NEGOTIABLE INSTRUMENTS,

BANKING AND INSURANCE

(For LL.B. Students of various Universities of India; and Civil/
Judicial Services Aspirants)

(Based on New Syllabus)

B.K. GOYAL
M.Com., LL.B.

Associate Professor
Shri Ram College of Commence
University of Delhi

Twelfth Thoroughly Revised Edition

SINGH AL LAW PUBLICATIONS

 First Edition : 1983
Second Edition : 1985
rhird Edition : 1988
Fourth Edition : 1990
Fifth Edition : 1992
Sixth Edition : 1997
Seventh Edition : 2002
Eighth Edition : 2005
Nineth Edition : 2007
Tenth Edition : 2009
Eleventh Edition : 2016
Twelfth Edition : 2019

© B.K. Goyal
All rights reserved with the author.

Price: Rs. 225

Published by:
Singhal Law Publications
A-2/157, Bhagat Colony, Hanuman Mandir,
Burari, SantNagar, Delhi-84, Ph. 27616474

* The publica tions have taken all possible precau tions in publishing this book, yet ifany
mistake has crept in, the publishers shall not be responsible for the same.
* This book or any part thereof may not be reproduced in any form by Photographic,
Mechanical, or any other method, for any use, without written permission from the
author.
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Printed at:
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 PREFACE TO THE TWELFTH EDITION
In this revised edition the text of most of the chapters has been improved
and a few latest cases and examinations question with hints have been
added. I am confident that the students will find the book of great value in
understanding the legal provisions of negotiable instruments, banking and
insurance.

Delhi B.K. GOYAL

January 24, 2019 Mobile: 9810994452

PREFACE TO THE FIRST EDITION

This book in the field of negotiable instruments, banking and insurance
is an humble attempt. It is intended primarily for LL.B, students of Delhi
University. The main features of the book are (i) to explain the provisions of
the relevant Acts with the help of decided cases, and (ii) to explain the
leading cases in detail. It is hoped that it will prove of service to the students
as an inducement to the study of law on the subject dealt with in this book
and that it will save their valuable time and labour. Numerous illustrations
and cases have been given to explain the provisions. Some works of
acknowledged value besides being of formidable size are not easily accessible
to the students. In this book the subject has been dealt with in a form which
the student can easily grasp. Both the text and the cases have been explained
in such a manner that the students can easily understand the provisions of
law. I hope the book will be found by law students reasonably satisfactory.
I will most gratefully welcome suggestions for its improvement.

Delhi B.K. GOYAL

February 15,1983
 Contents
PAGE
The Negotiable Instruments Act, 1881
1. Meaning and Kinds of Negotiable Instruments
Meaning of Negotiable Instrument 1.2
Features of a Negotiable Instrument 1.2
Instrument which are not negotiable instruments 1.5
Promissory Note 1.6
Bill of Exchange 1.16
Kinds of Bills of Exchange 1.22
Maturity of Bill or Note 1.26
Cheque 1.27
Difference between a Cheque and a Bill of Exchange 1.29
Bank Draft 1.30
Letter of Credit (LC) 1.31
Ambiguous Instrument 1.31
Amount stated differently in figures and words' 1.32
Leading Cases 1.32
Examination Questions 1.41
2. Holder and Holder in Due Course 2.1-2.41
Parties to Bill of Exchange 2.1
Parties to Promissory Note .. 2.2
Parties to Cheque 2.2
Holder 2.3
Holder in due course 2.6
English Law ... 2.9
Indian Law ... 2.11
Privileges of Holder in Due Course ... 2.14
Difference between Holder and Holder in Due Course ... 2.18
Payment in due course 2.18
To whom payment should be made 2.20
Payment by cheque 2.20
Leading Cases 2.21
 (Vi)

