Section 142, Section 143 -A and Section 148 of the Negotiable Instruments Act

Case: Modi Cement vs Kuchil Kumar Nandi, SampellySatyanarayan Rao v. Indian Renewable Development Agency, K. Bhaskaran vs Sankaran, Dashrath Roop
Singh Rathore v. State of Maharashtra

Basic Reading:
Banking and Negotiable Instruments Act by Avtar Singh Reference Reading ; https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8704&Mode=0
NEGOTIABLE INSTRUMENTS ACT, 1881
 WHAT ARE NEGOTIABLE INSTRUMENTS

Negotiable Instruments - Documents of a certain type, used in commercial transactions and monetary dealings. A negotiable instrument is a piece of paper which
entitles a person to a sum of money and which is transferable from person to person by mere delivery or by endorsement and delivery.

 NEGOTIABLE – Transferable

 INSTRUMENTS – Written Document

The person to whom it is so transferred becomes entitled to the money also to the right to further transfer it. Negotiable instrument is described as a document of
title of money, Therefore an negotiable instrument is a document which physically expresses the payment obligation. An instrument will be in deliverable state only
if it is signed by the possessor or it should be with the authority of that person. The instrument clearly states the contractual right to payment and the right will be
transferred only after the complete delivery. Thus, negotiable instruments play a major role in the trade world.

A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee.

N.I. MEANS,
 A Piece Of Paper
 Containing In Writing
 A Right entitling the Holder to claim something,
 Usually Money (Sometimes goods as well)

Thus, the negotiable instrument is a doc. by which rights vested in a person can be transferred to another person in accordance with the provisions of the Negotiable Instruments Act, 1881.
 Negotiable Instruments can be of two kinds:-

1) Negotiable by Statute: The Act mentions only three kinds of instruments by Law.

i.e. Promissory Note, Bill of Exchange (includes Demand Drafts) and Cheque.

2) Negotiable by Custom or Usage: Other than above three, all other custom and usage based locally negotiable instruments belong to this type.

Ex:- Hundis (instrument drawn in vernacular language – governed by customs but if parties to it agrees to apply NIA or the custom is silent then the Act will apply), Railway
reciept, Treasury Bill. Etc

In the words of Justice, Willis, “A negotiable instrument is one, the property in which is acquired by anyone who takes it bona-fide and for value notwithstanding
any defects of the title in the person from whom he took it”.

Although the Act mentions only these three instruments (such as a promissory note, a bill of exchange and cheque), it does not exclude the possibility of adding any other
instrument which satisfies the following two conditions of negotiability:

1. the instrument should be freely transferable (by delivery or by endorsement. and delivery) by the custom of the trade; and

2. the person who obtains it in good faith and for value should get it free from all defects, and be entitled to recover the money of the instrument in his own name.
 THE NEGOTIABLE INSTRUMENTS ACT,
1881
Introduction To Negotiable Instruments Act, 1881

 The Negotiable Instruments Act, 1881 was enacted, in India, in 1881. It came into force on 01/03/1882.

 Source : Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also

based on the English Act with certain modifications.

 Major Amendments : 1988, 2002-3, 2015, 2018 (Section 143A & 148)

 Purpose :Main purpose of negotiable instruments is :

 To avoid the carriage of higher amount of money and to reducing the risk of theft; robbery etc.

 To facilitate trade and commerce.

 This law is commercial in nature and aims to regulate the payment-related settlements of trade and commerce.
 SEC. 13. “NEGOTIABLE INSTRUMENT”
(1) A “negotiable instrument” means a promissory note, bill of exchange or cheque payable either to order or to bearer.

 Explanation (i)—A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is
expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it
shall not be transferable.

 Explanation (ii)—A promissory note, bill of exchange or cheque is payble to bearer which is expressed to be so payable or on which
the only or last endorsement is an endorsement in blank.

 Explanation (iii)—Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be
payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.

(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one
of two, or one or some of several payees.
Section 31 in The Reserve Bank of India Act, 1934

31. Issue of demand bills and notes.—

[(1) ] No person in [India] other than the Bank, or, as expressly authorized by this Act the [Central Government] shall draw, accept,
make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand, or
borrow, owe or take up any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such person:

Provided that cheque or drafts, including hundis, payable to bearer on demand or otherwise may be drawn on a person’s account with a banker,
Shroff or agent.

[(2)] Notwithstanding anything contained in the Negotiable Instruments Act, 1881, (26 of 1881) no person in [India] other than the Bank or, as
expressly authorized by this Act, the Central Government shall make or issue any promissory note expressed to be payable to the bearer of
the instrument.
 CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
An instrument is to be called 'negotiable' if it possesses the following characteristic features:

1. Negotiable instrument is freely transferable. (No registration required)

2. A Negotiable instrument must be in writing.

3. A negotiable instrument must have an unconditional order or promise for payment.

4. The instrument must involve the payment of a certain amount of money and money only and nothing else.

For example : one can not make a promissory note on assets or goods.

5. The payee (to whom the money is paid) must be a certain person.

Though the negotiable instrument might be made payable to several persons or alternative to one of the several payee. (Section 13(2)).

6. The negotiable instrument must be signed.

7. The time of payment must be specific. So, when the time was mentioned as “When convenient” it was held not to be a negotiable instrument.

8. Stamping- The stamping of Bills of Exchange and Promissory Notes is mandatory by law. The respective instrument must be duly stamped as per the Indian Stamp
Act, 1899.
KINDS OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTE, BILL OF

EXCHANGE OR CHEQUE
 SEC. 4. “PROMISSORY NOTE.”
A “Promissory note” is an instrument in writing (not being a bank-note or a currency-note – IPCA,1871) 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.

Maker: The person who makes the promissory note and promises to pay is called the maker.

Payee: The person to whom the payment is to be made is called the payee.

Illustrations A Signs instruments in the following terms:

(a ) “I promise to pay B or order Rs. 500.”

(b) “I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received.”

(c) “Mr. B, I O U Rs. 1,000.”

(d) “I promise to Pay B Rs. 500 and all other sums which shall be due to him.”

(e) “I promise to Pay B Rs. 500, first deducting thereout any money which he may owe me.”

(f) “I promise to Pay B Rs. 500 seven days after my marriage with C.”

(g) “I, promise to Pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum.”

(h) “I promise to Pay B Rs. 500 and to deliver to him my black horse on 1st January next.”
 ESSENTIALS OR CHARACTERISTICS OF A
PROMISSORY NOTE:
From the definition, it is clear that a promissory note must have the following essential elements.

1. In writing - A promissory note must be in writing. Writing includes print and typewriting.
2. Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of indebtedness is not sufficient.
Notice that the use of the word ‘promise’ is not essential to constitute an instrument as promissory note.

3. Certain sum of money (Promise to pay money only ) - The sum payable must be certain or capable of being made certain. If the
instrument contains a promise to pay something in addition money, it cannot be a promissory note.

4. The payee must be certain.

5. Unconditional - The promise to pay must not be conditional. Thus, instruments payable on performance or non- performance of a
particular act or on the happening or non-happening of an event are not promissory notes.

6. Signed by the Maker – The promissory note must be signed by the maker, otherwise it is of no effect.
7. Stamping- The stamping of Bills of Exchange and Promissory Notes is mandatory by law. The respective instrument must be duly
stamped as per the Indian Stamp Act, 1899.
 SEC. 5. “BILL OF EXCHANGE”

A “bill of exchange” is 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.

Parties to a Bill Of Exchange:

 Drawer: The maker of a bill of exchange is called the drawer.

 Drawee: The person directed to pay the money by the drawer is called the drawee.

 Payee: The person named in the instrument, to whom or to whose order the money are directed to be paid by the instruments are called the
payee.

A demand draft is a negotiable instrument similar to a bill of exchange. A bank issues a demand draft to a client (drawer),
directing another bank or one of its own branches (drawee) to pay a certain sum to the specified party (payee).
 CHARACTERISTIC
FEATURES OF A BILL OF
EXCHANGE:

1. It must be in writing.

2. It must contain an order to pay and not a promise or request. The order must be unconditional.

4. There must be three parties, viz., drawer, drawee and payee. The parties must be certain.

5. It must be signed by the drawer.

6. The sum payable must be certain or capable of being made certain.

7. The order must be to pay money and money alone.

8. The stamping of Bills of Exchange and Promissory Notes is mandatory by law. It must be duly stamped as per the
Indian Stamp Act, 1899.
 SEC. 6. “CHEQUE”
A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of

a truncated cheque and a cheque in the electronic form.

Explanation I.—For the purposes of this section, the expressions—

[(a) “a cheque in the electronic form” means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital
signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be;

(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

Explanation II.— For the purposes of this section, the expression “clearing house” means the clearing house managed by the Reserve Bank of India or a clearing house
recognized as such by the Reserve Bank of India.]

