DISHONOUR OF CHEQUES

SECTION 138 NEGOTIABLE INSTRUMENTS ACT, 1881

Dissertation Submitted to The Guru Gobind Singh Indraprastha University, in Partial fulfillment of the requirement for the Degree of L.L.B.(Hons.)

TABLE OF CONTENTS Table of Cases Chapter - I Chapter - II Chapter - III Chapter - IV Chapter - V Chapter - VI Chapter - VII Chapter - VIII History of Banks Meaning of Negotiable Instruments. Kinds of Instruments, specifically cheques Dishonour of cheque Duty of the Bank in case of dishonour and the effect of amendments. Comparison of the old act with new act. Summary suits on cheques dishonoured Comments and Suggestions Judicial Approach Bibliography i xi 1-17 18-32 33-39 40-57 58-71 72-87 88-90 91-124

Chapter-1 History of Banking

The Invention of Banking and Coinage The invention of banking preceded that of coinage. Banking originated in Ancient Mesopotamia where the royal palaces and temples provided secure places for the safe-keeping of grain and other commodities. Receipts came to be used for transfers not only to the original depositors but also to third parties. Eventually private houses in Mesopotamia also got involved in these banking operations and laws regulating them were included in the code of Hammurabi. In Egypt too the centralization of harvests in state warehouses also led to the development of a system of banking. Written orders for the withdrawal of separate lots of grain by owners whose crops had been deposited there for safety and convenience, or which had been compulsorily deposited to the credit of the king, soon became used as a more general method of payment of debts to other persons including tax gatherers, priests and traders. Even after the introduction of coinage these Egyptian grain banks served to reduce the need for precious metals which tended to be reserved for foreign purchases, particularly in connection with military activities. Precious metals, in weighed quantities, were a common form of money in ancient times. The transition to quantities that could be counted rather than weighed came gradually. On page 29 of A History of Money Glyn Davies points out that the words "spend", "expenditure", and "pound" (as in the main British monetary unit) all come from the Latin "expendere" meaning "to weigh". On page 74 the author points out that the basic unit of weight in the Greek speaking world was the "drachma" or "handful" of grain, but the precise weight taken to represent this

varied considerably, for example from less than 3 grams in Corinth to more than 6 grams in Aegina. Throughout much of the ancient world the basic unit of money was the stater, meaning literally "balancer" or "weigher". The talent is a monetary unit with which we are familiar with from the Parable of the Talents in the Bible. The talent was also a Greek unit of weight, about 60 pounds. Many primitive forms of money were counted just like coins. Cowrie shells, obtained from some islands in the Indian Ocean, were a very widely used primitive form of money - in fact they were still in use in some parts of the world (such as Nigeria) within living memory. "So important a role did the cowrie play as money in ancient China that its pictograph was adopted in their written language for 'money'." (page 36) Thus it is not surprising that among the earliest countable metallic money or "coins" were "cowries" made of bronze or copper, in China. In addition to these metal "cowries" the Chinese also produced "coins" in the form of other objects that had long been accepted in their society as money e.g. spades, hoes, and knives. Although there is some dispute over exactly when these developments first took place, the Chinese tool currencies were in general use at about the same time as the earliest European coins and there have been claims that their origins may have been much earlier, possibly as early as the end of the second millennium BC. The use of tool coins developed (presumably independently) in the West. The ancient Greeks used iron nails as coins, while Julius Caesar regarded the fact that the ancient Britons used sword blades as coins as a sign of their backwardness. (However the Britons did also mint true coins before they were conquered by the Romans). These quasi-coins were all easy to counterfeit and, being made of base metals, of low intrinsic worth and thus not convenient for expensive purchases. True coinage developed in Asia Minor as a result of the

practice of the Lydians, of stamping small round pieces of precious metals as a guarantee of their purity. Later, when their metallurgical skills improved and these pieces became more regular in form and weight the seals served as a symbol of both purity and weight. The first real coins were probably minted some time in the period 640 - 630 BC. Afterwards the use of coins spread quickly from Lydia to Ionia, mainland Greece, and Persia. Greek Coinage One of the smaller Greek coins was the silver obol. In the Attic standard of weights and coinage six silver obols were worth one silver drachma. It is interesting to note that before the development of coinage six of the pointed spits or elongated nails used as tool currency constituted a customary handful similar to that of the even earlier grain-based methods. Therefore one of the early Greek coins, the obol, was simply a continuation of a primitive form of money - the iron spit or pointed rod. Inflation was a problem even in the early days of coin production. In 407 BC Sparta captured the Athenian silver mines at Laurion and released around 20,000 slaves. As a result Athens was faced with a grave shortage of coins and in 406 and 405 BC issued bronze coins with a thin plating of silver. The result was that the shortage became even worse. Good coins tended to disappear from circulation since people naturally kept them and used the new coins instead in order to get rid of them. This gave rise to what is probably the world's first statement of Gresham's law, that bad money drives out good, in Aristophanes' play, The Frogs, produced in 405 BC. Aristophanes wrote "the ancient coins are excellent...yet we make no use of them and prefer those bad copper pieces quite recently issued and so wretchedly struck." These base coins were demonetized in 393 BC.

Considerable rivalry developed between different currencies. "In coinage as in other matters the Greek city-states strove desperately for predominance, as did their arch-rivals the Persian emperors." City-states with strong and widely accepted currencies would have gained prestige. In the 1960s newly independent countries in the Third World took pride in the trappings of nationhood - their own airlines, national banks, and currency. The city states of ancient Greece took a similar pride in their currencies - as is suggested by the beauty of their coins. Glyn Davies quotes another author, J. Porteous, who wrote " the fifth century saw the minting of the most beautiful coins ever made." He also quotes two historians, Austin and Vidal-Naquet, who claimed that "in the history of Greek cities coinage was always first and foremost a civic emblem. To strike coins with the badge of the city was to proclaim one's political independence." Coercion played a role in establishing monetary uniformity. In 456 BC Athens forced Aegina to take Athenian `owls' and to stop minting her own `turtle' coinage and in 449 BC Athens issued an edict ordering all `foreign' coins to be handed in to the Athenian mint and compelling all her allies to use the Attic standard of weights, measures and money. The conquests of Alexander the Great brought about a large degree of monetary uniformity over much of the known world. His father, Philip, had issued coins celebrating his triumph in the chariot race in Olympic games of 356 BC - an example of the use of coins as propaganda. The Roman emperors made even more extensive use of coins for propaganda, one historian going so far as to claim that "the primary function of the coins is to record the messages which the emperor and his advisers desired to commend to the populations of the empire."

On pages 85-86, Glyn Davies points out that "coins were by far the best propaganda weapon available for advertising Greek, Roman or any other civilization in the days before mechanical printing was invented." Money Exchange and Credit Transfer The great variety of coinages originally in use in the Hellenic world meant that money changing was the earliest and most common form of Greek banking. Usually the money changers would carry out their business in or around temples and other public buildings, setting up their trapezium-shaped tables (which usually carried a series of lines and squares for assisting calculations), from which the Greek bankers, the trapezitai derived their name, much as our name for bank comes from the Italian banca for bench or counter. The close association between banking, money changing and temples is best known to us from the episode of Christ's overturning the tables in the Temple of Jerusalem (Matthew 21.12). Money changing was not the only form of banking. One of the most important services was bottomry or lending to finance the carriage of freight by ships. Other business enterprises supported by the Greek bankers included mining and construction of public buildings. The most famous and richest of all was Pasion who started his banking career in 394 BC as a slave in the service of two leading Athenian bankers and rose to eclipse his masters, gaining in the process not only his freedom but also Athenian citizenship. In addition to his banking business he owned the largest shield factory in Greece and also conducted a hiring business lending domestic articles such as clothes, blankets, silver bowls etc. for a lucrative fee. When Egypt fell under the rule of a Greek dynasty, the Ptolemies (32330 BC) the old system of warehouse banking reached a new level of

sophistication. The numerous scattered government granaries were transformed into a network of grain banks with what amounted to a central bank in Alexandria where the main accounts from all the state granary banks were recorded. This banking network functioned as a giro system in which payments were effected by transfer from one account to another without money passing. As double entry booking had not been invented credit transfers were recorded by varying the case endings of the names involved, credit entries being in the genitive or possessive case and debit entries in the dative case. Credit transfer was also a characteristic feature of the services provided in Delos which rose to prominence in banking during the late second and third centuries BC. As a barren offshore island its inhabitants had to live off their wits and make the most of their two great assets - the island's magnificent natural harbour and the famous temple of Apollo around which their trading and financial activities developed. Whereas in Athens banking, in its early days, had been carried on exclusively in cash, in Delos cash transactions were replaced by real credit receipts and payments made on simple instructions with accounts kept for each client. The main commercial rivals of Delos, Carthage and Corinth, were both destroyed by Rome and consequently it was natural that the Bank of Delos should become the model most closely imitated by the banks of Rome. However their importance was limited by the Roman preference for cash transactions with coins. Whereas the Babylonians had developed their banking to a sophisticated degree because their banks had to carry out the monetary functions of coinage (since coins had not been invented), and the Ptolemaic Egyptians segregated their limited coinage system from their state banking system to economise on the use of precious metals, the Romans preferred coins for many kinds of

services which ancient (and modern) banks normally provided. After the fall of the Roman Empire banking was forgotten and had to be reinvented much later. Banking re-emerged in Europe at about the time of the Crusades. In Italian city states such as Rome, Venice and Genoa, and in the fairs of medieval France, the need to transfer sums of money for trading purposes led to the development of financial services including bills of exchange. Although it is possible that such bills had been used by the Arabs in the eighth century and the Jews in the tenth, the first for which definite evidence exists was a contract issued in Genoa in 1156 to enable two brothers who had borrowed 115 Genoese pounds to reimburse the bank's agents in Constantinople by paying them 460 bezants one month after their arrival. The Crusades gave a great stimulus to banking because payments for supplies, equipment, allies, ransoms etc. required safe and speedy means of transferring vast resources of cash. Consequently the Knights of the Temple and the Hospitallers began to provide some banking services such as those already being developed in some of the Italian city states. The Royal Monopoly of Minting One of the reasons for the rapid spread of the use of coins was their convenience. In situations where coins were generally acceptable at their nominal value there was no need to weigh them and in everyday transactions where relatively small numbers were involved counting was quicker and far more convenient than weighing. By the Middle Ages monarchs were able to use this convenience as a source of profit.

On page 168 Glyn Davies writes, "because of the convenience of royally authenticated coinage as a means of payment, and with hardly any other of the general means of payment available in the Middle Ages being anything like as convenient, coins commonly carried a substantial premium over the value of their metallic content, more than high enough to cover the costs of minting. Kings could turn this premium into personal profit; hence ... the wholesale regular recall of coinage... first at six yearly, then at three-yearly intervals, and eventually about every two years or so. In order to make a thorough job of this short recycling process it was essential that all existing coins should be brought in so as to maximize the profit and, in order to prevent competition from earlier issues, the new issues had to be made clearly distinguishable by the authorities yet readily acceptable to the general public." These recoinage cycles were far more frequent than was justified by wear and tear on the coins but the profits from minting, known as seigniorage, supplemented the revenue that English monarchs raised from the efficient systems of taxation introduced by the Normans. However, revenue from minting depended on public confidence in the coinage and consequently an elaborate system of testing was introduced. "Anyone who had occasion to handle coins of silver or gold in any volume, whether merchants, traders, tax collectors, the King himself, the royal treasury, or the sheriffs, required reliable devices for testing the purity of what passed for currency." (Page 144). One of these methods was rough and ready - the use of touchstones which involved an examination of the colour trace left by the metal on the surface of a schist or quartz stone. The other, the Trial of the Pyx, was a test held in public before a jury. This Trial involved the use of 24 "touch needles",

one for each of the traditional gold carats, with similar test pieces for silver. Thus, despite the challenge of counterfeiters, governments controlled coin production and hence the money supply. Not until the rise of commercial banking and the widespread adoption of paper money was this monopoly broken, with profound consequences for the growth of democracy. Paper Money In China the issue of paper money became common from about AD 960 onwards but there had been occasional issues long before that. A motive for one such early issue, in the reign of Emperor Hien Tsung 806-821, was a shortage of copper for making coins. A drain of currency from China, partly to buy off potential invaders from the north, led to greater reliance on paper money with the result that by 1020 the quantity issued was excessive, causing inflation. In subsequent centuries there were several episodes of hyperinflation and after about 1455, after well over 500 years of using paper money, China abandoned it. Bills of Exchange With the revival of banking in western Europe, stimulated by the Crusades, written instructions in the form of bills of exchange, came to be used as a means of transferring large sums of money and the Knights Templars and Hospitallers functioned as bankers. (It is possible that the Arabs may have used bills of exchange at a much earlier date, perhaps as early as the eighth century). The use of paper as currency came much later.