PAGE
Examination Questions ... 2.33
Appendix: 11th Law Commission Report ... 2.38
I. Negotiation .............. 3.1-3.16
Meaning of Negotiation 3.1
Negotiation and Assignment distinguished 3.4
Indorsement or Endorsement 3.5
Kinds of Indorsements * 3.6
Negotiation Back ... 3.10
Leading Cases ... 3.13
Examination Questions ... 3.15
. Capacity, Liability and Discharge from Liability .............. 4.1-4.35
Capacity 4.1
Liability of the Parties 4.2
Liability of drawer of bill 4.3
Liability of drawer of cheque 4.3
Liability of maker of a note and acceptor of bill 4.8
Liability of indorser 4.9
Liability of intervening parties ... 4.10
Liability of transferor by delivery ... 4.10
Discharge of parties from Liability ... 4.11
Material Alteration ... 4.13
Distinction between material alteration and forgery 4.17
Leading Cases 4.18
Examination Questions 4.33
5. Presentment .............. 5.1-5.12
Acceptance ... 5.1
Presentment for Acceptance ... 5.2
Presentment for Payment ... 5.4
Time for presentment ... 5.6
Place of presentment ... 5.7
Presentment of Cheques ... 5.8
Presentment of demand instruments ... 5.9
Examination Questions ... 5.12
 (vii)