[Explanation III.—For the purposes of this section, the expressions “asymmetric crypto system”, “computer resource”, “digital signature”, “electronic form” and
“electronic signature” shall have the same meanings respectively assigned to them in the Information Technology Act, 2000 (21 of 2000).]

Parties To A Cheque
 Drawer: Drawer is the person who draws the cheque.
 Drawee: Drawee is the drawer‟s banker on whom the cheque has been drawn.
 Payee: Payee is the person who is entitled to receive the payment of a cheque.

Banker : Banker includes any person who is acting as a bank or any post-office savings bank. (Section 3)
 ESSENTIALS OF CHEQUE:

1. In Writing: The cheque must be in writing. It cannot be oral. The language used in a cheque should be
such as to convey an unconditional order.

2. Signature of the Drawer: It must be signed by the maker.

3. Certain Sum of Money (Only Money): The amount in the cheque must be certain.

4. Payees Must be certain: It must be payable to specified person.

5. Payable on Demand: It must be payable on demand.

6. Upon a Bank: It is an order of a depositor on a bank.

A cheque is a kind of bill of exchange, but it has additional qualification namely:

 It is always drawn on a specified banker and

 it is always payable on demand.
 POST-DATED CHEQUE WHETHER A CHEQUE OR NOT ?
A cheque is a bill of exchange but it is payable on demand so till the demand is being made cheque might not be payable and this demand can only be made on the date
of the cheque. So a post dated cheque will only become a cheque on the date mentioned on it.

1. Shri Ishar Alloy Steels Ltd. v. Jayaswals Neco Ltd. (2001 SCC 3 609, Supreme Court Of India, 2001) - This judgment clarifies that a post-dated cheque is
considered a bill of exchange until the date mentioned on the cheque. It becomes a cheque under the Negotiable Instruments Act on the date written on it,
and the period of six months for presenting the cheque for payment is reckoned from that date.

Case Note: Negotiable Instruments Act, 1881-- Section 138-- Dishonour of cheque -- Collecting bank obliged to present the cheque in payee bank within six months
from the date on which it issued-- Cheque not presented within statutory period-- Criminal Court has no jurisdiction to issue process against accused. (Para--9 and 11)

2. Anil Kumar Sawhney v. Gulshan Rai (1993 SCC 4 424, Supreme Court Of India, 1993) - This judgment emphasizes that the presentation of a post-dated cheque
to the bank is essential for the offense under Section 138 of the Negotiable Instruments Act. It states that until the post-dated cheque becomes a cheque on the
date mentioned on it, the provisions of Section 138(a) are not applicable.

Case Note: Criminal - post dated cheque - Sections 5, 6 and 138 of Negotiable Instruments Act, 1881 - date from which period of six months contemplated under
Section 138 (a) is to be reckoned - postdated cheque is only bill of exchange and becomes cheque when it is payable on demand - post dated cheque becomes cheque
under Act on date which is written on post dated cheque and six months period has to be reckoned from said date.

This was affirmed in Ashok Yashwant Badabe V. Surender M. Nikhojkar AIR 2001 SC.
3. Ramsingh Amarsingh And Others v. Kandasamy Textiles (Madras High Court, 1994) - This judgment reiterates that a post-dated cheque remains a
bill of exchange until the date mentioned on it. It becomes a cheque under the Negotiable Instruments Act from that date, and the provisions of
Section 138(a) are applicable from that point onwards.

Case Note: Criminal - Quashing of Complaint - Complainant issued a notice on Accused as cheques presented were again dishonoured - Respondent filed
private complaint against Petitioner for an offence under Section 138 of the Negotiable Instruments Act, 1881 - Hence, this Petition - Whether, complaint
filed was liable to be quashed.

Held : on request made by Petitioner, Respondent supplied goods and Petitioner asked for three months' time to pay a portion of the value of the goods and
issued two cheques in part payment thereof - Then, again, those two cheques were returned dishonoured when presented for encashment and when
Respondent contacted Petitioner and apprised him of fate of the two cheques, accused again pleaded for time to honour commitments and requested him
to take two fresh cheques and these two cheques were issued - Thus, allegations would go to show that these cheques were issued for discharge of
amount payable for supply of goods by complainant to accused - Thus, complaint does not disclose reason for dishonour of cheques and only in a case
where it was alleged that cheques were returned for reason that funds were insufficient or exceeded arrangement, offence was made out - Only for purpose
of computing period of time as to whether it was filed within time or beyond time, date was to be fixed, that could be done at the time of trial.

Petition dismissed.
4. V.S.Yarn v. Adhaven Cottage (Madras High Court, 2018) - This judgment refers to the Supreme Court decision in Shri Ishar Alloy Steels Ltd. v. Jayaswals Neco
Ltd. (2001) 3 SCC 609 and highlights the mandatory requirement of presenting a cheque to the bank within six months from the date mentioned on it. It clarifies that a
post-dated cheque becomes a cheque under the Act on the date written on it.

It has further to be noticed that to make an offence under Section 138 of the Act, it is mandatory that the cheque is presented to "the bank" within a period of six months
from the date on which it is drawn or within the period of its validity, whichever is earlier. It is the cheque drawn which has to be presented to "the bank" within the period
specified therein. When a post-dated cheque is written or drawn, it is only a bill of exchange. The post-dated cheque become a cheque under the Act on the date
which is written on the said cheque and the six months' period has to be reckoned, for the purposes of Section 138 of the Act, from the said date.

A combined reading of Sections 3, 72 and 138 of the Act would leave no doubt in our mind that the law mandates the cheque to be presented at the bank on which it is
drawn if the drawer is to be held criminally liable. Such presentation is necessarily to be made within six months at the bank on which the cheque is drawn, whether
presented personally or through another bank, namely, the collecting bank of the payee. "

Based on the above judgments, it can be concluded that a post-dated cheque is initially considered a bill of exchange until the date mentioned on it. It becomes a cheque
under the Negotiable Instruments Act on the mentioned date, and the provisions of Section 138(a) are applicable from that point onwards. The presentation of the post-
dated cheque to the bank within the specified period is crucial for establishing the offense under Section 138 of the Act.
 CROSSING OF CHEQUE
CHAPTER XIV
O F CROSSED C H E Q U E S

A crossed cheque is a cheque that has been marked specifying an instruction on the way it is to be redeemed.

 Crossing of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. Thus, crossing is necessary in order to have safety. The significance of crossing of a

cheque is that a crossed cheque cannot be encashed by the bearer but can only be collected from the drawee bank in the bank account. Therefore, Crossing of cheque

provides protection and safeguard to the issuer of the cheque. In case of a crossed cheque one can easily detect who encashed the said cheque, unlike the case of non-crossed

cheque. Hence, Crossing protects both payer and the payee of the cheque.

TYPES OF CROSSING :-

1. General Crossing - 123. Cheque crossed generally.—Where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two

parallel transverse lines, or of two parallel transverse lines simply, either with or without the words “not negotiable,” that addition shall be deemed a crossing, and the cheque

shall be deemed to be crossed generally.

126. Payment of cheque crossed generally.— Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker.

2. Special or Restrictive Crossing - 124. Cheque crossed specially.—Where a cheque bears across its face an addition of the name of a banker, either with or without the

words “not negotiable,” that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.

126. Payment of cheque crossed specially.—Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is

crossed, or his agent for collection.

 Who is authorized to Cross a Cheque?

Drawer as well as under Section 125 in The Negotiable Instruments Act, 1881 ; Crossing after issue—

 Where a cheque is uncrossed, the holder may cross it generally or specially.

 Where a cheque is crossed generally, the holder may cross it specially.

 Where a cheque is crossed generally or specially, the holder may add the words “not negotiable”.

 Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection.

Hence, In accordance with the Sec. 125 of the Negotiable Instruments Act, the following persons are authorized to cross the cheque, apart from the drawer:

The Holder (UNCROSSED OR GENERAL)

• The holder of a cheque is authorized to cross a cheque, either in general or in particular if the cheque is not crossed.

• He is also entitled to cross a cheque, especially if the same is generally crossed.

• He can also add the words “non- negotiable” to crossed cheques in general and in particular.

The Banker (SPECIAL)

The banker in whose favour a cheque is crossed in particular can also cross it in favour of another banker or his agent for collection purposes. Such a crossing is called Special
Double-crossing.
127. Payment of cheque crossed specially more than once.—Where a cheque is crossed specially to more than one banker, except when
crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.

128. Payment in due course of crossed cheque.—Where the banker on whom a crossed cheque is drawn has paid the same in due course, the
banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to
the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the
cheque had been paid to and received by the true owner thereof.

129. Payment of crossed cheque out of due course.—Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque
crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the
true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.

130. Cheque bearing “not negotiable”.—A person taking a cheque crossed generally or specially, bearing in either case the words “not
negotiable,” shall not have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he
took it had.
131. Non-liability of banker receiving payment of cheque.— A banker who has in good faith and without negligence received payment for a
customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true
owner of the cheque by reason only of having received such payment.