Goldsmith Bankers During the English Civil War, 1642-1651, the goldsmith's safes were secure places for the deposit of jewels, bullion and coins. Instructions to goldsmiths to pay money to another customer subsequently developed into the cheque (or check in American spelling). Similarly goldsmiths' receipts were used not only for withdrawing deposits but also as evidence of ability to pay and by about 1660 these had developed into the banknote. Virginian Tobacco In England's American colonies a chronic shortage of official coins led to various substitutes being used as money, including, in Viriginia, tobacco, leading to the development of paper money by a different route. Tobacco leaves have drawbacks as currency and consequently certificates attesting to the quality and quantity of tobacco deposited in public warehouses came to be used as money and in 1727 were made legal tender. Gold Standard Although paper money obviously had no intrinsic value its acceptability originally depended on its being backed by some commodity, normally precious metals. During the Napoleonic Wars convertibility of Bank of England notes was suspended and there was some inflation which, although quite mild compared to that which has occurred in other wars, was worrying to contemporary observers who were used to stable prices and, in accordance with the recommendations of an official enquiry Britain adopted the gold standard for the pound in 1816. For centuries earlier silver had been the standard of value. The pound was originally an amount of silver weighing a pound. France and the United States

were in favour of a bimetallic standard and in 1867 an international conference was held in Paris to try and widen the area of common currencies based on coins with standard weights of gold and silver. However when the various German states merged into a single country in 1871 they chose the gold standard. The Scandinavian countries adopted the gold standard shortly afterwards. France made the switch from bimetallism to gold in 1878 and Japan, which had been on a silver standard, changed in 1897. Finally, in 1900, the United States officially adopted the gold standard. With the outbreak of the First World War in 1914 Britain decided to withdraw gold from internal circulation and other countries also broke the link with gold. Germany returned to the gold standard in 1924 when it introduced a new currency, the Reichsmark and Britain did the following year, and France in 1928. However the British government had fixed the value of sterling at an unsustainably high rate and in the worldwide economic crisis in 1931 Britain, followed by most of the Commonwealth (except Canada) Ireland, Scandinavia, Iraq, Portugal, Thailand, and some South American countries abandoned gold. The United States kept the link to gold and after the Second World War the US dollar replaced the pound sterling as the key global currency. Other countries fixed their exchange rates against the dollar, the value of which remained defined in terms of gold. In the early 1970s the system of fixed exchange rates started to break down as a result of growing international inflation and the United States abandoned the link with gold in 1973. Intangible Money The break with precious metals helped to make money a more elusive entity. Another trend in the same direction is the growing interest in

forms of electronic money from the 1990s onwards. In some ways emoney is a logical evolution from the wire transfers that came about with the widespread adoption of the telegraph in the 19th century but such transfers had relatively little impact on the everyday shopper. The evolution of money has not stopped. Securitisation, the turning of illiquid assets into cash, developed in new directions in the 1990s. One much publicised development was the invention of bonds backed by intangible assets such as copyright of music, e.g.Bowie bonds, named after those issued by the popstar David Bowie. (See also Something Wild, the first novel dealing with Bowie bonds). Noteworthy Points Regarding the Origins of Money Some of the points stressed by Glyn Davies in his book are:Money did not have a single origin but developed independently in many different parts of the world.

Many factors contributed to its development and if evidence of what anthropologists have learned about primitive money is anything to go by economic factors were not the most important.

Money performs a variety of functions and the functions performed by the earliest types were probably fairly restricted initially and would NOT necessarily have been the same in all societies.

Money is fungible: there is a tendency for older forms to take on new roles and for new forms to be developed which take on old roles, e.g. (this is my example) on English banknotes such as the 5 pound notes it says "I promise to pay the bearer on demand the sum of five pounds" and below that it carries the signature of the chief cashier of the Bank of England. This is a reminder that originally

banknotes were regarded in Britain, and in many other countries, as a substitute for money and only later did they come to be accepted as the real thing. Relevance of History One of Glyn Davies's main motives for writing the book was that, as he writes in his preface around the next corner there may be lying in wait apparently quite novel problems which in all probability bear a basic similarity to those that have already been tackled with varying degrees of success or failure in other times and other places. Furthermore he is of the opinion that economists, especially monetarists, tend to overestimate the purely economic, narrow and technical functions of money and have placed insufficient emphasis on its wider social, institutional and psychological aspects. These issues aren't simply of academic interest. Economists still argue about how to measure and control the money supply and numerous different measures, corresponding to slightly different definitions have been proposed. These disputes have implications for the material wellbeing of everyone, especially now that thanks to the development of computer networks, new forms of money are coming into existence. Hence the importance of learning from history.

The word "bank" is of Greek origin. In that language it means a bench or table for changing money. The word "bankrupt" is of Italian origin, as in Florence the term banca rotta meant "broken bench'' hence a bankrupt had his bench broken. The first bankers sat behind a little bench on the open street with their money piled upon the bench in front of them This was their "bank," and when their money was lost, then their bench was said to be broken, from which comes our term "bankrupt."

There are three great functions which the bank of to-day performs, viz., the receipt of deposits, the making of discounts, and the issue of notes. For the last named, a charter is generally granted at the present time, though in earlier days, and especially in England, private banks and banking firms could issue notes. It is possible, however, to group all the duties of a bank under two heads-lenders and borrowers. Their loan able funds consist of their own capital, and that of their depositors. Their profits arise from the payment to them of interest on loans. The origin of banking goes back to the most remote antiquity. The modern banker is generally a dealer in credit, while in ancient times he was a mere custodian of other people's money, and a buyer and dealer of foreign moneys. The first credit instrument handled by the early bankers appears to have been a bill of exchange. The historians find the bill of exchange in use in Assyria, a thousand years before the birth of Christ. The same was true in Athens and Rome, though not quite so early as in Assyria. The profits in those early days seem to have come almost entirely from commissions on deposits. Livy first mentions (B. C. 350) this system in banking and it is frequently referred to in Latin literature of a later time. The great insecurity of all kinds of property during the Middle Ages almost destroyed the system of banking. In fact it was reduced to that of mere money changing. The rise of modern banking, however, dates from the establishment in Venice of the Banco di Rialto in 1587. In 1619 this great bank was absorbed by the Banco del Giro. So strong did this latter bank become that it was relied upon as the main support of the government, and we have a record that it loaned the government of Venice 500,000 ducats at one time. So well were its affairs managed that for 100 years or more this Bank of Venice, as it was called, was enabled to hold all its. credits at a premium, until 1805, when its affairs were liquidated under a decree of Napoleon. In the 18th century the two characteristics of modem banking the issue of notes not covered by coin, and the granting of deposit accounts upon the mere credit of borrowers were evolved, and this forms a part of the banking system of to-day. In China, bank notes, such as are known to the modern banking system in America, were more or less familiar for 12 centuries, but in Europe the use of bank notes dates only from 1661, when the Bank of Sweden issued notes to avoid the transfer of copper coin. The world is more or less familiar with the Bank of England,

established at the close of the 17th century. This great banking institution, perhaps the greatest in the world, was established by a Scotchman, and more than once has it saved not only the credit, but the real life of England. It is familiarly known as the "Old Lady of Threadneedle Street." The Bank of Scotland was not established until shortly after the Bank of England, but it received privileges from the English government, similar to those possessed by the Bank of England. In America; the words "Wall Street" carry with them a financial significance, recognized in every corner of the world. It was formerly said that "when the Old Lady of Threadneedle Street took snuff, Wall Street sneezed." This is not true at the present time. Wall Street stands alone, and the money interest of the United States is on a par with the greatest nation of the world. No civilized country can make advancement without a bank. When conservatively managed, it is a blessing not only to its immediate community, but to the world of advancement it large, and in Marion County it may safely be said that the financial interests are well managed, and of liberal, patriotic usefulness, when needed for the advancement of the county. The following accounts of the banks of Marion County and of the building and loan associations will be of interest to every citizen of the county. It is a common knowledge that the London goldsmiths were the first bankers of England and the system of payment of cash through cheques dates back to the 17th century. Written orders were addressed to the bankers by the customers which were known as drawn notes and later on cheques. It used to be only an ordinary slip of paper containing written orders addressed to the banker by his customer to pay on demend the sum specified therein. Generally, it was made payable to the

payee only and sometimes to the payee or order or bearer. Under Lex Mercatoria, the drawn note were regarded as a bill of exchange.

the

We find that the cheques have become popular in international trade and are playing an important role in the monetary system of all the countries and in fact, a study of the banking law involves a study of the development of cheque as a bill of exchange and also the liability of the banks as collecting banker and as paying bankers. In fact, the drawing, collecting and paying of cheques and the various implications and legal problems resulting therefrom have become the back-bone of the banking law. In India, Section 6 of the Negotiable Instruments Act, 1881 states that a cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise on demand. A bill of exchange has been defined under Section 5 of the Negotiable Instruments Act, 1881 as 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. If we consider the definition of cheque as is given in section 6 of the Negotiable Instruments Act and the definition of the Bill of

Exchange as given in section 5 of the Act and consider also the objects and reasons for the amended Act, it will be seen that the circumstances that may contribute to the situtation when a cheque is dishonoured would be irrelevant. After examining the definition, as aforesaid, and combining the definition of a cheque and a bill of exchange, it is possible to point out the essential requisites of a cheque. CHAPTER-II
There are certain documents which are freely used in commercial transactions and monetary dealings. These documents, if they satisfy certain conditions, are known as negotiable instruments. The word negotiable means transferable from one person to another in return for consideration and instrument means a written document by which a right is created in favour of some person. A negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery. The terms delivery and indorsement have been explained in a subsequent Chapter. The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881, which deals with promissory notes, bills of exchange and cheques, as also hundis (a bill of exchange in a vernacular language). It is based, except where conditions in India required a departure, mainly upon the English Law as to negotiable, instruments and judicial decisions. A negotiable instrument is one which is, by a legally recognised custom of trade or by law. Characteristics of a negotiable instrument 1. Freely transferable. The property in a negotiable instrument passes from one person to another by delivery, if the instrument is payable to bearer and by indorsement and delivery if it is payable to order. 2. Title of holder free from all defects. A person taking an instrument bona fide and for value, known as a holder in due course, gets the instrument free from all defects in the title of the transferor. He is not in any way affected by any defect in the title of the transferor or of any prior party.

3. Recovery. The holder in due course can sue upon a negotiable instrument in his own name for the recovery of the amount. Further he need not give notice of transfer to the party liable on the instrument to pay. 4. Presumptions. Certain presumptions apply to all negotiable instruments, unless contrary is proved. These presumptions are dealt with in Secs. 118 and 119 and are as follows: (a) Consideration.Every negotiable instrument is presumed to have been made, drawn, accepted, indorsed, negotiated or transferred, for consideration. This would help a holder to get a decree from a Court without any difficulty. (b) Date. Every negotiable instrument bearing a date is presumed to have been made or drawn on such date. (c) Time of acceptance. When a bill of exchange has been accepted, it is presumed that it was accepted within a reasonable time of its date and before its maturity. (d) Time of transfer. Every transfer of a negotiable instrument is presumed to have been made before its maturity. (e) Order of indorsements. The indorsements appearing upon a negotiable instrument are presumed to have been made in the order in which they appear thereon. (f) Stamp. When an instrument has been lost, it is presumed that it was duly stamped.