PAGE
. Dishonour of an Instrument ... . ....... 6.1-6.9
Dishonour by non-acceptance 6.1
Dishonour by non-payment 6.2
Notice of dishonour 6.2
Reasonable Time 6.6
Protest and Protest for Better Security 6.7
Examination Questions 6.9
Crossing of Cheques ......... ... 7.1-7.25
Kind of Crossing 7.2
Who may cross a cheque 7.4
Payment of crossed cheques 7.5
Leading Cases ... 7.10
Examination Questions ... 7.22
Penalties in Case of Dishonour of Cheques for
Insufficiency of Funds ........ ... 8.1-8.48
Conditions to be fulfilled for prosecution of a drawer 8.3
Offences by Companies ... 8.14
Civil action against the drawer ... 8.15
Sections 143 to 147 ... 8.15
Leading Cases ... 8.18
Examination Questions ... 8.46
Control of Banking System by Reserve Bank of India ........ ... 9.1-9.34
Meaning of "Banking" and "Banking Company" and
Forms of Businss in which a banking company may engage 9.3
Classification of Banks . 9.5
Requirement as to Minimum Paid Up Capital & Reserves 9.6
Regulation of Capital and Voting Rights 9.7
Restrictions as to Payment of Dividend ' ... 9.8
Statutory Reserve Fund 9.8
Cash Reserve of Schedule Banks 9.9
Cash Reserve in case of Non-Scheduled Banks 9.9
Statutory Liquidity Ratio 9.9
Capital Adequacy Ratio ... 9.10
Restrictions on loans and advances ... 9.10
 (viii)
PAGE
Power of Reserve Bank to Control Advances by Banking
... 9.11
... 9.11
Restriction on Opening of New, and Transfer of Existing
Place of Business ... 9.13
Maintenance of a Percentage of Assets ... 9.16
Inspection ... 9.16
Powers of the Reserve Bank to give directions ... 9.17
Amendments of provisions relating to Appointments of
Managing Directors etc. to be subject to previous
approval of the Reserve Bank ... 9.19
. Leading Cases ... 9.21
Examination Questions ... 9.34
0. General Principles of Insurance .............. 10.1-10.70
General Principles of Insurance ... 10.3
Definition of Life insurance, fine insurance, marine insurance
and contract of insurance ... 10.4
General Principles of Contract of Insurance ... 10.5
1. Insurable Interest ... 10.5
2. Indemnity ...10.11
3. Subrogation ... 10.12
4. Mitigation of Loss ... 10.13
5. Risk must attach . - ... 10.13
6. Contribution ... 10.14
-7. Proximate Cause ... 10.14
8. Utmost good faith ... 10.18
Policy not to be called in question on ground of
mis-statement after two years ... 10.22
Recasting of Section 45 Suggested ... 10.27
9. Interpretation of Liability Clauses in Favour of Insured ... 10.28
Leading Cases ... 10.31
Examination Questions ... 10.65
 (ix)
PAGE
LEADING CASES
Meaning and Kinds of Negotiable Instruments
1. Mohammad Akbar Khan v. Attar Singh
AIR 1936 PC 171 ... 1.32
2. Surjit Singh and Others v. Ram Rattan Sharma
AIR 1975 Gau. 14 ... 1.34
3. Ponnuswami Chettiar v. P. Vellaimuthu Chettiar
AIR 1957 Mad 355 ... 1.36
4. Nanga v. Dhannalal
AIR 1962 Raj. 68 ... 1.37
5. Ashok Yeshwant Badeve v. Surendra Madhavrao Nighojakar
(2001) 3 SCC 726: AIR 2001 SC 1315 ... 1.40
Holder and Holder in Due Course
1. Lachmi Chand v. Madan Lai Khemka
AIR 1947 All. 52 ... 2.21
2. Singheswar Mandal v. Smt. Dita Devi
AIR 1975 Pat. 81 ... 2.23
3. Nunna Gopalan v. Vuppuluri Lakshminarasamma
AIR 1940 Mad. 631 ... 2.24
4. S.D. Asirvatham and Another v. Palaniraju Mudaliar
AIR 1973 Mad. 439 ... 2.26
5. U. Ponnappa Moothan Sons v. Catholic Syrian Bank Ltd.
(1991) 1 SCC 113 ... 2.28
6. Federal Bank v. Panicker Simor Carves Ltd.
AIR 1976 Ker. 5 ... 2.31
Negotiation
1. Firm Kalka Prasad Ram Charan v. Lala Kunwar Lai Thapar
1957 All. L.J. 209 ... 3.13
Capacity, Liability and Discharge from Liability
1. London Joint Stock Bank v. Macmillan and Arthur
(1918) AC 777 ... 4.18
2. Lala Prabhu Dayal v. The Jawala Bank
AIR 1938 AIL 374 ... 4.19
3. Canara Bank Limited v. I.V. Rajagopal
(1975) 1 MLJ 420 .„ 4.19
4. Allampati Subha Reddy v. Neelapa Reddy Ramana Reddy
AIR 1966 A.P. 267 ... 4.21
 (x)
PAGE
5. Shivalingappa v. P.B. Puttoppa
AIR 1971 Mysore 273 ... 4.23
6. Bihta Co-operative Development and Cane Marketing Union
Ltd. v. Bank of Bihar
AIR 1967 SC 389 ... 4.24
7. Canara Bank v. Canara Sales Corporation Ltd.
AIR 1987 SC 1603 ... 4.27
8. Jayantilal Goel v. Zubeda Khanum