[Explanation (I) ].— A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his
customer’s account with the amount of the cheque before receiving payment thereof.]

[Explanation II.—It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the
prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with
due diligence and ordinary care.]

[131A. Application of Chapter to drafts.—The provisions of this Chapter shall apply to any draft, as defined in section 85A, as if the draft were a cheque.]

[85A. Drafts drawn by one branch of a bank on another payable to order.—where any draft, that is an order to pay money, drawn by one office of a bank
upon another office of the same bank for a sum of money payable to order on demand, purports to be endorsed by or on behalf of the payee, the bank is
discharged by payment in due course.
 “ACCOUNT PAYEE” CROSSING
A/C Payee Crossing : In order to ensure that a cheque will not be able to be encashed by anyone but the rightful owner of the cheque, the words “account payee” are often added to the crossing
ensuring that the bank receiving such a cheque is to collect the amount only for the purposes of the payee’s account. An Account Payee Cheque is a highly secured type of cheque as the amount
can only be deposited in the account of payee. The payee cannot endorse this cheque to anyone else.

The Advantages of A/C Payee Crossing : The Court held that this was also the case in various matters like National Bank v. Lilke and also in the case of A.Z. Underwood Ltd. v. Bank of Liverpool
& Martins Ltd. Checking with an account payee crossing does not affect the paying banker in any way since it only has to ensure that even if the cheque cannot be collected by the payee himself, the
proceeds of the payee are credited to the account of the payee.

 Rajmoti Industries vs. Assistant Commissioner of Income Tax (01.04.2014 - GUJHC) : MANU/GJ/0381/2014

 There is a difference between “cross cheque” (General) and “account payee cheque”.

 payments made otherwise than by account payee cheque attracts disqualification under Section 40A(3) for deductions.

 FACTS : Business disallowance under section 40A(3) - Payment exceeding prescribed limit Payment through cheques encashed by payee through different shroffs--Assessee made payments
exceeding Rs. 20,000 in a day for purchases made by it from S and claimed deduction in respect thereof. AO made disallowance on the ground that payments were made otherwise than by
account payee cheque or draft. The CIT(A) and the Tribunal confirmed the disallowance. Assessee contended that payments were made through cheques which were discounted through shroffs
and payments were received by the drawees of the cheques. Thus, the fact that all payments were received by the drawees was established. That being the paramount consideration of
legislature for enactment of section 40A(3), disallowance would not be justified. He further submitted that there was no distinction in law between a crossed cheque and an account payee
cheque.

 HELD: An account payee cheque can be credited by bank to the bank account of payee only, whereas crossed cheque can be negotiated and can be credited by bank to bank account
of a person, other than payee. Thus, there was clear distinction existed between account payee cheque and crossed cheque. In instant case, the payee encashed entire payment received from
assessee-payer through different shroffs. Such kind of endorsement was not permissible in account payee cheque. Thus, in absence of any compelling reason or commercial expediency
which compelled payment other than by account payee cheque, the Tribunal was justified in confirming disallowance made under section 40A(3).
 RBI CIRCULAR ON COLLECTION OF ACCOUNT PAYEE
CHEQUES – PROHIBITION ON CREDITING PROCEEDS
TO THIRD PARTY ACCOUNT
Prohibition on Crediting Proceeds to Third Party Account - circular RPCD.CO.RF.BC. No.78/07. 38.03/2005- 06 dated April 27, 2006 in terms of which banks are prohibited from crediting ‘account
payee’ cheque to the account of any person other than the payee named therein.

RBI/2005-06/376
RPCD.CO.RF. BC No. 78/07.38.03 / 2005-06 April 27, 2006

Collection of account payee cheques – Prohibition on crediting proceeds to third party account

1. Please refer to our circular RPCD.No.BC 31/07.38.01/96-97 dated September 2, 1996, advising that the banks should not collect third party ' account payee' instruments on behalf of their constituent
societies. As banks are aware, an account payee cheque is required to be collected for the payee constituent.

2. In view of the recent misuse of Initial Public Offer (IPO) process by certain individuals/entities and reports received in this regard from SEBI, the Reserve Bank of India took up detailed investigations at
some banks to ascertain the modus operandi adopted by different parties in manipulating the system. It was observed that despite the above mentioned instructions, banks had credited the proceeds of
individual account payee refund orders into the accounts of the brokers instead of to the individual accounts on the request of the associates of depository service providers. This has resulted in manipulation
of the payment system and has facilitated the perpetration of irregularities. This manipulation would not have taken place but for the banks deviating from the procedure for collection of account
payee cheques. The deviations can also not be sanctified as a prudent market practice since it has the potential to expose the banks to various risks.

3. Being satisfied that in consonance with the legal requirements and in particular the intent of the Negotiable Instruments Act, and with a view to protecting the banks being burdened with liabilities arising out
of unauthorized collections, and in the interest of the integrity and soundness of the payment and banking systems, and in order to prevent recurrence of deviations observed in the recent past, the
Reserve Bank has considered it necessary to prohibit the banks from crediting 'account payee' cheque to the account of any person other than the payee named therein. The Reserve Bank
accordingly directs the banks that they should not collect account payee cheques for any person other than the payee constituent.

4. These directions are issued in exercise of the powers conferred under Section 35A of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies and Regional Rural Banks).
 RBI GUIDELINES ON COLLECTION OF ACCOUNT PAYEE
CHEQUES
“Account Payee” crossing : N.I. Act does not recognize “Account Payee” crossing, but this is prevalent as per practice of banks in India. In view of this, RBI has directed banks that:

(1) Crediting the proceeds of account payee cheques to parties other than that clearly delineated in the instructions of the issuers of the cheques is unauthorized and should

not be done in any circumstances.

(2) If any bank credits the account of a constituent who is not the payee named in the cheque without proper mandate of the drawer, it would do so at its own risk and would be

responsible for the unauthorized payment. Reserve Bank has also warned that banks which indulge in any deviation from the above instructions would invite severe penal

action.

(3) In case of an ‘account payee’ cheque where a bank is a payee, the payee bank should always ensure that there are clear instructions for disposal of proceeds of the cheques from the

drawer of the cheque. If there are no such instructions, the cheque should be returned to the drawer.

(4) However, with a view to mitigating the difficulties faced by the members of co-operative credit societies in collection of account payee cheques, relaxation has been extended in respect

of co-operative credit societies. Banks may consider collecting account payee cheques drawn for an amount not exceeding `50,000/- to the account of their customers who are co-

operative credit societies, if the payees of such cheques are the constituents of such co-operative credit societies. While reiterating that such practice of collection of third party

cheques is not permissible, in order to facilitate collection of cheques from the payment system angle, account payee cheques deposited with the sub-member for credit to their

customers’ account can be collected by the member bank (referred to as the sponsor member) of the Clearing House. Under such arrangements, there should be a clear undertaking

from the sub-member to the effect that the proceeds of the account payee cheque will be credited to the payee’s account only, upon realisation.
 NON-NEGOTIABLE CROSSING

Non-Negotiable Crossing : Although the non- negotiable crossing does not result in the cheque becoming non- transferable, it still loses much of the negotiability of the cheques.
This prevents anyone other than the cheque transferor from holding a better title than the one he has. However, if such a cheque is transferred for consideration and if such a transfer does
not lead to a defect in the transferor ‘s title, the validity of such a non- negotiable crossing is still not removed from the cheque.

Section 130 of the Negotiable Instrument Act which deals with Non-Negotiable crossing states that “a person taking a cheque crossed generally or especially, bearing in either case the
words ‘not negotiable’ shall not have and shall not be capable of giving a better title to the cheque than that which person from whom he took it had.”

 Great Western Railway Co v. Londaon & Country Banking Co, 1901 (own risk)

 Wilson and Meeson v Pickering (1946) (Fraudulent transfer by agent/secretary)

Importance of Non- Negotiable Crossing : A person taking a cheque crossed generally or specially, bearing in either case the words “not negotiable”, shall not have, and shall not be
capable of giving, a better title to the cheque than that which the person form whom he took it had. [section 130]. Thus, mere writing words ‘Not negotiable’ does not mean that the cheque
is not transferable. It is still transferable, but the transferee cannot get title better than what transferor had.

The phrase “Not Negotiable” restrains the negotiability of the cheque thereby increasing the security and protection to the holder to a great extent.

How ??? : For example; Mr. P issues a crossed cheque in favour of Mr. K which does not bear the words ‘not negotiable’ therein. One Mr. N steals it from the office of Mr. K and endorses it to Mr. G who receives it for value in
good faith without having an idea that the cheque is stolen by Mr. N from Mr. K’s office. In this case Mr. G who satisfies all the conditions to be a holder in due course, acquires a good title and he as a holder in due course is
empowered with the right to recover the money not only from the thief Mr. N, but also from all prior parties like Mr. P and Mr. K.