(g) Holder presumed to be a holder in due course. Every holder of a negotiable instrument is presumed to be a holder in due course (sec.118). (h) Proof of protest. In a suit upon an instrument which has been dishonoured, the Court, on proof of the protest, presumes the fact of dishonour, until such fact is disproved (Sec.119). PROMISSORY NOTE A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument (Sec.4). The person who makes the promissory note and promises to pay is called the maker. Essential elements

For an instrument to become a promissory note, it must have the following essential elements: 1. Writing. The instrument must be in writing. Mere verbal engagement to pay is not enough. Writing includes print and typewritting and may also be in pencil or ink. 2. Promise to pay. The instrument must contain an express promise to pay. A mere acknowledgement of indebtedness or implied undertaking by the use of the word debt or pronote, is not sufficient and it does not constitute a promissory note. 3. Definite and unconditional. The promise to pay must be definite and unconditional. If it is uncertain or conditional, the instrument is invalid. The promise to pay may be subject to a condition which according to the ordinary experience of mankind is bound to happen. Thus a promise (or order, in case of a bill of exchange) to pay is not conditional if(1) (2) it depends upon an event which is certain to happen though the time of its happening may be uncertain. the promise is to pay at a particular place or after a specified time.

4. Signed by the maker. The instrument must be signed by the maker, otherwise it is incomplete and of no effect. Even if it is written by the maker himself and his name appears in the body of the instrument, his signature must be there. Signature means the writing of a persons name in order to authenticate and give effect to the contract contained in the instrument. It is, at the same time, essential that the mind of the signer must accompany the signature. 5. Certain parties. The instrument must point out with certainty as to who the maker is and who the payee is. Where the maker and the payee cannot be identified with certainty from the instrument itself, the instrument, even if it contains an unconditional promise to pay, is not a promissory note. The payee may sometimes be misnamed or designated by description only. In such a case, the note is valid if the payee can be ascertained by evidence [Wills v.Barret, (1816) 2 Stark 29]. As such a promissory note payable to the manager of a certain bank is payable to a certain person. A promissory note cannot be made payable to the maker (promisor) himself. Such a note is a nullity. But if it is indorsed by the maker to some other person or indorsed in blank, it becomes a valid promissory nte. 6. Certain sum of money. The sum payable must be certain and must not be capable of contingent additions or substractions. The sum payable is certain-

(1) (2) (3)

When it is payable with interest. But if the rate of interest is not stated in the instrument, it is not a promissory note. When it is payable at an indicated rate of exchange. When it is payable by instalments, with a provision that on default being made in payment, the balance unpaid shall become due (Sec.5, para 3).

7. Promise to pay money only. The payment to be made under the instrument must be in the legal tender money of India. If the instrument contains a promise to pay something other than money or something in addition to money, it cannot be a promissory note. 8. Bank note or currency note is not a promissory note. note or a currency note is money itself. This is because a bank

9. Formalities like number, date, place, consideration, etc. These are usually found in an instrument although they are not essential in law. The omission of the words for value received, the place where the instrument is made or where it is payable or date (if the date of execution of the instrument can be independently proved) do not invalidate the instrument. The date of a promissory note is also not necessary unless the amount is payable at a certain time after date. But it must bear the necessary stamp under the Indian Stamp Act, 1899. 10. It cannot be payable on demand or after a definite period of time. The expression on demand means payable immediately or forthwith. 11. It cannot be made payable to bearer on demand. The Reserve Bank of India Act, 1934 prohibits issue of such promissory notes except by the Reserve Bank of India itself or the Central Government. 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 (Sec.5) Parties to a bill. There are three parties to a bill of exchange, viz., the drawer, the drawee and the payee.

Requisites of a cheque

The essential requisites of a cheque are : (1) The instrument must be in writing. (2) It must contain an unconditional order. (3) The instrument must be drawn on a specified banker. (4) The order must be only for the payment of certain sum of money. (5) Name of the payee must be mentioned. (6) Date. The cheque may be written in hand by using ink or ball point pen, typed or even it may be printed. But the customer should not use pencil to fill up the cheque form. Even though other columns may be permitted to be written in hand or printed or typed, the signature should be made by ink pen or ball point pen by the maker. Parties to the cheque The maker of a cheque is called the Drawer. The person thereby directed to pay is called Drawee. The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the Payee. The person entitled in his own name to the possession of the cheque and to receive or recover the amount due is called the Holder of the cheques.

Essential characteristics of a cheque A number of definitions have been given of the Negotiable Instrument and Wills has defined a negotiable instrument as under: A negotiable instrument is one the property in which is acquired by any one who takes it bonafide and for value, notwithstanding any defect of title in the person from whom he took it, from which is follows that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of the instrument. So far as negotiability is concerned, certain tests can be applied to find out whether the negotiability exists or not. Negotiability means that a cheque is transferable. Certain tests were laid down by Black Burn J. in Crouch v. Credit Forcier in the following terms.
1.

It may therefore be laid down as a safe rule that where an instrument is by the custom of trade transferable like cash be delivery, and is also capable of being sued upon by the person holding it protempore.

2.

Then it is entitled to the name of a negotiable instrumetn, and the property in it passes to a bonafide transferee for value, though the transfer may not have taken place in market overt.

3.

But that if either of the above requisites be wanting i.e., if it be either not accustomably transferable, or though it be

accustomable transferable, yet, if its nature be such as to render it incapable of being in suit by the party holding it protempore, it is not a negotiable instrument, nor will delivery of it pass the property in it to a vendee, however bonafide, if the transferor himself have not a good title to it and the transfer be made out of market overt. A cheque is, under the law, a negotiable instrument. Its negotiability can be destroyed only if it is marked as Not Negotiable on its face, it is not destroyed by its simply being crossed whether generally or specially. The essential feature of a cheque is that it can be transferred. The transfer can either be by mere delivery or by endorsement and delivery. Whenever an instrument is so transferred, the ownership of the property in the instrument is transferred and for this purpose no other document is required.

The second important characteristic of a cheque is that a holder in the course gets a valid title to it despite any defect in the transferors title. Such a bona fide transferee for value gets a complete, independent and indefeasible title to the instrument. Such person is known as the holder in due course and he gets a title against the whole world. In case this characteristics is missing then the whole machinery of trade will be upset as nobody will accept a cheque if the transferee was made liable to make fishing enquiries about the titles of the transferor. The third and the last characteristic of a cheque on account of its being a negotiable instrument is that it has an inherent machanism build in itself and it has a right of action infused in itself. The holder of a cheque has therefore a right to sue thereon in his own name and he is not dependent upon another title.

CHAPTER III Dishonour of a Cheque Whenever a cheque is dishonoured, the legal machinery relating to the dishonour of a cheque comes into motion. What is dishonour has first to be considered and for this we have to refer to sections 92 and 93 of the Negotiable Instruments Act, 1881. Section 92 reads as under:

Dishonour by non-payment.-A promissory note, bill of exchange or cheque is said to be dishonoured by nonpayment 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. It means to disgrace; to reduce; to degrade; to refuse the payment of, as a cheque. To refuse or neglect to accept or pay when duly presented for payment a bill or exchange or promissory note or draft on a banker. To refuse to accept a bill of exchange on representation for acceptance, or to pay it at maturity. To refuse or neglect to accept or pay when duly presented for payment a bill or exchange or promissory note or draft on a banker. A banker who without justification dishonours his customers cheque is liable to the customer in damage but special damage must be proved. It also means want of honour, disgrace share, anything which disgraces. Blacks Law Dictionary defines the term Dishonour as follows: Dishonour.- To refuse to accept or pay a draft or to pay a promissory note when duly presented. An instrument

is dishonoured when a necessary or optional presentment is duly made and due acceptance or payment is refused, or cannot be obtained within the prescribed time, or in case of bank collections, the instrument is reasonably returned by the midnight deadline; or presentment is excused and the instrument is not duly accepted or paid. Liability to pay damages In case all the conditions which are necessary for the payment of a cheque are present and have been fulfilled then if the bank dishonours a cheque it will amount to a breach of contract for which the banker is liable to pay damages. Damage to reputation follows almost as a matter of course when the customer is in trade or business, unless, of course, it can be shown that owing to bankruptcy or some other reason the customers credit is of no business value. In the case of other persons, however, the loss to reputation may be problematical. Nature of damages The damages are just in the nature of damages in an action for defamation. If it is correct that only a trader can recover so called exemplary damages for wrongful dishonour, it might be possible for a

non-trader to recover by framing his action in liable only, as was done in Davidson v. Barclays Bank Ltd. So long as bankers continue the practice in question they must expect occasional actions against them framed in libel, especially in actions by non-traders. Some Indian Cases Gopesh Chandra Pal v. Nirmal Kumar Das Gupta, in this case it was held by the Calcutta High Court that where a person, who had opened a current account in a bank sought to prosecute the managing director, the chief accountant and the accountant of the bank for the offences of criminal misappropriation and criminal breach of trust by a banker for wrongfully dishonouring his cheque. Held-(i) That they were not bankers and the essential ingredient of entrustment in the offence of criminal breach of trust was not involved in a deposit of money on current account; (ii) That dishonouring a cheque did not cannot misappropriate and that therefore no case of a criminal nature was made out against them. The remedy for a cheque being wrongfully dishonoured lies in the civil court.

The Madras High Court in New Central Hall v. United Commercial Bank Ltd., held that where a banker having sufficient funds of a customer in his hands fails, even by mistake to honour cheque issued by the customer, the customer has a right to claim damages. Further it was held that in an action for damages against a bank by a non-trader customer for dishonour of cheques nominal damages should be awarded where there is no proof of special loss or damage by the wrongful dishonouring, and in the case of a trader, substantial damages should be awarded even in the absence of proof of special loss or damages. As pointed out by a Division Bench of this Court in New Central Hall v. United commercial Bank, the fact that such dishonouring took place due to a mistake of the bank is no excuse nor can the offer of the Bank to write and apologise to the payees of such dishonoured cheques affect the liability of the bank to pay damages for their wrongful act. In Jogendra Nath Chakrawarti v. New Bengal Bank Limited, it was heldWhere the Banker, being bound to honour his customers cheque, has failed to do so, he will be liable in damages. If, special damage, naturally ensuing from the

dishonour, is proved, it will be properly taken into account in assessing the amount of the damages. If the customer be a trader, the court may properly award substantial damages, in the absence of proof of special damages. In other cases the customer will be entitled to such damages as will reasonably compensate him for the injury which, from the nature of the case, he has sustained. All loss flowing naturally from the dishonour of a cheque may be taken into account in estimating the damages. In Mohamed Hussain v. Chartered Bank, it was heldAs negligent act may be the effective cause of an injury though it may not be proximate in time, if it is the particular incident, in a chain of events which has in fact led to the injury, that is, if it is the real cause of subsequent accident. To determine responsibility the law will consider the proximate and not the remote cause of an injury. Tindal, C.J. in Davis v. Carret, at page 1030 heldno wrong doer can be allowed to apportion or qualify his own wrong and that as a loss has actually happened whilst his wrongful act was in operation and

force, and which is attributable to his wrongful act, he cannot set up as an answer to the action the bare possibility of a loss, if his wrongful act had never been done. Compensation The principle of awarding compensation to the drawer of a cheque is reparation for the injury sustained or likely to be sustained by reason of the dishonour. In almost every case the drawer can recover substantial damages against the drawee on the basis of injury to his credit, although he may not be able to prove that he had suffered actual pecuniary loss through the dishonouring of the cheque. But there appears to be a distinction between a trader and non-trader in this respect; while a trader is always entitled to substantial damages for dishonouring of his cheque, a non-trader will be entitled only to nominal damages in the absence of an allegation and proof of substantial damages. This is the rule followed by the High Court of Andhra Pradesh in S.K.C.C. Bank v. Subrahmnyam. It is a discredit to a person and therefore injurious in fact to have payment refused of a draft for so small a sum, for it shows that the

banker had very little confidence in the customer; it is particularly injurious to a person in trade. Loss includes damages to reputation Loss or damage contemplated by the section mean not merely pecuniary loss, but includes damage to reputation also, which is always considered as damage in law. In measuring the compensation in these cases section 117 of the Act has no application. The general principles which regulate the measure of damages have, therefore, to be applied. According to English law where the drawer has not sustained actual damage, he is at least entitled to a verdict for nominal damages. Thus, so far as the civil remedy is concerned a customer on account of a wrongful dishonour can claim damages against the Bank. So far as the question of civil remedy for the payee is concerned, it is a case for recovery of money under the summary procedure which can be filed against the Drawer. As for criminal remedy against the drawer the same are: (1) Prosecution for cheating, and (2) Prosecution under the newly added Chapter XVII of the Negotiable Instruments Act, 1881.

