The Negotiable Instruments Act 1881

Negotiable instruments, it is seen have a great significance over the modern business world. It has to be noted that these instruments have gained significant prominence as the principle instruments for paying and discharging business obligation.

So what essentially is a negotiable instrument? A negotiable instrument is any transferable document which satisfies certain conditions. These instruments pass freely from hand to hand and thus form an integral form part this modern businesses instruments.

It also has to be noted that in our country, the law relating to negotiable instruments, is governed by the Negotiable Instruments Act 1881.

This Negotiable Instruments Act, does not in specific define what a negotiable instrument is, it merely states that a negotiable instrument means “a promissory note, bill of exchange or cheque payable either to the bearer.” [1]

Section 13 of the Act [2], does not indicate the characteristics of a negotiable instrument but only states that three instruments-cheque, bill of exchange and a promissory note, are negotiable instruments. [3]

Thus these three instruments are therefore negotiable instruments as per the statute. But it has to be noted that S.13, does not prohibit any other instrument which satisfies the essential features of negotiability, to be treated as a negotiable instrument.

Thomas [4] , defines the negotiable instrument as an instrument is negotiable which it is, by a legally recognized custom of trade or law, transferable by delivery or by endorsement and delivery, without notice to the party liable, in such a way that a. a holder of it may for the time being may sue upon it in his own name .The property in it passes on to a bonafide transferee for value free from any defect in the title of the person from whom he obtained it.

Very simply putting it, a negotiable instrument is a transferable document either by the application of the law or by the custom of the trade concerned.

Thus it has to be noted that a negotiable instrument, firstly is easily transferable from person to person and the ownership of the property may be passed on by mere delivery. Secondly, a negotiable instrument confers absolute faith and good title on a transferee, provided that he takes it in good faith for value and without notice of the fact that the transferor had defective title thereto [5] .

It is seen that negotiable instruments can be essentially classified in to two major types [6]

Negotiable instruments by statute: The three instruments, cheque, bill of exchange and promissory notes are negotiable instruments by statute

Negotiable instruments by custom or usage: Some instruments, have acquired the character of negotiability by custom or usage of trade. Section 137 of the Transfer of Property Act, 1882, also recognized that an instrument may be negotiable by law or custom. Therefore we have case of promissory notes, delivery order and hundis being held as negotiable instruments.

Chapter 1

Liabilities of Parties

The main aim of this project would essentially be to look in to the liability of parties to a Negotiable Instruments. But before moving on to the liabilities, a brief on the parties and their capacity to capacity of parties to contract is required. The parties to a negotiable instrument, namely, the maker, drawer, drawee and the payee, enter in to a contract among themselves.

It is therefore very essential that they should have a capacity to enter in to a valid contracts. Section 26 of the Negotiable Instrument Act, states that

“Every person capable of contracting , according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiations of a promissory note, bill of exchange or a cheque”.

S.11 of the Indian Contract Act, states the requirements of parties to contract. Thus as per this section, any person who is of a sound mind, above the age of majority and not disqualified form entering in to contract by any Act, is competent to enter in to valid contract.

1.1 Liability of drawer of bill or a cheque

Essentially the liability of the parties to a ‘negotiable instrument’ has it statutory provisions under Sections 30, 32 and 35 of the Negotiable Instruments Act 1881.

The first section in this aspect to be analyzed, would be S.30 of the Act, which provides for the Liability of the drawer of the bill or a cheque.

The ‘drawer’ of the cheque, essentially, as defined by S.7 of the Act, is “The maker of a bill of exchange or Cheque”

Thus Section 30 of the Act, goes on to define the liability of the drawer of a bill or cheque

“The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been give to, or received by, the drawer as hereinafter provided”

The important thing to be noted here is that the liability of the drawer here arises only in case of dishonor of the cheque or a bill of exchange and nothing prior to it. A bill of exchange it is seen is dishonored by non-acceptance or by non-payment, but on the other hand, a cheque, is dishonored by non-payment only.

As soon as this bill or exchange or a cheque has been dishonored by non-acceptance by the drawee, it is seen that the holder of the has the right to recourse against the drawer. The drawee, as per Section 7 of the Act, is “the person directed to pay”

It also has to be noted that the drawer, becomes liable only when the bill of exchange or the cheque has been dishonored by the drawee.

But unlike the bill of exchange, it has to be noted that in case of dishonor of a cheque, the drawer remains liable thereto, even if the cheque is not presented by the holder to the drawer bank. This was held by the Supreme Court, in Harish Cnander v. M/s. Ganga Singh and Sons and others [7] . Here again the relevance of Sections 72 and 84, were looked in to. These sections essentially deal with the discharge of the drawers liabilit , in case he suffers damage as a result in the presentment of the cheque

Another aspect that needs to be looked in to before the drawer can be held liable, is the fact that ‘due and sufficient prior notice of dishonor’, has been given.

But again taking Section 98 [8] in to consideration, no notice is required if the provision of this section are being taken in to consideration. It has to be noted that the service of this notice, may be oral or written or may even be faxed [9] , but it is a must.