In the above example, if the cheque bears the words “Not Negotiable” then Mr. G will not get better title than Mr. N from whom he acquired the cheque. In the other words, if Mr. G accepts a stolen cheque marked with ‘Not
Negotiable’ and encashes it, then he is liable to refund encashed money to the true owner of the cheque.
NEGOTIATION OF NEGOTIABLE
INSTRUMENTS
 SECTION 14 ; NEGOTIATION
One of the essentials features of a negotiable instrument is its transferability. A negotiable instrument may be transferred from one person to another in either of the followings way:

 By negotiation (under section 14 of NIA)

 By assignment (under section 130 of TPA)
Section 14 : Negotiation - When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

 Right to sue- The transferee of a negotiable instrument is entitled to file a suit in his own name for enforcing any right or claim on the basis of the instrument.
 Transfer Notice- The notice of transfer of a negotiable instrument is not necessarily to be given to the party liable to pay the same.
Section : 51. Who may negotiate.—Every sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payees or indorsees, of a negotiable instrument may, if the negotiability of such
instrument has not been restricted or excluded as mentioned in section 50, indorse and negotiate the same. Explanation.—Nothing in this section enables a maker or drawer to indorse or negotiate an instrument,
unless he is in lawful possession or is holder thereof; or enables a payee or indorsee to indorse or negotiate an instrument, unless he is holder thereof. Illustration A bill is drawn payable to A or order. A indorses it
to B, the indorsement not containing the words “or order” or any equivalent words. B may negotiate the instrument

An instrument is to be called 'negotiable' if it is Freely transferable - Transfer may be by –

1. By delivery, (if the instrument is bearer instrument) or

Section 47: Negotiation by delivery.—Subject to the provisions of section 58 (Instrument obtained by unlawful means or for unlawful consideration) a promissory note, bill of exchange or cheque
payable to bearer is negotiable by delivery thereof. Exception.—A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not
negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.

2. By indorsement and delivery. (if the instrument is order one)

Section 48 : Negotiation by indorsement.—Subject to the provisions of section 58, a promissory note, bill of exchange or cheque [payable to order], is negotiable by the holder by indorsement and
delivery thereof.
 SECTION 15 ; INDORSEMENT
Indorsement: When a maker or holder, (otherwise than such as maker) puts his signatures thereto for the purpose of negotiation

 on the face or back of the instrument

 or on a slip of paper annexed thereto,
 or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument - it is called as “endorsement”.
 Person who signs as “endorser”
 To whom it is endorsed as“ endorsee.
Note : indorsement by maker refers to second signature by the maker (otherwise than such as maker).

Essentials of valid endorsement: Effects of Endorsement:

Section 50 : Effect of indorsement.—The indorsement of a negotiable
 On the back or face of the instrument. Or paper slip or a stamp paper instrument followed by delivery transfers to the indorsee the property therein with
attached the right of further negotiation; but the indorsement may, by express words,
 Must be made by maker or holder. restrict or exclude such right, or may merely constitute the indorsee an agent to
indorse the instrument, or to receive its contents for the indorser, or for some
 Must be properly signed by the endorser. other specified person.
 It must be for the entire negotiatiable instrument.
 No specific form of words is necessary for endorsement.  The property in instrument is transferred from endorser to endorsee. (Right to
 No stamp duty required under Indian Stamp Act, 1899. (R.
receive the payment of the instrument)
 The endorsee gets right to negotiate the instrument further.
chandanmouli v. katta satyanarayana reddy)
 The endorsee gets the right to sue in his own name to all other parties.
 TYPES
1. INDORSEMENT “IN BLANK” AND “IN FULL” (SECTION 16)
If the indorser signs his name only, the indorsement is said to be “in blank,” (General indorsement) and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a
specified person, the indorsement is said to be “in full”; (Special indorsement) and the person so specified “Indorsee”.— is called the “indorsee” of the instrument.
Section 54 : Instrument indorsed in blank.—Subject to the provisions hereinafter contained as to crossed cheques, a negotiable instrument indorsed in blank is payable to the bearer thereof even
although originally payable to order.
2. RESTRICTIVE INDORSEMENT (SECTION 50)
When the endorser restrict the right of indorse to further transfer the negotiable instrument.
Section 50 : Effect of indorsement.—The indorsement of a negotiable instrument followed by delivery transfers to the indorsee the property therein with the right of further negotiation; but the
indorsement may, by express words, restrict or exclude such right, or may merely constitute the indorsee an agent to indorse the instrument, or to receive its contents for the indorser, or for some other
specified person.
3. SANS RECURSE INDORSEMENT (SECTION 52)
The indorser of a negotiable instrument may, by express words in the indorsement, exclude his own liability thereon. Where an indorser so excludes his liability.
Section 52 : Indorser who excludes his own liability or makes it conditional.—The indorser of a negotiable instrument may, by express words in the indorsement, exclude his own liability thereon, or
make such liability or the right of the indorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen. Where an indorser so excludes
his liability and afterwards becomes the holder of the instrument, all intermediate indorsers are liable to him.
4. CONDITIONAL INDORSEMENT (SECTION 52)
The right of the indorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen.
5. PARTIAL INDORSEMENT (SECTION 56)
No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount
has been partly paid, a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance.
Section 56 : Indorsement for part of sum due.—No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be
due on the instrument; but where such amount has been partly paid, a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance.
 ASSIGNMENT
When a holder of a bill note or cheque transfers the same to another, he in fact gives his right to receive the payment of the instrument to the transferee.

Negotiation implies the transfer of negotiable instrument, that takes place in order to make the transferee, the holder of the instrument. On the other hand, assignment
alludes to the transfer of ownership of the negotiable instrument, in which the assignee gets the right to receive the amount due on the instrument from the prior
parties.

The most important difference between negotiation and assignment is that they are governed by different acts. Assignment under section 130 of TPA, requires that the
transfer has to be made by written document signed by the transferor and this procedure is required both in case of bearer and order instrument.

Difference between Assignment & Negotiation

 Mode of transfer- The transfer by assignment requires a separate written document such as transfer deed signed by the transferor.

 Consideration - Consideration is always presumed in the case of transfer by negotiation. In the case of assignment consideration must be proved.

 Notice of transfer - In case of negotiation, notice of transfer is not necessary, whereas in the case of assignment notice of the transfer must be given by the assignee
to the debtor.

 Defects in the title - The assignee takes the instrument subject to all the defects in the title of the transferor. If the title of the assignor was defective the title of the
assignee is also defective. However, in case of negotiation the transferee takes the instrument free from all the defects in the title of the transferor. A holder in due
course is not affected by any defect in the title of the transferor. He may therefore have a better title than the transferor.

 Sue the third party in his own name – 130(2) The transferee of an actionable claim may, upon the execution of such instrument of transfer as aforesaid, sue or
institute proceedings for the same in his own name without obtaining the transferor’s consent to such suit or proceeding and without making him a party thereto.
 PRESUMPTIONS (SECTION 118)
The negotiable instruments are in written form and duly signed by the parties, and therefore, they can be used as evidence of the fact of indebtness in the
court of law because they have special rules of evidence.

Section 118 : Presumptions as to negotiable instruments.— Until the contrary is proved, the following presumptions shall be made:

a) Consideration: Every negotiable instrument is deemed to have been drawn and accepted, endorsed, negotiated, or transferred for
consideration.

b) Date: Every negotiable instrument must bear the date on which it is made or drawn.

c) Acceptance: Every negotiable instrument shall be accepted within a reasonable time after the date mentioned therein and before the date of its
maturity.

d) Transfer: Every transfer should be made before the expiry.

e) Order of Endorsement : That the indorsement that appear on the NI were made in order as they appear.

f) Stamp : That the lost NI was duly stamped.

g) Holder in due course : That the holder is a holder in due course ; provided that, where the instrutment has been obtained from its lawful owner,
or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means
of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him.
(Exception)
 SECTION 8 & 9
HOLDER & HOLDER IN DUE COURSE
Section 8 – HOLDER : means any person entitled in his own name to the possession a promissory note bill of exchange or cheque and to
recover or receive the amount due thereto from the parties thereon.

� So, A holder must therefore have the possession of the instrument and also the right to recover the money in his own name.

Section 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 the bearer

▪ or the payee or indorsee thereof ,if payable to the order

before the amount mentioned in it became payable (overdue), and without having sufficient cause to believe that any defect existed
in the title of the person from who he derived his title (good faith).

Section 53 : Holder deriving title from holder in due course.—A holder of a negotiable instrument who derives title from a holder
in due course has the rights thereon of that holder in due course.
 INGRIDIENTS OF HDC:
1. He must obtain it for consideration.