CHAPTER IV Duty of the Bank If the cheque is dishonoured, the collecting Bank should intimate the customer regarding the dishonour of the cheque and it is to be returned immediately. Return of the cheque and the Liability of the Bank If a cheque is dishonoured, the paying banker does not have any legal obligation to giving in writing as to why the cheque is being returned. This is, however, done in compliance with the clearing house rules. The cheque is returned to the holder or bearer or presenter with a return memo. No definition of the word Return has been given in the Amended Act. It has been stated in Dictionary of Banking by Perry and Ryder (11th Edition, Page 499) as cheques or bills which are returned either through lack of funds or some irregularity in the instruments themselves are commonly known as Returns. Here a cheque returned unpaid suggests dishonour of a cheque on presentation. A cheque drawn on the bank can be dishonoured on any of the reason(s) given below. While returning the cheque, banker must assign the reason otherwise he is liable for wrongful dishonour of the cheque to

the drawer and will have to pay compensation for any loss sustained by him. Thus since there is a criminal liability cast on the drawer there is a responsibility of a banker to assign the reason before returning any cheque. In case there is a mistake on the part of banker, the bank can be put to task. In case, a customer files a case against the bank for damages on account of the fact that the cheque exceeds arrangement and the bank may be having funds in the account then the customer can use the bank for damages on account of having caused a loss to the status and reputation of the customer. Thus the bank must be very careful in assigning a reason while returning the cheque. Since the passing of the Amended Act and in view of the Criminal Liability cast on the drawer, the bankers liability to assign a reason has increased many fold. To constitute an offence under Section 138, the cheque must be returned on the ground of insufficiency of funds or on the ground of exceeding the arrangement with bank. When banker returns the cheque either presented on the counter or through clearing, banker is required to give an answer to the holder to whom it is returned.

 There is a danger in not putting a written answer on a cheque presented over the counter, for a subsequent holder would not have known of its dishonour. Since the Bankers return memo is a very important document, a banker can be held liable for damages if a wrong reason is given. SPECIMEN .Bank MEMORANDUM Date. To .. .. .. Cheque No.. Returned unpaid for reason No 1. 2. 3. 4. Refer to drawer Not arranged for Exceeds arrangement Full cover not received

5. 6. 7. 8.

Effects not yet cleared; present again No account Account closed Account transferred to our branch

9.

No arrangement .

10.

. Payees endorsement incomplete/required

11.

Payees endorsement irregular/illegible

12.

Endorsement requires Banks guarantee/Confirmation

13. 14. 15. 16. 17. 18. 19.

Drawer deceased/Bankrupt Contravenes S.B./Current Account Rule No Payment stopped by drawer (a) Post-dated (b) out of date (c) not dated Amount in words and figures differs No advice Not drawn on us

20. 21. 22.

Crossed please present through a Bank Crossed to two Banks Crossed not over/Under Rsonly

23. 24. 25. 26.

Crossed account payee only Mutilated Drawers signature incomplete/differs/required Alteration in date/figures/words requires drawers full signature

27. 28. 29. 30. 31. 32. 33. 34. 35.

Bankers discharge required/irregular/ambiguous Payees separate discharge to the bank required Payees receipt required Should not contain extraneous matter Not drawn on us Re 1/- receipt stamp required Discharge on Revenue stamp required Collecting Banks confirmation required/irregular Collecting Bankers confirmation requires clearing Banks Guarantee

36.

Title of account required

37.

Drawn on non-resident account Form A.7(c) approved by Reserve Bank of India required

38.

Insufficiency of Funds (Reason No.38 has been suggested by the Author)

Some reasons for return examined

(i)

Refer to Drawer : In Thomsons Dictionary of Banking it is

stated that the answer put upon a cheque by the drawee banker when dishonouring a cheque in certain circumstances. The most usual circumstance is where the drawer has no available funds for payment or has exceeded any arrangement for accommodation. Refer to drawer could be used in cases where there were any reasonable grounds for suspecting that the cheque had been tampered with, such an answer would rarely be given in practice for any reason other than those given above. In the Dictionary of Banking by Perry and Ryder, 11th Edition on page 487, Refer to drawer is described as under :REFER TO DRAWER : The answer put upon a cheque by the drawer banker when dishonouring a cheque in certain circumstances. The most usual circumstances is where the drawer has no available funds for payment or has exceeded any arrangement for accommodation. The use of

the phrase is not confined to this case, however, it is the proper answer to put on a cheque which is being returned on account of the service of a Garnishee Order, it is likewise properly used when a cheque is returned on account of the drawer being involved in bankruptcy proceedings. (i) Exceeds arrangement : It is generally meant to convey that the

drawer has credit limit but the amount exceeds the drawing power. Not arranged means no overdraft facility exceeding the limit already sanctioned or overdraft facility not sanctioned. (ii) Effects not cleared : According to Thomsons Dictionary of

Banking, owing to the exigencies of business, the bankers usually credit articles paid in for collection to a customers account, before clearance thereof. In some cases items are entered in the ledger and statement as Cash; in other cases they are indicated by symbols. It is generally meant to convey that the drawer has paid the cheques of bills, which are in course of collection but their proceeds are not available for meeting the cheque. (iii) Full cover not received : It is generally meant to convey adequate

funds to honour the cheque or has not given adequate security to cover the overdraft which might be created by paying the cheque.

(iv)

Not provided for : An answer sometimes written by a banker on a

cheque which is being returned unpaid for the reason that the drawer has failed to provide funds to meet it. A better answer in these circumstances is Refer to Drawer. (v) Not sufficient : When the funds in a customers account are

insufficient to meet a cheque which has been presented to the banker through the clearing or otherwise, the cheque, on being returned unpaid, is sometimes marked with the words not sufficient, or not sufficient funds. The answer Refer to drawer is preferable. (vi) Present again : According to Thomsons Dictionary of Banking,

these words are sometimes written by a banker upon a cheque which is returned unpaid because of insufficient funds in the customers account to meet it. It is not, however, by itself a correct answer to give, as it does not afford any explanation why the cheque has been returned. The best answer to write upon a dishonour cheque is Refer to Drawer. Sometimes the words are joined with another answer, as Refer to Drawer-Present again, Not sufficient-Present again. No doubt the words Present again are used with the idea of minimising the risk of injury to the drawers credit by returning the cheque, but it is perhaps questionable whether they are altogether prudent words to use.

The banker to whom a cheque is returned with a request Present again advises his customer of the dishonour of the cheque and arranges for it to be represented. (vii) Payment stopped by drawer : One of the reasons on account of which the Banker can refuse to make the payment of a cheque is that the payment has been stopped by the drawer. The customer has the right to give notice his Bankers to stop payment of a cheque which he has issued. The notice should be in writing and should give accurate particulars of the cheque and should be signed by the drawer. According to Thomson Dictionary of Banking, in case a Bank passes a cheque after a Stop Order has been received, he shall be liable for so doing. It is necessary, therefore, to warn each Branch where the cheque may be presented, of the notice which has been received. A notice should be place in the Customer Account in the ledger, so that any one referring to the account may at once observe particulars of the Stop Order. A red colour slip may be inserted in the ledger, so that there is no mistake. As for different branches of a bank, in case notice is given to one branch, it shall not be deemed a notice to the other branches as well.

In Abdul Samod V. Satya Narayan Mahavir, a complaint had been filed under Section 138 and the case of the respondent was that he had stopped the payment of the cheque on account of civil litigation pending between the parties. Honble Mr. Justice A.P. Chowdhry analysed

Section 138 of the Negotiable Instruments Act and he stated that there were 5 ingredients of the section which must be fulfilled, which are as under :-

(i).

the cheque is drawn on a bank for the discharge of any legally enforceable debt or other liability;

(ii).

the cheque is returned by the bank unpaid;

(iii). the cheque is returned unpaid because the amount available in that account is insufficient for making the payment of the cheque; (iv). the payee gives a notice to the drawer claiming the amount within 15 days of the receipt of the information by the bank; and (v). the drawer fails to make payment within 15 days of the receipt of the notice.

1.

Special procedure for summary suits When a cheque is dishonoured, the holder of or the payee of the cheque can sue the drawer or endorser for the recovery of the amount along with interest. Besides a civil suit for recovery of the amount we have already seen that proceeding in a summary manner can be initiated under Order 37 of the Code of Civil Procedure, 1908 which has been amended by Act 105 of 1976. There is a special provision made in Chapter XXXVII of the Code for a summary procedure for trial of suits on bills of exchange, promissory notes or cheques. This summary procedure is also available een though the bill or note is no-negotiable. The

advantage of suing under Chapter XXXVII of the Code is that the defendant is not allowed in such cases to defend the suit without leave obtained from court and it is provided further that a decree passed under the said Order, may be executed forthwith. If no such leave is applied for or granted, the allegations in the plaint shall be deemed to be admitted, and the plaintiff is entitled to a decree for the principal sum and also interest as calculated under Sections 79 and 80 of the Negotiable Instruments Act, 1881 up to the date of the institution of the suit and afterwards up to the

decree at the same or at such other rate as the court thinks fit. Interest subsequent to the decree is to be provided for as provided by Section 34 of the Code of Civil Procedure, 1908.

Since litigation is a lengthy process and nobody knows as to how much time may be consumed in a particular case special procedure has been provided in the Code of Civil Procedure for trying certain cases to which the said provisions have been made applicable. Here, we refer to Order 37 of the Code which deals with the summary procedure. In case there are cases which may fall under the summary procedure, then an defendant shall have to take leave from the court for defending the said case which has been filed against the defendant and until and unless a leave is granted by the court, the suit shall stand decreed against the defendant. The relevant rules of Order 37 which are important from our point of view are Rules 1 and 2 which are reproduced below :Order XXXVII Summary Procedure [* * *] 1. Courts and Classes of suits to which the order is to apply

(1)

This Order shall apply to the following courts, namely :(a) High Court, City Civil Courts and Courts of Small Causes; and (b) other Courts:

Provided that in respect of the courts referred to in clause (b), the High Court may, by notification in the Official Gazette, restrict the operation of the order only to such categories of suits as it deems proper, and may also, from time to time, as the circumstances of the case may require, by subsequent notification in the Official Gazette, further restrict, enlarge or vary, the categories of suits to be brought under the operation of this Order as it deems proper.

(2)

Subject tot he provisions of sub-rule (1), the Order applies to the following classes of suits, namely :(a) Suit upon bills of exchange, hundies and promissory notes;

(b)

Suits in which the plaintiff seeks only to recover a debt or liquidated demand in money payable by the defendant, with or without interest, arising (i) (ii) on a written contract; or on an enactment, where the sum sought to be recovered is a fixed sum of money or in the nature of a debt other than a penalty; or (iii) on a guarantee, where the claim against the principal is in respect of a debt or liquidated demand only.