V.V.L.N.Chary and Others v. N.A.Martin and others [10] , is another case, which needs to be looked in to. The issue here, was whether a post-dated cheque for payment of goods is only a promise to pay on a future date or not?.The court, held in the affirmative and stated that it is but a promise. It further held that if this promise is broken by the dishonor of the cheque, it would enforce a civil liability only. The liability of proving the dishonest intention of the drawer was put on the shoulders of the holder, as the court stated that only if prior knowledge was present on the drawers part that he intended to dishonor the cheque, can he be convicted.

This case essentially put the drawer in a rather better position, by ensuring that unnecessary accusations and liabilities would not be enforced on him.

So then would a drawer ever be criminally liable?. The answer to this came later on in the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act 1988, which was further modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002As per this act, the dishonor of cheques due to the insufficiency of funds, was deemed to be an offence for which the drawer could be punished with an imprisonment for a term up to a year or with a fine up to twice the amount of the cheque or with both. More specifically Section 138-142, were inserted which deal with these offences [11] .

Another section to be noted here, is Section 31 of the Act, that deals with the liability of the drawee of the cheque . As per this section, “The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.”

Section 32 of the Act, deals with the liability of the maker of the note and the acceptor of the bill. As per this section, “In the absence of contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand.

In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default.”

Here, it has to be noted that the maker of a promissory note and the acceptor of a bill of exchange are the principle debtors and their liability on the instrument, is absolute and unconditional. The first part of this section, deals with the liability of the maker of a note and the second part with the consequences on default.

The crux of this section can summed up as. This section essentially puts the maker if the note and the acceptor of the bill on the same footing. It makes both liable as principle debtor. Besides this, it can be seen that a bill may be accepted before the maturity or at or after maturity. An acceptor of the bill, it is seen before maturity is bound to pay the amount at maturity and an acceptor at or after maturity shall have to pay the amount to the holder on demand.

It is however not that there is o difference between the liability of the maker of the note and the acceptor of the bill. The maker of the note, it is seen is bound to pay the amount according to the apparent tenor of the note [12] . That he, as he makes it himself, he cannot change its terms and shall have to abide by the tenor of the note. But on the other hand, it is seen that the acceptor of the bill, is liable to pay the amount according to the apparent tenor of his acceptance. That is to say, if the acceptor accepts the bill, he is required to honor the bill as per his qualified acceptance and not according to the tenor of the bill.

This cane very simply be illustrated by the following example. If A, draws a bill of Rs.10,00 on B, to be paid after a year and B, gives his acceptance to pay the amount after 18 months, B is liable to pay after 18 moths and not a year.

It ahs to be noted that in case of a promissory note signed by two or more promisors and the consideration has been received by only one of them, irrespective of any reason, all the promisors shall be equally liable for the amount of the promissory note.

It also has to be noted that Sections 78, 41 42 and 88 of the Act, also deal with the liability of the maker of the note and the acceptor of a bill

1.2 Liability of the endorser

This is provided for under Section 35 of the Act, which states that

“In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without in such endorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonor, provided due notice of dishonour has been given to, or received by, such endorser as hereinafter provided.

Every endorser after dishonour is liable as upon an instrument payable on demand.”

Before moving on further, it is pertinent to study Section 15 of the Act in relevance to the term ‘endorsement’ and also to define an ‘endorser’. As per Section 15 of the Act, which defines endorsement,

“When the marker or holder of an negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, one the back or face thereof 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, he is said to indorse the same, and is called the endorser.”

It is seen that in order to invoke Section 35, firstly and most importantly, there has to be an endorsement of an instrument, which has to be delivered to the endorsee. It has to be noted that it either of this act does not occur, the liability of the endorser does not arise.

Secondly, this section again puts the endorser of the cheque on the same footing as the drawer of a bill/cheque or maker of a note. In the sense that it confers upon him the same levels of liability.

The idea behind this concept of endorsement is essentially on the belief that the bill, cheque or note, will be duly accepted or honored by the drawee or the maker. On the failure of this event happening, the liability of the endorser occurs. So essentially, it is seen that the role of the endorser is pretty much equivalent tot that of a surety, who undertakes the performance by the acceptor of the bill.

It is seen that immediately on the dishonor of an instrument, the older of the instrument, gets an inherent right to sue to endorser at once, which can in no way be challenged. In fact the holder stands in a rather advantageous position as he is in a better position to sue either parties, the drawer for non-compliance or the endorser for failure to ensure compliance on the part of the drawer

Then again it has to be noted that the liability of an endorser arises only when there is an absence of a contract to the contrary. As mentioned in the section itself, the endorser may save himself from liability by either excluding his liability thereon by endorsing sans recourse or by making his liability conditional. If these acts have been adhered to, the endorser would save himself the trouble of being liable.

An aspect which need to be looked in to is to when the endorsers liability is discharged?. In order to answer this, Section 36 of the Act which deals with the liability of prior parties to holder in due course, needs to be looked in to first. This Section states that “Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.”

Section 40 of the act also needs to be looked in to, which states that “Where the holder of a negotiable instrument, without the consent of the endorser, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.”

Conclusion

The essence of this liabilities being imposed upon the parties, is nothing by an act to being upon greater sense of responsibilities on the part of the parties. The Sections provided here, are rather comprehensive and cover a rather broad range of parties to a negotiable instrument, and also impose penal sanctions on them, if they turn offenders. Although prior to the various amendments, there was no criminal liability imposed on parties, the amendment of 2002, imposed upon a greater sense of responsibility as it brought upon more stringent measures to counter the offending parties.