2. He must receive the negotiable instrument before its maturity.

3. He must take the negotiable instrument in good faith.

DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE

Meaning-holder means any person entitled in his own name possession of the instrument in other hand holder in due course a holder who takes the instrument in good faith for consideration before it is

overdue and without any notice of defect in the title of who transferred it to him.

ADVANTAGES OF HDC : Benefit – Title of HDC is always good.

Section 8 and 9 lays down the definition of holder and the holder in due course. This concept of holder in due course is an exception to the rule of “Nemo dat quod non habet”. It is an exception because despite
having no title if a NI is transferred but the transferee is receiving in good faith believing the transferor to be the owner he would become the holder in due course. Until contrary is proved the holder of
negotiable instrument is presumed to be a holder in due course. (Section 118(g)).

Section 36 : The Negotiable Instruments Act, 1881 : Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.

Section 41 : Acceptor bound, although indorsement forged : An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such indorsement is forged, if he knew or had
reason to believe the indorsement to be forged when he accepted the bill.
 BASIS FOR COMPARISON
HOLDER
HOLDER IN DUE COURSE (HDC)
Meaning

 A holder is a person who legally obtains the negotiable instrument, with his name entitled on it, to receive the payment from the parties liable.

 A holder in due course (HDC) is a person who acquires the negotiable instrument bona-fide for some consideration, whose payment is still due.

Privileges
Consideration

 Not necessary
 Comparatively less
 Necessary
 More
Maturity
Right to sue
 A person can become holder, before or after the maturity of the negotiable instrument.
 A holder cannot sue all prior parties.
 A person can become holder in due course, only before the maturity of negotiable instrument.
 A holder in due course can sue all prior parties.
Section 22. “Maturity”.—The maturity of a promissory note or bill of exchange is the date at which it falls due.
Good faith

 The instrument may or may not be obtained in good faith. Days of grace.— Every promissory note or bill of exchange which is not expressed to be payable on demand, at
sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable.
 The instrument must be obtained in good faith.
Section 23 (PARA 2) : If the month in which the period would terminate has no corresponding day, the period shall
be held to terminate on the last day of such month.
 SECTION 10 ; PAYMENT IN DUE COURSE

“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 do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

SECTION 10 ; PAYMENT IN DUE COURSE -- “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 possesion, whose title does not appear to be defective.

 Person making payment in due course is discharged by making such payment, i.e., even the payment is made to a wrong person, but it is otherwise in due course, the
person making the payment can not be held liable for the same.
PRESENTMENT OF NEGOTIABLE DISHONOUR, NOTING AND
INSTRUMENT PROTEST
 DISCHARGE
SECTION 82
Discharge means release from obligation

1. By Payment

2. By express waiver/release

3. By cancellation

4. By lapse of time/Delay

5. Dishonor

▪ Non acceptance ; or

▪ Non payment

Section 82 : Discharge from liability — The maker, acceptor or indorser respectively of a negotiable instrument is discharged from liability thereon—

(a) by cancellation.— to a holder thereof who cancels such acceptor's or indorser’s name with intent to discharge him, and to all parties claiming under such
holder;

(b) by release.— to a holder thereof who otherwise discharges such maker, acceptor or indorser, and to all parties deriving title under such holder after notice of
such discharge;

(c) by payment.— to all parties thereto, if the instrument is payable to bearer, or has been indorsed in blank, and such maker, acceptor or indorser makes payment in
due course of the amount due thereon.
 DISCREDIT/DISHONOUR
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 non-acceptance 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 :

a) Non acceptance or (Section 91)

b) Non payment. (section 92)

Section 83 : Discharge by allowing drawee more than forty-eight hours to accept.— If the holder of a bill of exchange allows the drawee more than [forty-eight]

hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharge from liability

to such holder.

A bill of exchange can be dishonored by non acceptance in the following ways-

 1-Does not accept it within 48 hours from the time of presentment.

 2-Drawee is incompetent or has become insolvent or dead.

 3-Drawee makes a qualified acceptance.

A. Dishonor by non-acceptance (Section 91) : A 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.

Section 91. Dishonour by non-acceptance.— A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees not being partners,

makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. Where the drawee is incompetent to

contract, or the acceptance is qualified the bill may be treated as dishonored.

B. 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.

Section 92. Dishonour 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.

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.
Section 93. By and to whom notice should be given.—When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment, the holder thereof,
or some party thereto who remains liable thereon, must give notice that the instrument has been so dishonoured to all other parties whom the holder seeks to make
severally liable thereon, and to some one of several parties whom he seeks to make jointly liable thereon.

 Nothing in this section renders it necessary to give notice to the maker of the dishonoured promissory note or the drawee or acceptor of the dishonoured bill of
exchange or cheque. (Due Notice)

Section 94. Mode in which notice may be given.— Notice of dishonour may be given to a duly authorized agent of the person to whom it is required to be given, or, where he has
died, to his legal representative, or, where he has been declared an insolvent, to his assignee; may be oral or written; may, if written, be sent by post; and 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, and that he will be held
liable thereon; and it must be given within a reasonable time after dishonour, at the place of business or (in case such party has no place of business) at the residence of the party for
whom it is intended. If the notice is duly directed and sent by post and miscarries, such miscarriage does not render the notice invalid.

Section 95. Party receiving must transmit notice of dishonour.—Any party receiving notice of dishonour must, in order to render any prior party liable to himself, give notice of
dishonor to such party within a reasonable time, unless such party otherwise receives due notice as provided by section 93.

Section 96. Agent for presentment.— When the instrument is deposited with an agent for presentment, the agent is entitled to the same time to give notice to his principal as if
he were the holder giving notice of dishonour, and the principal is entitled to a further like period to give notice of dishonour.

Section 97. When party to whom notice given is dead.— when the party to whom notice of dishonour is dispatched is dead, but the party dispatching the notice is ignorant of his
death, the notice is sufficient.
 NOTING & PROTEST
Noting - Noting is a convenient mode of authenticating the fact that a bill or note has been dishonoured. When an instrument is dishonoured, and to note the same, it is taken to
Notary public. The notary public presents it again for acceptance or payment, as the case may be. If drawee still refuses to accept or pay the bill noted, then a minute is prepared
containing the date, reason for dishonour and the facts on the instrument. It means that the Notary Public notes the cause of non- acceptance with date and fee on the promissory note or
bill of exchange. It is necessary that noting must be made in a reasonable time after dishonour. Noting is not essential for the cheque and are optional for inland bills.

Advantages Of Noting
 Wherever protest within particular time is compulsory under the law; it is sufficient if at least noting has been made within such time. Section 104 A has been introduced
to clarify the position of any bill or document which can be protested any time after taking the legal action against the party. Therefore, where a document has been noted within
the time required by law, the legal proceeding cannot be initiated on account of protest not having been made.
 A bill of exchange may be accepted for the honour after it has been noted
 A bill of exchange may be paid for the honour after it has been noted.

Protest - A protest is a formal record of dishonour signed by the notary public, and copy of the bill is also included in it. In the case of Inland Bills, the process of noting and protesting
is not necessary. But Section 104 states that every foreign bill of exchange should be protested for dishonor when the law requires a protest of the country where the bill has drawn. The
benefit of noting and protesting is that it constitutes prima facie evidence in the Court mentioning the fact why the instrument has been dishonored. Under Section 119, it is
made mandatory that the court is bound to recognize the protest, whereas the court may or may not recognize the noting.

Protest For Better Security - When the acceptor of a bill becomes insolvent before maturity then the holder may demand better security from the acceptor through a Notary Public, within
a reasonable time.If acceptor refuses to give better security, it can get certified by the notary by the process of noting. The certificate issued is known as a protest for better security.
 NOTING
SEC. 99 : When a promissory note or bill of exchange has been dishonoured by non-acceptance or non payment, the holder may cause such dishonour to be noted
by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each. Such note must be made within a reasonable time after dishonour
and must specify the date of dishonour, the reason, if any, assign for such dishonour or if the instrument has not been expressly dishonoured the reason why the holder
treats it as dishonoured, and the notary‘s charges. Hence, --

• When a promissory note or a bill of exchange has been dishonoured by non acceptance of non payment, in order to create a proof of this fact the holder may approach a notary public and
have the fact of dishonour noted either on the instrument itself or on a separate piece of paper or partly upon each.

• Noting must be made within a reasonable time after dishonour.

• Upon such request being received the notary public presents it again for acceptance or payment, as the case may be. If drawee still refuses to accept or pay the bill noted, then a minute
is prepared containing the date, reason for dishonor and the facts on the instrument.

The note should contain the following particulars:

 (1) The fact that the instrument has been dishonored;

 (2) That date on which it was dishonored;

 (3) The reason, if any assigned for the dishonor;

 (4) If the instrument has not been expressly dishonored the reason why the holder treats it as dishonored, and

 (5) Notary charges.