Amendment

The scope of the rule has been extended by the

Amendment Act, 1976. 2. Reasons for summary suits Order XXXVII provides for a summary procedure in respect of certain suits. The essence of the summary suit is that the defendant is not, as in ordinary suit, entitled as of right to defend the suit. He must apply for leave to defend within ten days from the date of the service of the summons upon him and such leave will be granted

only if the affidavit filed by the defendant discloses such facts as will make it incumbent upon the plaintiff to prove consideration or such other facts as the court may deem sufficient for granting leave to the defendant to appear and defend the suit. If no leave to defend is

granted, the plaintiff is entitled to a decree. The object underlying the summary procedure is to prevent unreasonable obstruction by a defendant who has no defence. The Order, is, however, confined to suits of negotiable instruments and is confined to the superior courts. Rule 1 has been substituted to provide for extending the summary procedure to the trial of the specified classes of suits by all courts.

Institution of Summary Suits (1) A suit, to which this Order applies, may if the plaintiff desires to proceed hereunder, be instituted by presenting a plaint which shall contain (a) a specific averment to the effect that the suit is filed under this Order; (b) that no relief, which does not fall within the ambit of this rule, has been claimed in the plaint; and (c) the following inscription, immediately below the number of the suit in the title of the suit, namely :--

(Under Order XXXVII of the Code of Civil Procedure, 1908) (2) The summons of the suit shall be in Form No. 4 in

Appendix B or in such other Form as may, from time to time, be prescribed. (3) The defendant shall not defend the suit referred to in sub-rule (1) unless he enters an appearance *** and in default of his entering an appearance*** the allegations in the plaint shall be deemed to be admitted and the plaintiff shall be entitled to a decree for any sum, not exceeding the sum mentioned in the summons, together with interest at the rate specified, if any, up to the date of the decree and such sum for costs as may be determined by the High Court from time-to-time by rules made in that behalf and such decree may be executed forthwith.

3.

Legislative changes and reasons for change The existing rule has been substituted by a new rule by Code of Civil Procedure(Amendment) Act, 1976.

Rule 2 has been substituted to provide for the procedure of summary suits. The Joint Committee noticed that in Order XXXVII, the sequence in that summons of the suit to the defendant is issued first and, when the defendant appears, the plaintiff is required to obtain the leave of the court to defend the suit. But this sequence was altered by being sub-rule (3) of rule 2 as proposed in the original Bill which required the defendant to obtain the leave of the court to defend the suit at the stage when he enters appearance. Since this could not be the intention, sub-rule (3) of rule 2 has been modified accordingly.

The scope of this Order has been considerably widened in 1976 and in case an examination of the summary suit and the ordinary suits on negotiable instrument is made, then the following points of difference between summary suits and ordinary suits on negotiable instrument shall emerge ----

(1)

A plaintiff enforcing a negotiable instrument may either being a summary suit or he may bring a suit in the ordinary manner. The advantage of a summary suit is that the Defendant is not as in a suit brought in the ordinary manner, entitled as of right to defend to suit. The defendant in a summary suit must apply for leave to defend within 10 days from the service of the summons upon him (see Limitation Act, 1908, schedule I, article 159, now article 48 of the Limitation Act, 1963), and such leave will be granted only if the affidavit filed by the defendant discloses such facts as would made it incumbent on the plaintiff to prove consideration or such other facts as the court may deem sufficient for granting leave to the defendant to appear and defend the suit. If no leave to defend is granted, the plaintiff is entitled to a decree.

(2)

A summary suit must be brought with one year from the date on which the debt becomes due and payable (Limitation Act, 1908, schedule I, article 5). The

period of limitation for a suit brought in the ordinary manner on a negotiable instrument is 3 years. In

Bombay, by Bombay Act VI of 1937, article 5 of the Limitation Act has been repealed and Article 64A has been inserted to the Limitation Act, 1908, as it originally stood, referred to suits under the summary procedure referred to in Section 128(2), clause (f) of the Code, and this was construed as not including suits under Order 37(e). The Limitation Act, 1963 (36 of 1963), which has repealed the Limitation Act, 1908 has not re-enacted article 5. The result is that the period of limitation for filing suits of the character dealt with in this order is 3 years, whether they are filed under summary or ordinary procedure. (3) A summary suit can only be brought in the courts mentioned in Rule 1. (4) The Code of Civil Procedure (Amendment) Act, 1976 has enlarged the scope of this rule by including written contract and guarantee within its scope. 4. Procedure for the appearance of defendant

(1)

In a suit to which this Order applies, the plaintiff shall, together with the summons under rule 2, serve on the defendant a copy of the plaint and annexure thereto and the defendant may, at any time within ten days of such service, enter an appearance either in person or by pleader and, in either case, he shall file in court an address for service of notices on him.

(2)

Unless otherwise ordered, all summons, notices and other judicial processes, required to be served on the defendant, shall be deemed to have been duly served on him if they are left at the address given by him for such service.

(3)

On the day of entering the appearance, notice of such appearance shall be given by the Defendant to the plaintiffs pleader, or, if the plaintiff sues in person, to the plaintiff himself, either by notice delivered at or sent by a paid letter directed to the address of the plaintiffs pleader or the plaintiff, as the case may be.

(4)

If the defendant enters an appearance, the plaintiff shall thereafter serve on the defendant a summons for judgement in Form No. 4A in Appendix B or such other Form as may

be prescribed from time to time, returnable not less than ten days from the date of service supported by an affidavit verifying the cause-of-action and the amount claimed and stating that in his belief there is no defence to the suit. (5) The defendant may, at any time within ten days from the service of such summons for judgement, by affidavit or otherwise disclosing such facts as may be deemed sufficient to entitle him to defend, apply on such summons for leave to defend such suit and leave to defend may be granted to him unconditionally or upon such terms as may appear to the court or Judge to be just :-Provided that leave to defend shall not be refused unless the court is satisfied that the facts disclosed by the defendant do not indicate that he has a substantial defence to raise or that the defence intended to be put up by the defendant is frivolous or vexatious :-Provided further that, where a part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend the suit shall not be granted unless the

amount so admitted to be due is deposited by the defendant in court. (6) At the hearing of such summons for judgement, -(a) if the defendant has not applied for leave to defend, or if such application has been made and is refused, the plaintiff shall be entitled to judgement forthwith; or (b) if the defendant is permitted to defend as to the whole or any part of the claim, the court of Judge may direct him to give such security and within such time as may be fixed by the court or Judge and that, on failure to give such security within the time specified by the court or Judge or to carry out such other directions as may have been given by the court or Judge, the plaintiff shall be entitled to judgement forthwith. (7) The court or Judge may, for sufficient cause shown by the defendant, excuse the delay of the defendant in entering an appearance or in applying the leave to defend the suit.

5.

Legislative Changes and reasons for change in rule 3

This rule has been substituted by a new rule by Code of Civil Procedure(Amendment) Act, 1976 to provide the procedure for the appearance of the defendant and the consequence of nonappearance for the defendant.

The Joint Committee noticed that the Code does not give any guidance as to the grounds on which the petition for leave to defend the suit would be refused. The Joint Committee felt that if such leave is refused the defendant would be deprived of the opportunity of contesting the suit and consequently he would have to suffer the decree prayed for against him. The Joint Committee has, therefore, provided that in case the court is satisfied that the facts disclosed by the defendant do not indicate that he has a substantial defence to raise or that the defence intended to be put up is frivolous or vexatious the leave to defend the suit should be refused.

The Joint Committee was also of the view that if any amount is admitted by the defendant to be due from him, leave to defend should not be granted unless the admitted amount is

deposited by him in the court. The proviso to sub-rule (5) of rule 3 of Order XXXVII fulfils this object.

M/s. Mechalec Engineers and Manufacturers Vs. Basic Equipment Corporation that if the defendant has no defence or the defence is illusory or sham or practically moonshine then although ordinarily the plaintiff is entitled to leave to sign judgement, the court may protect the plaintiff by only allowing the defence to proceed if the amount claimed is paid into court or otherwise secured and give to the defendant on such condition, and thereby show mercy to the defendant by enabling him to try to prove a defence.

When a prima facie defence is made out, the court will grant leave on such term as it thinks fit and a decision on the question whether leave to defend should be granted or not is a judgement which can be appealed against under section 15 of the Letters Patent. Once the Court comes to the conclusion that there is a triable issue, i.e. a plea which is at least plausible, it must grant leave to defend, without requiring the defendant either to pay the amount claimed into court or to furnish

security therefor. Such conditions may be imposed only in exceptional cases, as where the defence is put in only in order to contain further time. Or when the court is left with a real doubt about the defendants good faith. In general the test is to see whether the defence raises a real issue and not a sham one, in the sense that, if the facts alleged by the defendant are duly proved, they will afford a good, or even a plausible answer to the plaintiffs claim. Whether the defence raises a triable issue or not has to be ascertained by the court from the pleadings before it and the affidavits of parties and it is not open to it to call for evidence at that stage. The question whether the defence is genuine or not must be left to the discretion of the trial judge. But, where the triable issue is not dependant on facts to be investigated, and is simply a question of law, no leave should be given to the defendant, an the point may be decided at once. The question whether by the terms of a promissory note, a personal liability has been undertaken or not is a question of law. It has been held that the question whether plaintiffs are or not holders in due course is a triable issue, especially where the defendant pleaded that the note in question was negotiated in fraud of the original understanding. It seems that a counter-claim for damages cannot

afford ground for grant of leave to defend. But, compensation due to

the defendant for improper arrest may be taken into account in granting leave, as under Section 95(1) of the Code of Civil Procedure, investigation into compensation is to be allowed in any suit. A set off has also been allowed in some cases. When a partner enters appearance in a suit against a firm under Order 27, rule 2. If the defendant defaults in applying for leave, the plaintiff will be entitled to a decree without further proof, on the mere allegations in the plaint.

Whenever the courts are confronted with summary suits, they have to decide whether leave to defend is to be granted to a defendant or not. Even otherwise, when summary suits are filed under different Acts or under different provisions of law, the question arises as to whether a leave to defend is to be granted or not and the main criteria to be adopted by the court while granting leave to defend or refusing the leave to defend is to examine whether there is a triable issue which is to be decided by the court which shall also include the decision of the question whether a particular suit cannot be filed under the summary procedure as provided by the Act. Usually when leave to defend is given by the court in a summary suit, it is a red signal to the plaintiff since it means that all is not well and unless full precautions are tkaen, there may be some points which have come to the knowledge of the court and which makethe success for the plaintiff difficult in that particular case. It is not necessary that the courts

should grant leave to the defendant to defend the suit unconditionally and on certain occasions, the courts grants the leave to defend the suit by placing certain conditions on the defendant which condition in the eyes of law provide a proper safeguard to the rights of the defendant and which do not prejudice the trial of the case. This defence is to be disclosed by the defendant at any time within 10 days from the service of such summons for judgement, by affidavit or otherwise disclosing such facts as may be deemed sufficient to entitle the such suits, and leave to defend may be granted to him unconditionally or upon such terms as may appear to the court or judge to be just; provided that leave to defend shall not be refused unless the court is satisfied that the facts disclosed by the defendant do not indicate that he has a substantial defence to raise or that the defence intended to be put up by the defendant is frivolous or vexatious; provided further that where a part of the amount claimed by the defendant is admitted by the defendant to be due from him, leave to defend suit shall not be granted unless the amount so admitted to be due is deposited by the defendant in court.

Chapter Five Prosecution under the Indian Penal Code

1.

Cheating Whoever by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or

omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely or cause damage or harm to that person in body, mind, reputation or property is said to cheat.

2.

Cheating by personation A person is said to cheat by personation if he cheats by pretending to be some other person or by knowingly substituting one person for another, or representing that he or any other person is a person other than he or such other person really is.

3.

Punishment for cheating Whoever cheats shall be punished with imprisonment of either description for a term which may extend to one year, or with fine, or with both.

4.

Cheating with knowledge Cheating with knowledge that wrongful loss may ensue to a person whose interest offender is bound to protect. Whoever cheats with the knowledge that he is likely thereby to cause wrongful loss to a person whose interest in the transaction to which the cheating relates, he was bound, either by law, or legal contract to protect, shall be punished with imprisonment of either description for a term which may extend to three years or with fine, or with both.

5.

Punishment for cheating by personation

Whoever cheats by personation shall be punished with imprisonment of either description for a term which may extend to three years, or with fine or with both. 6. Cheating and dishonestly inducing delivery of property Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term, which may extend to sever years, and shall also be liable to fine. ( Section 420 ) It is clear that the aforesaid provisions as contained in the Indian Penal Code bring out without any ambiguity the scope of cheating and the definition clearly cover the case of cheating by cheques as well. When a cheque is

dishonoured, the payee feels frustrated and seeks an immediate remedy at no costs or low costs. Civil Suits are a costlier affair and a time consuming device and thus a complaint under the provisions of Indian Penal Code comes as a remedy under section 415.

Under section 415, a person is said to cheat when he by deceiving another person fraudulently or dishonestly induces the person so deceived to deliver any property to him or to consent that he shall retain any property or intentionally induces the person so deceived to do or omit to do anything which he would not

do or omit if he was not so deceived and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property.

The Supreme Court has enumerated the ingredients to constitute the offence under this section as under :-

(i).

There should be fraudulent or dishonest inducement of a person by deceiving him;

(ii).

(a) the person so deceived should be induced to deliver any property to any person, or to consent that any person shall retain any property; or (b) the person so deceived should be intentionally induced to do or omit to do anything which he would not do or omit if he were not so deceived.

(iii).

In the case covered by item (ii)(b), the act or omission should be one which causes or is likely to cause damage or harm to the person induced in body, mind, reputation or property.

Cheating can be committed in either of the two ways described in section 415 of the Indian Penal Code. Deceiving a person is common in both the ways of cheating. A person deceived may be fraudulently or dishonestly induced to

deliver any property or to consent to the retention of any property by any person. The person deceived may also be intentionally induced to do or to omit to do anything which he would not have done if not deceived and which act of his

caused or was likely to cause damage or harm in body, mind, reputation or property.

Section 415 consists of two parts : The first part refers to the offence of cheating committed by fraudulently or dishonestly obtaining delivery of any property from the person deceived. That part also makes the act by which the deceived person is made to consent to the retention of such property, an offence of cheating. The words which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, occurring in the second part of section 415, have no application to the first part of that section. They have reference only to the offence of cheating committed by inducing the deceived person to do or to omit to do something which he would not do or omit to do if he were not so deceived.

If the cheque is dishonoured, the drawer of the cheque may be prosecuted under section 417 and 420 of the Indian Penal Code. However, it all depends on the circumstances of each case. Every dishonour of a cheque is not cheating. It must be proved that there was the intention to cheat. It would be better to refer to the case law on the subject.

The analysis of the section will show that in each case when the cheque is dishonoured, one has to find out as to what was the intention of the drawer at the time when the cheque was issued and whether the drawer knew that the cheque

was bound to be dishonoured. Moreover, we have to see as to whether the cheque was issued to meet an antecedent debt or a liability or whether it was only for a future transaction. Thus it has to be seen and determined whether it was a civil or a criminal liability and whether it amounted to cheating or could lead only to a civil liability. A reference to case law can be of help to determine whether the accused had a guilty intention. Shri P.R. Thakur, DJS in his article cheating by cheques has very correctly stated that cheating in criminal law is essentially a question of guilty intention and that too, at a particular time when a person is cheated. If, therefore, a person does not have a guilty intention when the other person is cheated at his hands, no offence of cheating will be committed by him. The most crucial question, therefore, in a case of cheating is as to what was the intention of the person concerned and in any case of cheating the most difficult question for determination is the guilty intention of accused. Intention is a mental phenomenon and has, therefore, to be gathered from the facts of a case and the circumstances attending to the case. There is no rule much less a uniform or universal rule, whereby intention of a person may be unquestionably and unfailingly determined. It is often said that a thought of a man is not triable and even the devil himself knows not the intention of man.

7.

Circumstances when held liable for cheating There are decisions which pinpoint to the circumstances where a person is held liable for cheating and there are others where it is considered as a civil liberty.

We shall consider first the cases where a person has been held liable for cheating : In R. Vs. Cornett, it was held that drawing of cheque on a bank in which the accused either had no amount or in which the account had been closed and the accused knew that the cheque will be dishonoured, a case of cheating was held to be made out.

9.

Cheating by Cheques before amendment of the Negotiable Instruments Act, 1881

Before the amendment of the Negotiable Instruments Act, 1881, different Courts in India were having different views relating to dishonour of cheques resulting from the insufficiency of funds and a recourse to the criminal action was not possible. The drawer of the cheque could not be prosecuted for cheating under sections 415 and 420 of the Indian Penal Code. However, there was a presumption of innocence in favour of the accused.

So far as the two sections are concerned, namely section 415 and 420, there was conflict of opinion and it was very easy for a person to escape the punishment as it has been held in a number of cases that if no express representation is made that the drawer has requisite amount in the bank or if no allegations are made in the complaint that bouncing of a cheque resulted in the harm to the complainant in his body, mind, reputation and property the mere fact that the cheque was dishonoured would not make the accused liable for cheating. All this resulted in a number of judgements in which it

was held that if there was no express representation which can prove the intention of the drawer at the time of the issuing of the cheques, in case the cheque bounced then it may not prove the existence of the intention of the drawer to cheat the payee. This resulted in drawing of a cheque attracting no criminal liability even when the drawer knew for certain that he had no sufficient balance in his account with the bank, we can refer to a number of cases such as P. Eswara Reddy Vs. State of Andhra Pradesh, in which Andhra High Court dealt with all the major aspects of English and India Law and held that the dishonour of the cheque does not constitute the offence of cheating under section 415 or section 420 of the Indian Penal Code, as it does not amount to any damage to the body, mind, reputation or property of the complainant.

In G. Laxminarayan Naidu Vs. Chitibaina Yerraiah, it was decided by Orissa High Court that the dishonest intention on the part of the drawer of the cheque at the time of making the promise needs to be proved.

10.

Cheating by corporations We have seen that a person can be punished for offence of cheating under sections

415 to 420 of the Indian Penal Code. So far as the corporations are concerned, the liability in India is in the main statutory, there are two sections in the Indian Penal Code which provide the definition of the word person namely sections 2 and 11 which respectively provide as under :-

Every person shall be liable to punishment under this Code and not otherwise for every act or omission contrary to provisions thereof, of which he shall be guilty within India.

The word Person includes any company or association or body of persons, whether incorporated or not

The question arises as to whether in view of these definitions the Corporation is liable for all act or omission punishable under the Code. Here we are concerned with the offence of cheating. The broad definition of person which includes a corporate body is to be read subject to certain exceptions which may be termed as glaring exceptions. The following points need to be considered :-

The definition of Person in section 11 of the Code is more or less at par with the definition of Person given in section 3(42) of the General Clauses Act, 1897 (10 of 1897) which enacts :-

person shall include any company or association or body of individuals whether incorporated or not.

The following observations of Kennedy J.C. in the case of Punjab National Bank Vs. A.R. Gonsalves Bundur Inspector for Karachi Port Trust are relevant :-

A corporation is of course, capable of acting through its regular employees who are servant, and as such, may in some cases make the master (whether a company or not) criminally liable for the acts of its servants and its employees. It is true that it is only in a limited class of cases that a company can commit an offence. These must be cases in which mens rea is not essential, and must be cases in which it is impossible for the court to pass a sentence to fine only. For a corporation is incapable of forming a criminal intention and to hold that it is capable of committing crimes punishable with imprisonment without option of a fine would be to hold the law inconsistent because it is not possible to punish a corporation.

11.

Criminal liability of corporations under the amended Negotiable Instruments Act It is a matter of great satisfaction that in India the legislation now is to make the corporations liable for criminal offences and a reference in this connection be made to the insertion of new Chapter XVII under the Banking Public, Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 (66 of 1988) in the Negotiable Instruments Act, 1881, which received the assent of the President on 16th December, 1988 and came into force from 1-4-1989 and provides for penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts. Section 141 provides for offences by companies. Under sub-section (1) it is provided that 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. However, a number of safeguards have been provided. At any rate it is a progressive step.

12.

Penalties in case of dishonour of certain cheques for insufficiency of funds in the accounts (Section 138)

The object of the amendment is to make cheques more acceptable in settlement of debts and liabilities and in case there is bouncing of cheques for want of funds, then the drawer can be penalised.

Section 138 reads as under :-

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 an offence and shall, without prejudice to any other provision of this Act, be punished with imprisonment for a term which may extend to one year or with fine which may extend to twice the amount of the cheque, or with both :-

Provided that nothing contained in this section shall apply unless (a). the cheque has been 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; (b). 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 fifteen days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and (c). 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 fifteen days of the receipt of the said notice.

13.

Prosecution under section 138 of the amended Negotiable Instruments Act[Prior to Amendment of 2002] As the very heading of Chapter VII suggests, the Chapter relates to the dishonour

of certain cheques and it is thus clear that all the cheques which are dishonoured cannot be dealt with under this Chapter and only those cheques which satisfy the conditions of section 138 along with its proviso which are three in number and which meet the

requirements of the Explanation to the section can be dealt with under the penal law. We should also note that the penal provisions relates only the cheque and not to the two other negotiable instruments namely the promissory note and the other bills of exchange. The essential conditions which must be fulfilled for prosecution under section 138 of the Act may be briefly stated as under :-

1.

The Section applies when any cheque drawn by a person for the discharge of a debt or liability is returned unpaid by the bank on either of the twin grounds as contained in the section namely because 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 the bank. Thus, if the credit balance in the account is Rs. 5,000/- only and the cheque is for Rs. 7,000/- and is dishonoured on this account or in case the banker has granted an overdraft or permission to overdraw the account up to Rs. 10,000/- and the drawer issues a cheque for Rs. 15,000/- then the cheque is dishonoured in terms of the requirements of this section so as to given a cause of action to the drawee.

14.

Legal enforceable debt or liability

We have already seen that the Act is applicable only to certain cheques. The Explanation to Section 138 makes it clear that it applies only to those cheques which relate to the discharge of a debt or a liability. In case a cheque is issued for donation

purposes or as a gift and the same is dishonouredon presentation or as a gift and the same is dishonoured on presentation then no cause of action shall lie under the present Act irrespective of the fact that every cheque is supposed to be made or drawn for consideration and every such instrument when it has been accepted, indorsed, negotiated or transferred is supposed to be and presumed to be only for consideration. In other words we can say that there must be a consideration as defined in section 2(d) of the Indian Contract Act, 1872. Even according to section 25 of the Indian Contract Act, a contract unsupported by consideration is void and negotiable instrument are no exception to it. A reference may also be made to section 43 of the Negotiable Instruements Act, 1881.

15.

Commission of the Offence

In Sugesan Finance Investment Vs. Union of India, it was held that offence can be committed after 1-4-1989. It is immaterial if cheques were issued before April 2, 1989. The contention that prosecution cannot be made in such cases is not maintainable. There is no question of a retrospective effect. Sufficient time has been given by the Act to the Drawee to set the things right. Even if the cheques were issued prior to April 1, 1989, the offence is committed since a notice is to be issued in terms of sub-sections (b) and (c) of section 138.

As has been held in Paramjit Singh Vs. N.C. Job the date of cheques is not material for the purpose of section 138 as the drawing of cheques does not constitute an

offence. It is failure to pay within 15 days from the date of notice from the payee that constitutes the offence. This is also clear from section 142(b) of the Act that cause of action arises on the failure of the drawer to make the payment. Some view has been taken in judgements by the various High Courts. Now the guilty mind is not to be proved to constitute the offence. The Act does not cover two other negotiable instruments, i.e. the Pronote and the Bill of Exchange. As observed by the Supreme Court a post dated cheque becomes a legally valid cheque only on the date which it bears. A cheque is considered stale on the expiry of six months after the date of issue. It is now expressly provided by provisor (a) to section 138. So far as a Demand Draft or the pay order of a Bank are concerned, the provisions of section 138 are not likely to be attracted.