 The advantage of noting is that it creates evidence of the fact of dishonor and things connected with it. Noting is a convenient mode of authenticating the fact that a bill or note has been
dishonoured. But even so noting is not compulsory except for foreign bills. The holder may at his choice have the fact of dishonor noted or not.
 PROTEST
Sec: 100 – When a promissory note or a bill or 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 notary public. Such certificate is called a protest.

Protest for better security.— When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may, within a
reasonable time, cause a notary public to demand better security of the acceptor, and on its being refused may, within a reasonable time, cause such facts to be noted and certified as aforesaid.
Such certificate is called a protest for better security.

CONTENTS OF PROTEST : Section 101 requires a protest to contain certain particulars for its validity the omission of any one of such particulars result in its being invalid. The particulars are as
follows:

 1. It should contain the instrument itself or a literal transcript of it and of everything written or printed on the instrument.
 2. The name of the person for whom and against whom the instrument has been protested, that is, the name of the party making the protest and against whom the protest is made.
 3. It should contain a statement that acceptance, or payment or better security has been demanded from such person by the notary public, the terms of his answer, or a statement
that he gave no answer or that he could not be found.

 4. When the protest is against the dishonor of a bill or note, the protest should specify the time and place of dishonor.
 5. The subscription of the notary public making the protest.
 6. Where there has been acceptance or payment for honor, the protest should specify the name of the person who accepted or paid for honor and for whose honor he did so and also the
manner in which such acceptance or payment was offered and effected.

 Clause (c) i.e., 3 rd point of the section requires the notary before preparing his certificate to make a demand for acceptance, payment or security. This section concludes with the provision that the notary may make
such demand either in person or by his clerk or, where authorized by agreement or usage, by registered post.
DISHONOUR OF CHEQUES SECTION 138 to 142
 TIMELINE FOR PROCEDURE FOR DISHONOUR OF
CHEQUES

 Presented within 3 months (Earlier 6 months)

 Bank Informs the holder (Along with reason)

 Legal Notice of Dishonor (within 30 days)

 Demand Payment within a specified time (15 days)

 Part Payment - ???

 After expiry of 15 days – Court Case

 Within one month (From 16th day)
 DISHONOUR OF CHEQUES
PENALTIES IN CASE OF DISHONOUR OF CHEQUE

SEC. 138 DISHONOUR OF CHEQUE FOR INSUFFICIENCY, ETC. OF FUNDS IN THE ACCOUNT –

Where any cheque drawn by a person on an account maintained by him with a banker ; for payment of any amount of
money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability
; is returned by the bank unpaid,

 either because of the amount of money standing to the credit of that account is insufficient to honour the cheque

 or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank

such person shall be deemed to have committed that offence and shall, without prejudice to any other provision of
this Act, be punishable with imprisonment for a term which may extend to 2 years of with fine which may extend
to twice the amount of the cheque or with both. (PUNISHMENT)
 PRE-REQUISITES FOR INITIATING THE SUIT

Provided that nothing contained in the section shall apply unless –

 The cheque has been presented in the bank within a period of 3 months from the date on
which it was drawn or within the period of its validity, whichever is earlier.

 The payee or the holder in due course of the cheque, as the case may be, makes a demand for
the payment of the said amount of money by giving a notice, in writing, to the drawer of the
cheque within 30 days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid; and

 The drawer of such cheque fails to make the payment of the said amount of money to the
payee or , as the case may be , to the holder in due course of the cheque , within 15 days of the
receipt of the said notice.
 PROCEDURE THAT IS FOLLOWED IN MATTERS
WITH REGARD TO SECTION 138 OF THE ACT
1. A legal notice is to be issued to the drawer within 15 days of dishonor of cheque by registered post with all relevant facts.

2. The drawer is given a time of 15 days to make the payment, if the payment is made then the matter is served and the issue is
settled.

3. On the other hand if the payment is not made then the complainant is to file a criminal case process under Section 138 of the
Act, against the drawer within 30 days from the date of expiry of 15 days specified the notice, with the concerned magistrate
court within the jurisdiction.

4. If the court is satisfied and finds substance in the complainant, then summons will be issued to the accused to appear before
the Court. The complainant or his authorized agent should appear in the witness box and provide relevant details for filing
the case.

5. If after being served with the summons the accused abstains himself from appearing then the court may issue a bailable
warrant. Even after this if the drawer does not appear a non-bailable warrant may be issued.
6. On appearance of the drawer/accused, he may furnish a bail bond to ensure his appearance during trial.

7. After which the plea of accused is recorded.

 In case he pleads guilty, the court will post the matter for punishment.

 If the accused, denies the charges then he will be served with the copy of complaint.

8. The Complainant may present his evidence by way of affidavit and produce all documents including the original in support of his complaint. The
complainant will be cross examined by the accused or his counsel.

9. The accused will be given an opportunity to lead his evidence. The accused will also be afforded an opportunity to submit his documents in support of his case, as
well as witnesses in his support. Accused and his witnesses will be cross examined by the complainant.

10. The last stage of the proceeding is that of the arguments after which the court will pass a judgment.
11. If the accused is acquitted then the matter ends, but the complainant can go on further appeal in the High Court, similarly if the accused is convicted he can
file an appeal in the Sessions Court.

12. It must be noted that the offence under Section 138 of the Act, has been made compoundable.
 In Dayawati v. Yogesh Kumar Gosain 2017

Delhi High Court took into account the question whether an offence under Section 138, which is a criminally
compoundable case, could be settled by mediation.

The Court held that even though an express statutory provision enabling the criminal court to refer the
complainant and accused persons to alternate dispute redressal mechanisms has not been specifically provided
by the Legislature. The Code of Criminal Procedure ("Cr.P.C.") does permit and recognize settlement without
stipulating or restricting the process by which it may be reached.

Thus, there is no bar to utilizing the alternate dispute mechanisms including arbitration, mediation, conciliation
(recognized under Section 89 of Civil Procedure Code, 1908) for the purposes of settling disputes which are the
subject matter of offences covered under Section 320 of the Cr.P.C.

It also stated the proceedings under Section 138 of the Act is distinct from other criminal cases and are really in the nature of a civil wrong which has been
given criminal overtones.
 PRESUMPTION & DEFENCE
Section 139 in The Negotiable Instruments Act, 1881

139. Presumption in favour of holder.— It shall be presumed, unless the contrary is proved, that the
holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in
whole or in part, of any debt or other liability.

Section 140 in The Negotiable Instruments Act, 1881

140. Defence which may not be allowed in any prosecution under section 138.— It shall not be a
defence in a prosecution for an offence under section 138 that the drawer had no reason to believe
when he issued the cheque that the cheque may be dishonoured on presentment for the reasons
stated in that section.
 Counter-mainded Cheques
M/S. Modi Cements Ltd. v. Kuchil Kumar Nandi, Air 1998 SC 1057 : 1956 : 1998 Cri LJ 1397

The Supreme Court in AIR 1998 SC 1057, popularly known as the Modi Cements Case, gave a landmark judgment on the law relating to “Stoppage of payment under the
Negotiable Instruments Act. 1881.” The Division Bench (comprising of M. K, Mukherjee, S. P. Kurdukar and K. T. Thomas, JJ), while partly overruling its two earlier
judgments on this point, laid down that once a cheque is issued by drawer, a presumption under Section 139 of Negotiable Instruments Act, in favour of holder must
follow and merely because the drawer issues notice to drawee or to Bank for stoppage of payment, it will not preclude action for dishonour of cheque under
Section 138, Negotiable Instruments Act, by drawee or holder of cheque in due course.

⮚Case Note: Criminal - Complaints filed under Section 138 of the Negotiable Instruments Act, 1881 for the offence of dishonour of the cheque - Petitions filed for quashing the complaints under Section 482 of
the Code of Criminal Procedure, 1973 which were allowed - Appeals have been filed against this order. Issues : Whether the Court was justifiable in quashing the complaints?

⮚Holding : The drawer issued a notice to the drawee or to the bank for stoppage of the payment which was not barred under Section 138 of the Negotiable Instruments Act, 1881 by the drawee or the holder of
a cheque in due course. There were insufficient funds in the accounts on the day of issuance of the cheque. If a person draws a cheque with no sufficient funds available to his credit on the date of issue, but
makes the arrangement or deposits the amount thereafter before the cheque is out in the bank by the drawee, and the cheque was honoured then presumption of dishonesty was on the part of the drawer under
Section 138 would not be justified. Appeals allowed. Commercial - dishonour - Section 138 of Negotiable Instrument Act, 1881 - appeal against judgment of High Court by which it quashed complaint filed
against respondent under Section 138 - Section 138 provides that in case cheque has been drawn and issued for payment of amount to payee for discharge of debt and if same was returned back by bank
unpaid on ground of insufficiency of fund person who has issued cheque shall be deemed to have committed offence - Section 138 is penal provision and gets attracted only when cheque is dishonoured - Court
taking cognizance under Section 138 is required to be satisfied as to whether prima facie case is made out under said provision - complaint of appellant could not have been dismissed by High Court at threshold
- appeal allowed.