16.

Provisos to Section 138

Section 138 of the Amended Act is the section which may be termed as the king pin and provides both for punishment of imprisonment and fine both or alternatively with imprisonment or fine as the case may be, yet, the working of the section is governed by the three provisos to the section which may be termed as the regulating and controlling factors. In case any of the basic requirement is not fulfilled and in case any particular case is hit by non-compliance to the condition specified therein, a person cannot be prosecuted under section 138 of the Act. These provisos have been mentioned by us as conditions A, B and C and may be briefly stated as under :-

A.

The limitation clause :

The cheque must have been presented to the

bank for payment within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. The penal provisions even are not applicable if the payee has not proceeded to present the cheque within the time frame as envisaged under the Act. The payee thus loses his right to have recourse against the drawer. This

Proviso has been made for the benefit of the original holder. Thus, it shall not be a defence that the holder did not receive the cheque directly or immediately from the drawer but by way of an endorsement. A cheque not presented within a period of six months shall not make the drawer liable. We must know that so far as the civil law is concerned the liability does not come to an end after the expiry of six months but it is a continuous liability extending for a period of three years.

According to clause (a) of the proviso the Criminal Law can be set in motion against the drawer only if the cheque is presented to the bank within a period of six months from the date of the cheque and its validity whichever is earlier. The penal provisions become inapplicable after the expiry of this limitation as mentioned in the section. The limitation has been provided to put an end to the circulation gap.

Provisor (a) of section 138 of the Negotiable Instrument Act, 1881 provides that the cheque should have been presented to the Bank within a

period of six months from the date on which it is drawn or within a period of its validity whichever is earlier. If this clause is examined then we can find that the clause does not lay down Number of Times when a cheque can be presented to the Bank during its validity period. It is common knowledge matter that a cheque is to be presented along with the complaint and the question of the drawer being prosecuted again and again does not arise as the principle of autrefois acquit or autrefois convict will also come into play.

B.

The Notice clause :

Clause (b) of the proviso states that the

payee or the holder in due course of the cheque makes a demand by giving a notice within 15 days of the receipt of information by him regarding the dishonour of the cheque. Thus the second proviso stipulates

(i). (ii). (iii).

The payee is the holder in due course. A demand is made by giving a notice by the payee to the drawer. The notice is given within a period of two weeks from the date of receipt of the information about dishonour.

The provision of a notice in the proviso (b) to section 138 of the Act has been enacted so as to give an opportunity to the person who has drawn the cheque to make the payment. In case there is no mala fide on this part. What is contemplated by the section is a notice in writing. In V.P.

Ravathi Vs. Asha Bagree it was held that notice in writing should contain a demand of the dishonoured cheque in the complaint and it shall mean a compliance of clause (b) of proviso to section 138.

C.

The failure to pay

: Clause (c) of the proviso provides an

opportunity to the drawer to make the payment to that the criminal action of being put behind the bars can be avoided. It states that the cause of action shall arise only when even after the receipt of the notice the drawer keeps sleeping and fails to make the payment for a full period of 15 days. As soon as the 15 days are over, the payee get a cause-of-action.

Clause (c) of the provisor thus makes it clear that it is only when the drawer of the cheque fails to make the payment within 15 days of the receipt of notice contemplated that the offence shall be deemed to have been committed; Sugesan Finance Investment Vs. Union of India. Thus, clause (c) of the provisor to section 138 gives the cause of action. Court cannot take any congnizance prior to elapse of the period of 15 days under clause (c), Rakesh Nem Kumar Porwal Vs. Narayan Dhondu Joglekar.

The explanation to the section provides that for the purposes of this section, debt or other liability means a legally enforceable debt or other liability. When we examine section 139 of the Act we shall observe that

this section also provides for a presumption of the holder relating to the receipt of the cheque in consideration of a debt or other liability.

19.

Effect of not availing penal action A number of other points also need clarification and they may be put as under :If the penal provisions are not availed of then the drawer of the cheque is not absolved of his liability. The drawer may however claim damages if he has suffered any loss, injury or damages on account of neglect of the payee. In case he can prove such a loss then he can claim exemption of liability to the extent of such loss.

24.

Holder in Due Course Clause (b) of the proviso to section 138 provides that it shall be necessary for the purpose of filling the complaint under section 138 that even after giving of a notice by the payee or the holder in due course of the cheque, the drawer fails to make the payment. In both clauses (b) and (c) the expression which has been used is holder in due course.

So far as holder in due course is concerned it is defined by section 9 of the negotiable Instruments Act, 1881, which reads as under :--

Holder in Due Course :--

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 bear, or the payer of endorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

26.

Post-dated cheques So far as the question of post-dated cheque is concerned, this is just like the other

cheques and has the same implications as in the case of other cheques. A cheque otherwise valid does not become invalid merely by reason of it being either post dated or ante dated and, till the date there had arisen it could be treated as a bill payable at a future date. Thomsons Dictionary of Banking defines a post dated cheque as follows :--

A cheque which is dated subsequent to the actual date on which it is drawn and which is issued before the date it appears is called post dated cheque.

27.

Validity of post-date cheques The validity of the post-dated cheques has been recognised by the Indian Courts

Babu Xavier Vs. lal Chand Munoth. The holder of such a cheque duly negotiated to him even before the date the cheque bears, is indeed a holder in due course under the Act. The position of the holder in due course is the same with the only difference that till the date it bears passes no suit can be filed on its basis. In Shyam Sunder Vs. Lala Bhavan Kishore, it was held

In case in which as a result of passing of some property or doing of an act or omission to do it, a post dated cheque is issued with the full knowledge of both the parties that for the present the cheque was not encashable, there is no dishonesty or inducement at the very inception of contract. And if subsequently for some reason or the other, on the due date the cheques are dishonoured, the case may not be covered under section 420 of the Penal Code. It will only be a case of civil liability. The reason being that it was not the intention of person issuing the cheque to make an immediate payment and the post-dated cheque was only in the nature of a promise to pay which promise, if it is broken, could give rise only to a civil liability.

Thus, two situations have to be analysed (i) a post-dated cheque is given to meet an existing liability, and (ii) where it is given against the delivery of goods, property or cash on the assurance that it shall be honoured on presentation on due date and in due course.

Goaplast Pvt. Ltd. vs. Shri Chico Ursula DSouza and Anr. Negotiable Instrument Act, 1881-Section 138-Applicability of To a case in which a person issuing a post-dated cheque-Stops its payment by issuing instructions to the drawee bank-Before the due date of payment-Held-Section 138 of the Act will be attracted.

M/s Unique Butyle Tube Industries Pvt. Ltd. Vs. U.P. Financial Corporation & Ors.

Recovery of Debts Due to Bank and Financial Institutions Act, 1993-Section 34(2)-Proceedings for recovery initiated by U.P. Financial Corporation-Under the U.P. Public Monies (Recovery of Dues) Act, 1972 are not maintainable-In view of Section 34(2) of the Recovery of Debts Due to Bank and Financial Institution Act, 1993.

Bank of India & Ors. Vs. O.P. Swaranakar Etc.

Employees Voluntary Retirement Scheme (VRS)-Nature of-Held-Not a proposal or an offer-But merely an invitation to treat and application filed by the employees constituted offer.

Employees Voluntary Retirement Scheme (VRS)- Ex gratia payment- Acceptance of-Held-A group of employees accepted the ex gratia payment or any other benefits under the Scheme-They could not have resiled therefrom.

Punjab National Bank (Employees) Pension Regulation, 1995-Regulation 19(4)Employees Voluntary Retirement Scheme (VRS)-Validity of-Held-Scheme not ultra vires being violative of said sub-section-Because Scheme is not a part of statutory regulation-It was in the realm of the contract-And not necessary for the Central Govt. to place the same before parliament-Even if the same was regulation, the laying down rule is merely a directory one and not mandatory.

Employees Voluntary Retirement Scheme-Clause 10.5-Constitution of India, 1950-Article 12 read with 226, and 14 and 21-Writ Petitions-Voluntary Retirement Scheme-Question of validity of Maintainability petitions-Held-Appellants, the State Bank of India as also the nationalized Banks are States within the meaning of Article 12 of the Constitution-Question raised by writ petitioners thus could be raised in proceedings under Article 226 of the Constitution.

Doctrine of option-Applicability-Held-Applicable only at the instance of offeror-In the case of Voluntary Retirement Scheme employees would be offeror.

C. Antony vs. K.G. Raghavan Nair

Negotiable Instrument Act, 1881-Section 138-Cheque dishonour-Case of respondent that appellant filled up the cheque in its entirety-Including its signature-But the Court on perusal of cheque found that the difference in body of cheque as well as in the signature of appellant-Held-High Court was in error in reversing the finding of acquittal-Recorded by trial court.

Delhi Development Authority vs. Skipper Construction Co.(Pvt.) Ltd. and Anr.

Banking Law-Loss suffered by Bank-By reason of malfeasance and mifeasance of concerned officials-Held-How the responsibility stands foisted on to one individual rather than a body of persons-Who had taken upon themselves to sanction the limit-Or for

issuance of ascertainment of quantum of loss central vigilance commission directed to communicate complete inquiry within 18 months and filed report before Court.

M/s Hira Lall & Sons & Ors. Vs. M/s Lakshmi Commercial Bank

Recovery of Debts Due to Banks and Financial Institutions Act, 1993-Section 17 and 18-Jurisdiction-When exclusive Jurisdiction given to Tribunal-Jurisdiction in other courts to entertain and decide such matters-For recovery of debts due to banks and financial institutions stood ousted.

Constitution of India, 1950-Article 139-A-Transfer of proceedings-From Debts Recovery Tribunal to High Court-Article 139-A of Constitution is not attracted-Where transfer of case not from one High Court to another High Court.

Raj Lakshi Mills vs. Shakti Bhankoo

Negotiable Instrument Act, 1881-Section 138-Criminal Procedure Code, 1973Section 482-Dishonour of cheque-Issued by firm-Complaint-Against partner-Held-At the stage of summoning when evidence was yet to be led by the parties-High Court could not on an assumption of facts come to a finding of fact-That respondent was npot responsible for the conduct of business.

Smt. Katta Sujatha vs. Chemicals Travancore Ltd.

Negotiable Instrument Act, 1881-Section 138 and 141-Cheque dishonouredIssued on behalf of firm-Proceedings against appellants-Held-A partner of firm is liable to be convicted for an offence committed by the firm-If such partner was in charge ofAnd was responsible to the firm for the conduct of business-Or that such offence was committed with his consent or connivance.

K.L. Kunjappan vs. Rafeeque & Anr.

Negotiable Instrument Act, 1881-Section 138-Sentence-Dishonour of cheque-Due money received by respondent-Sentence reduced to already undergone.

Syndicate Bank vs. R. Veeranna & Ors.

Banking Law-Rate of Interest-Acknowledgements made by defendants and agreements indicate that the defendants acknowledged their liability of amount due-And amount had been calculated on basis of enhanced rate of interest-Rate of interest enhanced-Held-No question of taking separate consent from defendants again.

Natural justice-Principle of- It cant be read into the express terms of contract.

Banking law-Agreement-Instructions given by the Head Office to branches-At any rate cannot alter the terms of agreement between the parties.

Maruti Udyog Ltd. v. Narendar, JT 1998 (9) SC 411 : 1999 SCC 1 p.113 (24/7/1998)

Sections 138 and 139 -Scope of the sections and the nature of presumption must be drawn that the holder of the cheque received the cheque for discharge of any debt or other liability unless the contrary is proved.