⮚Para (21) It is needless to emphasize that the Court taking cognizance of the complaint under Section 138 of the Act is required to be satisfied as to whether a prima facie case is made
out under the said provision. The drawer of the cheque undoubtedly gets an opportunity under Section 139 of the Act to rebut the presumption at the trial. It is for this reason we are of the
considered opinion that the complaints of the appellant could not have been dismissed by the High Court at the threshold.
 Sampelly Satyanarayana Rao v Indian Renewable Energy Development Agency Limited

FACTS : The post-dated cheques issued by the appellant by way of security were dishonoured on
presentation and complaints were filed by the respondent in the court of the concerned magistrate in New
Delhi against the appellant and its director.

ISSUE : It was argued that the cheques were given by way of security and that on the date on which the
cheques were issued, no debt or liability was due on the same. In other words, the post-dated cheques
were not to discharge existing debt or liability, but rather for a future amount; therefore, it was contended
that Section 138 of the act did not apply.

HELD : Once the loan was disbursed and the instalments fell due as per the agreement, the
dishonoured cheques fell under Section 138 of the act.

⮚Post-dated cheques
 Sampelly Satyanarayana Rao vs . Indian Renewable Energy Development Agency Limited ( 19 . 09 . 2016 - SC )

Case Note : Criminal - Post dated cheque - Dishonour thereof - Section 138 of Negotiable Instruments Act, 1881 - Vide loan agreement, Respondent agreed to advance loan - Post-dated cheques
towards payment of installment of loan were given by way of security - Upon dishonour thereof, complaints were filed by Respondent - Appellant approached High Court to seek quashing of complaints - High
Court held that when cheques were issued, loan had been sanctioned - Hence same fall in first category that was they were cheque issued for debt in present but payable in future - High Court declined to
quash complaints - Hence, present appeal - Whether dishonour of post-dated cheque given for repayment of loan installment which is also described as security in loan agreement is covered by Section 138
of Act, 1881

Facts: The Appellant was Director of the company whose cheques have been dishonoured and who was also the co-accused. Vide the loan agreement, the Respondent agreed to advance loan for setting up
of Power Project in the State. The agreement recorded that post-dated cheques towards payment of installment of loan (principal and interest) were given by way of security. The cheques carried different
dates depending on the dates when the installments were due and upon dishonour thereof, complaints including the one were filed by the Respondent in the Court. The Appellant approached the High Court
to seek quashing of the complaints. Contention of the Appellant in support of his case was that the cheques were given by way of security as mentioned in the agreement and that on the date the cheques
were issued, no debt or liability was due. Thus, dishonour of post-dated cheques given by way of security did not fall under Section 138 of the Act. The High Court held that when the post-dated cheques were
issued, the loan had been sanctioned and hence the same fall in the first category that was they were cheque issued for a debt in present but payable in future and declined to quash the complaints.

Held, while dismissing the appeal:

(i) The question whether a post-dated cheque is for "discharge of debt or liability" depends on the nature of the transaction. If on the date of the cheque liability or debt exists or the amount has become
legally recoverable, the Section is attracted and not otherwise.

(ii) Though the word "security" is used in Clause 3.1(iii) of the agreement, the said expression refers to the cheques being towards repayment of installments. The repayment becomes due under the
agreement, the moment the loan is advanced and the installment falls due. Once the loan was disbursed and installments had fallen due on the date of the cheque as per the agreement,
dishonour of such cheques would fall under Section 138 of the Act. The cheques undoubtedly represent the outstanding liability.

(iii) As per the case of the Complainant, the cheques which were subject matter of the said complaint were towards the partial repayment of the dues under the loan agreement. While dealing with a quashing
petition, the Court has ordinarily to proceed on the basis of averments in the complaint. The defence of the Accused cannot be considered at this stage. The Court considering the prayer for quashing does
not adjudicate upon a disputed question of fact.

(iv) The question was answered in favour of the Respondent and against the Appellant. Dishonour of cheque in the present case being for discharge of existing liability was covered by Section 138
of the Act, as rightly held by the High Court.
 OFFENCES BY COMPANIES
141 Offences by companies. —

(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was
responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to
be proceeded against and punished accordingly:
 Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or
that he had exercised all due diligence to prevent the commission of such offence:

 Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State
Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution
under this Chapter.

(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has
been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the
company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished
accordingly.

Explanation.— For the purposes of this section,—

 (a) “company” means any body corporate and includes a firm or other association of individuals; and

 (b) “director”, in relation to a firm, means a partner in the firm.

 Dilip Hariramani v. Bank of Baroda - [2022] 138 186 (SC)
VICARIOUS LIABILITY IN CASE OF COMPANIES & BODY CORPORATES
Facts : In the instant case, the respondent – Bank of Baroda, had granted term loans and cash credit facility to a partnership firm – M/s. Global Packaging. It was alleged that in part repayment of the loan, the Firm, through its
authorised signatory, Simaiya Hariramani, had issued three cheques of Rs. 25,00,000/- each. However, the cheques were dishonoured on presentation due to insufficient funds. The Bank, through its Branch Manager, issued a
demand notice to Simaiya Hariramani under Section 138 of the NI Act and thereafter , filed a complaint under Section 138 of the NI Act, against Simaiya Hariramani and the appellant, a partner of firm. In the complaint filed, firm was
not made an Accused. Appellant and one another were shown as partners of the Firm. Both were convicted. High confirmed the conviction by impugned judgment. Hence the present appeal.

Case Note: Criminal - Conviction - Cheque Dishonour - Vicarious criminal liability of partner - Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 (NI Act) - Partners convicted in complaint where firm not
arrayed as party - High Court affirmed the findings - Hence the present appeal - Whethera partner can be convicted and held vicariously liable when partnership firm not tried as an Accused for the primary/substantive offence?

Held : while allowing the Appeal: The provisions of Section 141 impose vicarious liability by deeming fiction which presupposes and requires the commission of the offence by the company or firm. Therefore, unless the
company or firm has committed the offence as a principal Accused, the persons mentioned in Sub-section (1) or (2) would not be liable and convicted as vicariously liable. Section 141 of the NI Act extends vicarious criminal liability to
officers associated with the company or firm when one of the twin requirements of Section 141 has been satisfied, which person(s) then, by deeming fiction, is made vicariously liable and punished. However, such vicarious liability
arises only when the company or firm commits the offence as the primary offender. The exception carved out in Aneeta Hada which applies when there is a legal bar for prosecuting a company or a firm, is not felicitous for the present
case. No such plea or assertion is made by the Respondent.

Appeal allowed. Appellant's conviction under Section 138 read with Section 141 of the NI Act set aside. The impugned judgment of the High Court confirming the conviction and order of sentence passed by the Sessions Court, and
the order of conviction passed by the Judicial Magistrate First Class are set aside

The Firm was not made an accused. The appellant and Simaiya Hariramani were convicted by the Judicial Magistrate First Class, Balodabazar, Chhattisgarh, under Section 138 of the NI Act. And,

The High Court dismissed appeal of the appellant. On appeal, the Apex Court held that the provisions of Section 141 impose vicarious liability by deeming fiction which presupposes and requires the

commission of the offence by the company or firm. Therefore, unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) would

not be liable and convicted as vicariously liable.

Supreme Court Held : The Court stated that the Section 141 of the NI Act extends vicarious criminal liability to officers associated with the company or firm when one of the twin requirements of

Section 141 has been satisfied, which person(s) then, by deeming fiction, is made vicariously liable and punished. However, such vicarious liability arises only when the company or firm commits the

offence as the primary offender. In view of the above, the Apex Court set aside the impugned judgment of the High Court which confirmed the conviction and order of sentence passed by the Sessions Court,

and the order of conviction passed by the Judicial Magistrate First Class.
 COGNIZANCE OF OFFENCES
&
JURISDICTION OF COURTS
142 Cognizance of offences. —Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974)—

(a) no court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due
course of the cheque.

(b) such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to section 138.

Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making
a complaint within such period.

(c) no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.

(2)The offence under section 138 shall be inquired into and tried only by a court within whose local jurisdiction,—

(a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is
situated; or (A/C PAYEE Cheque)

(b) if the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the
account, is situated.

Explanation.— For the purposes of clause (a), where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be
deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.
 JURISDICTION OF COURTS
K. Bhaskaran vs Sankaran Vaidhyan Balan And Anr on 29 September, 1999

The Court, Bhaskaran Case, had held that the jurisdiction to try an offence under Section 138 NIA could not be determined only by reference to the place where the
cheque was dishonoured as the dishonour of the cheque was not by itself an offence under Section 138 NIA and that the offence was completed only when the
drawer failed to pay the cheque amount within the period of fifteen days stipulated under clause (c) of the proviso to Section 138 of the Act and held that any
court within whose jurisdiction any of the above acts were committed had jurisdiction.