K.Bhaskaran v. Sankaran Vaidhyan Balan, 1999 (6) SCALE 272 : MLJ Vol. XXXVIII 2000 (1) Page 193 : 1999 SCC (7) 510 : 1999 SCW (0) 3809 (08/01/2000). The question of jurisdition under Section 138 of the Negotiable Instruments Act, 1881-Tests for determination. A complaint can be filed at any of the places where any of the following acts took place : (1) drawing of the cheque; (2) presentation of the cheque to the Bank; (3) returning the unpaid cheque 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. The Associated Cement Co. Ltd. vs. Keshavanand, JT 1997 (10) SC 165 : (1998) 91 Comp Case 361 (16/12/1997)

Application of Section 247 of the Cr.P.C.-Section 247 of the old Cr.P.C. (or Section 256 of the new Cr.P.C.) is applicable in case where the complainant is a company or any other jurisdiction person. What is included in the Section is the absence of the corporeal person representing the incorporeal complainant.

Major General A.S. Gauraya vs. S.N. Thakur, 1988 (1) RCR (SC) 3: AIR 1986 SC 1440.

Applicability of Article 141 of the Constitution of India Once the complaint is dismissed for non-appearance of the complainant it is a final order The Magistrate has no inherent power to restore the same Article 141 of the Constitution of India is applicable to pendente lite proceedings with retrospective effect.

Sadanandan Bhadran vs. Madhavan Sunil Kumar, JT 1998 (6) SC 48: AIR 1998 SC 3043 (28/02/1998)

Successive presentation of the cheque The payee can without taking preemptory action, present the cheque any number of times before he gives a notice. Once the notice is given under proviso to Clause (b) of Section 138, he forfeit such right and in case of failure of the drawer to pay the money within the stipulated time he would be liable for the offence.

Modi Cements Limited (M/s.) Vs. Kuchil Kumar Nandi, JT 1998 (2) SC 198 : I (1998) BC 421 (SC) (02/03/1998)

Applicability of Section 138-In case a person draws a cheque with no sufficient funds, but makes the arrangement before the cheque is put in the bank by the drawee and

the cheque is honoured, there cannot be presumption of dishonesty Section 138 gets attracted only when the cheque is dishonoured.

Karandeep Singh vs. Jagdish Goyal, II (1999) BC 521 (07/05/1997)

Restoration of the complaint In view of the provisions of Section 256 of the Cr. P.C. - he Magistrate has no power to restore A complaint dismissed in default Reference can also be made to Major General A.S. Gauraya vs. S.N. Thakur, 1988 (1) RCR (SC) 3.

Bilakchand Gyanchand Co. vs. A. Chinnaswami, AIR 1999 SC 2182

Effect of the notice to the Managing Director A notice to the Managing Director of the Company is a sufficient compliance with legal requirements under section 138 and whether the complaint is liable to be quashed on this ground. The Supreme Court held that there is no infirmity or illegality in proceedings on the basis of such notice.

Anil Hada vs. Indian Acrylic Ltd., AIR 2000 SC 145 (26/11/1999)

Prosecution of the Directors The prosecution against the directors is maintainable even when the prosecution against the company is dropped because of the winding up of the company.

SIL Import (M/s.), USA v. M/s Exim Aides Silk Exporters, Bangalore, AIR 1999 SC (First Supplement) 1609

Notice by fax Negotiable Instruments Act, 1881 Section 138 Proviso Clause (b) Dishonour of cheque A notice of demand can be sent by Fax The mode of sending notice can be restricted to post or messenger.

D.Ramaswamy v. P. Mohan Babu, 1999 ISJ (Banking) 668 (04/03/1999)

Service of Notice In case the accused was in town and managed to send bank the notice It was a sufficient service of notice Effect of the judgement in Madan and Co. (M/s.) v. Wazir Jaivir Chand, AIR 1989 SC 630. This also follows as a result of Section 27 of the General Clauses Act, 1897.

Anil Kumar Sawhney v. Gulshan Rai, 1993 SCC 424 : 1993 JT 286 : (1993) SCC 424 : 1993 JT 286 : (1993) 2 Bank CLR 699 (11/10/1993)

Dishonour of a Post dated Cheque A post dated cheque remains only a bill of exchange till the date on its face and only from that date it becomes a cheque on being payable on demand.

Electronics Trade & Technology Development Corpn. Ltd., Secuderabad v, Indian Technologists & Engineers (Electronics) (P) Ltd., AIR 1996 SC 2339 : 1996 SCC 739 : JT 1996 (1) SC 643 : 1997 (3) Bank LJ V.33, p. 364 (22/01/1996)

Applicability of Section 138 In case before presentation of the cheque to the bank, the drawer issues a notice to the payee not to present the same for encashment and he still presents it then in case of dishonour of a cheque, section 138 is not attracted on account of the drawer not having sufficient funds to his credit.

K.K. Sidharthan v. T.P. Praveena Chandran, 1996 SC (6) 369 : 1997 ISJ (Banking) 117: [1996] 87 Comp Cas 685 SC : Bank LJ (Supp) V. 34, p. 95 (08/10/1996)

Presentment of cheque after drawers Stop Payment instruction The presentment of the cheque after drawer had instructed the bank to stop payment, will not make out a case under Section 138.

M.M.T.C. Ltd. v. Medical Chemicals and Pharma (P) Ltd., (2002) 1 SCC 234.

Complaint must be by the payee or holder in due course The respondent company issued two cheques on dated 31st October, 1994 and 10th November, 1994 respectively in favour of appellant company. Both the cheques were dishonoured and returned on the ground that payment stopped by drawer.

The appellant company lodged two complaints through the manager of the Regional Office. The respondent company filed two petitions for quashing of the said complaints. The High Court held that complaints were not maintainable on the ground that the manager and deputy manager are paid up employees and not authorised by the Board of Directors of company and in the complaint there was no specific allegation of existence of debt or liability.

The only eligibility criterion under section 142 of the Negotiable Instruments Act, 1881 for maintaining a complaint under section 138 is that the complaint must be by the payee or the holder in due course. This criterion is satisfied as the complaint is in the name and on behalf of the appellant company therefore even presuming that initially there was no authority, still the company can at any stage, rectify that defect at a subsequent stage, the company can send a person who is competent to represent the company. The complaints could thus not have been quashed on that ground. The judgment of the High Court was set aside.

K.N. Beena v. Muniyappan, (2001) 107 Comp Cas 459 (SC)

The Court has to presume that the cheque had been issued for a liability or debt The appellant filed a complaint under section 138 of the Negotiable Instruments Act of 1881 as the cheque dated 6th April, 1993 amounting to Rs.63,720 issued by the first respondent in favour of the appellant on Central Bank had been dishonoured with the remarks of insufficient funds. The appellant issued a legal notice on 28 th April, 1993.

A reply to such notice was sent by the first respondent but no payment followed. After a trial the judicial Magistrate-II, Kumbakonam, convicted the first respondent under section 138 of Negotiable Instrument Act and directed a payment of a fine Rs.65,000, in default to suffer imprisonment of one year. The first respondent file an appeal in Session Judge Court and the same was dismissed and the first respondent filed a criminal appeal in the High Court of Madras and his conviction was set aside.

Under section 139 of the Negotiable Instrument Act, 1881 the court has to presume, unless the contrary was proved that the holder of the cheque received the cheque for discharge, in whole or in part, of a dept or liability. Thus a complaint under section 138, the court has to presume that the cheque had been issued for a debt or liability. The presumption is rebuttable. Hence the first respondent not having led any evidence could not be said to have discharged the burden cast on him. And the conviction awarded by the magistrate was correct and the High Court erroneously set aside the conviction.

A.V. Murthy v. B.S. Naga Basavanna, (2002) 2 SCC 642

Cheque drawn in respect of liability or debt which is illegal The cheque issued was dishonoured by the bank on the ground of account closed. The respondent had issued such cheque in favour of appellant in respect to sum advanced to the respondent four years ago. Hence the appellant filed the complaint under section 138 of Negotiable Instruments Act of 1881. The magistrate issued summons to the respondent.

In a criminal revision filed by the respondent the Sessions Court quashed the entire proceedings on the ground that the borrowing barred by the limitation. The High Court also upheld the decision.

The Sessions Court and High Court erred in quashing the complaint proceedings. Because this is not the case where the cheque was drawn in respect of a debt or liability which is completely barred from being enforced at law. But the cheque drawn by the respondent was in respect of a debt or liability which was not legally enforceable, was clearly illegal and erroneous.

Suganthi Suresh Kumar v. Jadgeeshan, (2002) 2 SCC 420

Both parties should be heard Two cheques amounting to Rs.4,50,000 were drawn by the respondent in favour of the appellant, were dishonoured by the bank. The magistrate trying the case convicted the respondent under section138 of Negotiable Instruments Act, 1881 only to undergo imprisonment till rising of court and a fine of Rs.5000 for both the cheques. On the appeal the High Court did not interfere on such sentence.

The case was remitted back to the trial court that the trial magistrate shall hear both sides once again in the matter of sentence and pass a sentence which is condign. Therefore the sentence passed on the respondent is set aside.

AMITY LAW SCHOOL GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY DELHI-110 025

CERTIFICATE

I have the pleasure to certify that Pankaj Kapoor a law student of Amity Law School, Guru Gobind Singh Indraprastha University, has pursued his research work and prepared the present dissertation on DISHONOUR OF CHEQUE SECTION 138, NEGOTIABLE INSTRUMENT ACT, 1881 under my supervision and guidance. The present dissertation is the result of his own research and to the best of my knowledge no part of it has earlier comprised in any monograph, dissertation or book. This is being submitted to the Guru Gobind Singh Indraprastha University at Delhi for the degree of LL.B. (Hons.) in partial fulfillment of requirement of the said dissertation.

M.K. Balachandran Professor & Director Amity Law School Guru Gobind Singh Indraprastha University, Delhi-110 025

Professor Kanwal D.P. Singh Supervisor

ACKNOWLEDGEMENT Section 138, Negotiable Instrument Act is a pragmatic legislative step to reach justice to the aggrieved. The present work is just the quintessence of the intellectual discussions with my colleagues, professors and associates in the Amity Law School, based upon various judgements in various cases as pronounced by our honble judges for various issues and upon the research work done by various learned writers, advocates and the professors in this field. The present work is only a suggestion prepared by me and is a no manner the final authority to the topic in question but I have done my best efforts to provide the requirements of the readers. In this regard I had the benefit of help from my learned professor Kanwal D.P. Singh, my guide, which I gladly acknowledge. It was a great pleasure for me when I was assisted by my guide to clarify all my doubts, to provide with all the valuable inputs with his immense knowledge and experience in the vast field of law. To share a secret, preparation of this dissertation was not possible without the personal attention to the individual needs of the students by the Director of Amity Law School, Shri M.K. Balachandran, whose idealism I admire. I owe much of my research to the extensive library belonging to Vikram Kapoor & Companys office, who also gave his untiring support during the period of research and drafting thereafter. Though I have put my best efforts, relaying upon suggestions and ideas by various associates but the interpretations and analyses are my own. The present work is humbly sanctified to all those who help me to row the boat to reach the main stream.

BIBLIOGRAPHY Negotiable Instruments Act.N.D. Kapoor New Law on Negotiable Instruments..Universals Law of Dishonour of cheques.A.N. Saha Dishonour of Cheque Reporter 2003(1).Vashisht Publication Dishonour of Cheque Reporter 2003(2).Vashisht Publication All India Reporter Manual Civil & Criminal(36)...V.R. Manohar W.W. Chitaley

In view of the above, I seek your permission to proceed further in the matter.

Mrs. Aruna Venkat Faculty Incharge

BIBLIOGRAPHY

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On Line References taken from www.heritagepursuit.com/marion/history1907/html www.rbs.co.vk/group_information/memory_bank/html

www.blonnet.com/businessline/2000/html www.obarchive.com/english/act.price-competition-2002-result.html www.ex.ac.uk_~devies_arian-origin/html www.gogreece.com/business-finance/finance/html http://villa.lakes.com/elechno/Etsix/html www.vakilno.1/chqbouncing_qus.html www.lawindiainfo.com_acts/NEGOTIABLE www.moneymediaindia.com/businesslaw/negotiable