Dashrath Rupsingh Rathod v. State of Maharashtra, Criminal Appeal No. 2287 of 2009, decided on 01.08.2014

In this case, the Court overruled the Bhaskaran Ratio and, considering that Section 177 CrPC applies to Section 138 NIA, held that prosecution can be launched
only before the Court within whose jurisdiction the dishonour takes place except in situations where such offence is committed along with other offences in
a single transaction within the meaning of Section 220(1); read with Section 184 CrPC or is covered by the provisions of Section 182(1); read with Sections 184 and
220 CrPC thereof.

Earlier, a case under Section 138 could be initiated by the holder of the cheque at his place of business or residence. But, a bench of justices TS Thakur, Vikramjit Sen
and C Nagappan ruled that the case has to be initiated at the place where the branch of the bank on which the cheque was drawn is located. The bench said: “In this
analysis, we hold that the place, situs or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank is located.” Thus, an
offence within the contemplation of Section 138 is complete with the dishonour of the cheque but taking cognizance of the same by any court is forbidden so long as the
complainant does not have the cause of action to file a complaint in terms of clause (c) of the proviso read with Section 142.
 K . Bhaskaran vs . Sankaran Vaidhyan Balan and Ors .
( 29 . 09 . 1999 - SC )
 Case Note: Code of Criminal Procedure, 1973 - Sections 178(d), 177 & 179 --Negotiable Instruments Act, 1881 - Section 138 -- Complaint - Whether liable to be dismissed for want of territorial

jurisdiction of Magistrate Court -- Raising of such question is an idle exercise -- It is difficult to fix up any particular locality as place of occurrence.

Held: The offence under Section 138 of the Act can be completed only with the concatenation of a number of acts. Following are the acts which are components of the said offence: (1) Drawing of the

cheque, (2) Presentation of the cheque to the bank, (3) Returning the cheque unpaid by the drawee bank, (4) Giving notice in writing to the drawer of the cheque demanding payment of the cheque

amount, (5) failure of the drawer to make payment within 15 days of the receipt of the notice. It is not necessary that all the five acts should have been perpetrated at the same locality. It is not

necessary that all the five acts should have been perpetrated at the same locality. It is possible that each of those five acts could be done at five different localities. But concatenation of all the

above five is a sine qua non for the completion of the offence under Sec. 138 of the Act.

Referring Section 178(d) of the Code it is clear that if the five different acts were done in five different localities any one of the courts exercising jurisdiction in one of the five local areas can

become the place of trial for the offence under Section 138 of the Act. In other words, the complainant can choose any one of those courts having jurisdiction over any one of the local' areas

within the territorial limits of which any one of those five acts was done. As the amplitude stands so widened and so expansive it is an idle exercise to raise jurisdictional question regarding the offence

under Section 138 of the Act.

 Negotiable Instruments Act, 1881 -- Sees. 138, 118 & 139 -- Dishonour of cheque - Presumption -- The burden of proof is upon the accused to rebut presumption.

Held:- As the signature in the cheque is admitted to be that of the accused, the presumption envisaged in Section 118 of the Act can legally be inferred that the cheque was made or drawn for consideration

on the date which the cheque bears. Section 139 of the Act enjoins on the court to presume that the holder of the cheque received it for the discharge of any debt or liability. The burden was on the

accused to rebut the aforesaid presumption. The trial court was not persuaded to rely on the interested testimony of DW-to rebut the presumption. The said finding was upheld by the High Court.

It is not now open to the accused to contend differently on that aspect. Disposition: Appeal Allowed
 Dashrath Rupsingh Rathod vs . State of Maharashtra
( 01 . 08 . 2014 - SC )
 Prior History: From the Judgment and Order dated 04.09.2006 of the High Court of Judicature at Bombay, Nagpur Bench at Nagpur in Criminal Application No. 2932 of 2005 (MANU/MH/1413/2006)

Case Note: Negotiable Instruments Act 1881 Sections 3, 72, 138 -- Criminal Procedure Code, 1973 -- Sections 177, 178, 179, 180, 203 -- Cheque bouncing -- Place -- Jurisdiction -- Place, situs or venue of judicial inquiry and
trial of the offence must logically be restricted to where the drawee bank is located -- Law should not be warped for commercial exigencies. Negotiable Instruments Act 1881 Sections 3, 72, 138 -- Criminal Procedure Code, 1973
-- Sections 177, 178, 179, 180, 203 -- Cheque dishonour -- Notice -- Jurisdiction -- Choosing wrong jurisdiction -- Jurisdiction -- Place of the issuance or delivery of the statutory notice -- Where the Complainant chooses to
present the cheque for encashment by his bank are not relevant for purposes of territorial jurisdiction of the Complaints -- Even though non-compliance will inexorably lead to the dismissal of the complaint -- Complainant is
statutorily bound to comply with Section 177 etc. of the CrPC -- Place or situs where the Section 138 Complaint is to be filed is not of his choosing -- Territorial jurisdiction is restricted to the Court within whose local
jurisdiction the offence was committed -- Cheque was drawn at Maharashtra where it was dishonoured -- Judicial Magistrate had no jurisdiction to entertain the Complaint -- Subject cheque was presented at Digras, District
Yavatmal where the Complainant had a bank account -- Although complainant was a resident of another District -- Single Judge had rightly returned to the complainant for filing in the appropriate Court --

Held : Appeal is dismissed.

 Negotiable Instruments Act 1881 Sections 3, 72, 138 -- Criminal Procedure Code, 1973 -- Sections 177, 178, 179, 180, 203 -- Complaint -- Cheque bouncing -- Presenting bank -- Jurisdiction -- Complainant has its Registered
Office in Delhi from where accused are carrying on their business -- Cheques were drawn at New Delhi -- Cheques were presented and dishonoured at Maharashtra where the Complainant has an office -- No clarification
came out why the cheques had not been presented in Delhi where the Complainant had its Registered Office -- JMFC, Nagpur acquitted the accused on the ground of not having territorial jurisdiction -- Held, High Court
was justified in setting aside the acquittal and returning the complaint for filing before the proper Court.

 Negotiable Instruments Act 1881 Sections 3, 72, 138 -- Criminal Procedure Code, 1973 -- Sections 177, 178, 179, 180, 203 -- Cheque -- Drawing -- Presentation -- Registered office -- Jurisdiction -- Cheque was drawn by the
accused on State Bank of Travancore, Delhi -- It was presented at Aurangabad -- A Complaint was filed Aurangabad -- Application, seeking dismissal of the Complaint -- Registered Office of the Complainant was at Chitegaon,
Aurangabad -- Accused was transacting business from Delhi -- Complainant-company also had its branch office at Delhi -- Statutory notice had emanated from Aurangabad -- Subject transaction took place at Delhi -- Civil Suit
in respect of the recovery of the cheque amount has already been filed in Delhi -- Principles pertaining to the cause of action as perceived in civil law are not relevant in criminal prosecution -- Held, JMFC, Aurangabad has no
jurisdiction over the offence -- Appeal is dismissed.

Disposition: Appeal Dismissed

143. Power of Court to try cases summarily—

(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all offences under this Chapter shall be tried by a Judicial Magistrate of

the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials:

 Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term

not exceeding one year and an amount of fine exceeding five thousand rupees:

 Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the

case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the

case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined

and proceed to hear or rehear the case in the manner provided by the said Code.

(2) The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion,

unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing.

(3) Every trial under this section shall be conducted as expeditiously as possible and an endeavour shall be made to conclude the trial within six months from the

date of filing of the complaint.

 RECENT AMENDMENTS
(Interim compensation)
Section 143-A of the Amended Act

Section 143-A of the Amended Act empowers any court while trying an offence for dishonour of a cheque to direct the drawer, who is the issuer of
the cheque, to pay interim compensation to the complainant. The amount of compensation payable cannot exceed 20% of the amount as
stated in the cheque.

This amount has to be paid within a stipulated time period of 60 days from the date of the order passed by the court, or further within the
extended period of 30 days, as may be directed by the court on showing sufficient cause for the delay caused.

Section 148 of the Amended Act

According to the Amended Act, Section 148 states that in the event of the conviction of the drawer of the cheque, if the drawer proceeds to file an
appeal, the appellant court has the power to order the drawer of a cheque to deposit an amount. This deposited amount in such case has to be
a minimum of 20% of the fine or compensation awarded by the Magistrate Court in the appeal preferred against his/her conviction.

However, if the appellant is acquitted, then the Court shall direct the complainant to repay to the appellant the amount so released, with
interest.
 - KHYATI NAYAK
Assistant Professor (Law)

THANK YOU KPMSOL, NMIMS, MUMBAI

Email :
khyati.nayak@nmims.edu