AIR 1986 AP120 ... 4.31
Crossing of Cheques
1. Bapu Lal Prem Chand v. Nath Bank Ltd.
AIR 1946 Bom. 482 ... 7.10
2. Indian Bank v. Catholic Syrian Bank Ltd.
AIR 1981 Mad. 129 ... 7.12
3. Great Western Railway Co. v. London and County
Banking Co.
1901 AC 414 7.13
4. M/s Tailors Priya v. MA Gulab Chand Dhanraj
AIR 1963 Cal 36 7.15
5. Indian Overseas Bank v. Industrial Chain Concern
(1990) 1 MLH (SC) 40: (1990) 1 SCC 484: 7.18
Penalties in Case of Dishonour of Certain Cheques for
Insufficiency of Funds
1. Modi Cements Ltd. v. Kuchil Kumar Nandi
(1998) 3 SCC 249: AIR 1998 SC 1057 8.18
2. Kusum Ingots & Alloys Ltd. v. Pennor Peterson Securities
Ltd.
(2000) 2 SCC 745: AIR 2000 SC 954 8.21
3. Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies
Ltd.
(2001) 6 SCC 463: AIR 2001 SC 676 8.23
4. Suganthi Suresh Kumar v. Jageeshan
AIR 2002 SC 681: (2002) 2 SCC 420 8.27
5. M.M.T.C. Ltd. v. Medchl Chemicals and Pharama (P) Ltd.
(2002) 1 SCC 234: AIR 2002 SC 82 8.28
6. Goaplast (P) Ltd. v. Chico Ursula D'souza
(2003) 3 SCC 232: AIR 2003 SC 2035 8.30
7. C.C. Alavi Haji v. Palapetty Muhammad
(2007) 6 SCC 555: (2007) 7 SCALE 380 ‘ / 8.33
 (xi)
PAGE
8. Dashrath Rupsingh Rathore v. State of Maharashtra
(2014) 9 SCC 129 ... 8.35
9. Rangappa v. Sri Mohan
(2010) 11 SCC 441 ... 8.40
10. Laxmi Dyechem v. State of Gujarat and Others
(2012) 13 SCC 375 ... 8.43
Control of Banking System by Reserve Bank of India
1. Sajjan Bank v. Reserve Bank of India
AIR 1961 Mad 8 ... 9.21
2. Canara Bank v. P.R.N. Upadhyaya
(1998) 6 SCC 526 ... 9.26
3. Shivabhai Zaverbhai Patel v. Reserve Bank of India
AIR 1986 Guj 19 ... 9.28
4. Janata Sahakari Bank Ltd. v. State of Maharashtra
AIR 1993 Bom 252 ... 9.32
General Principles of Insurance
1. New India Assurance Co. Ltd. v. M/s Zuari Industries Ltd.
(2009) 8 SCC 70 ... 10.31
2. Simmond v. Cockell
(1920) 1 KB 843 ... 10.32
3. Harris v. Poland
(1941) 1 KB 462 ... 10.33
4. Central Bank of India v. Harford Fire Insurance Co. Ltd.
AIR 1965 SC 1228 ... 10.35
5. Castellain v. Preston
(1883) 11 QBD 380 ... 10.38
6. Pink and Others v. Fleming
(1899) 25 QBD 396 ... 10.40
7. Mithoolal Nayak v. L.I.C.
AIR 1975 SC 814 ... 10.41
8. Smt. Krishnawati Puri v. L.I.C.
AIR 1981 Delhi 19 ... 10.43
9. Manohar Lal v. L.I.C
Delhi 171 ... 10.44
10. Kami Bai v. L.I.C.
AIR 1981 M.P. 69 ... 10.45
11. Rati Lal & Co. v. National Security Insurance Co. Ltd.
AIR 1964 SC 1896 ... 10.46
 (Xil)
PAGE
12. Howard v. Refugee Friendly Society
54QBD644 ... 10.47
13. Kasim Ali Bulbul v. New India Insurance Co.
AIR 1968 J&K 39 ... 10.48
14. Life Insurance Corporation of India v. Smt. G.M.
Channabasamma
(1991) 1 SCC 357 ... 10.51
15. Life Insurance Corporation of India v. Ajit Ganghadhar
Shanbhag
AIR 1997 Kant 157 ... 10.52
16. Life Insurance Corporation of India v. Asha Goel
AIR 2001 SC 549 ... 10.54
17. M/s Krishna Food & Banking Industry P. Ltd. v. M/s New
India Assurance Co. Ltd.
2008 (13) SCALE 747 ... 10.57
18. Smt. Dipashri v. Life Insurance Corporation of India
AIR 1985 Bom. 192 ... 10.61
 CHAPTER T $S9EjSBSBBSB9BSHS
MEANING AND KINDS OF NEGOTIABLE
< INSTRUMENTS L

Hie Negotiable Instruments Act, 1881 deals with negotiable instruments

and the law governing them. It came into force on the first day of March,
1882. It extends to the whole of India. It deals with three kinds of negotiable
instruments e.g., promissory notes, bills of exchange, and cheques. Apart
from these some other instruments have also been recognized as negotiable
instruments by custom or usage by merchants, eg., hundies, bank notes,
bankers' drafts, dividend warrants, share warrants, circular notes, G.P.
Notes bearer debentures, treasury bills, exchequer bills, debentures of the
Mumbai Port Trust or Improvement Trust, Railway Bonds payable to bearer.

The Negotiable Instruments Act, 1881 was enacted to facilitate the

activities in trade and commerce by giving legal recognition to the instruments
of credit which would be deemed to be convertible into money and easily
ransferable from one person to another. It is not necessary in the trading
community to carry the currrency notes every time to settle the accounts.
The preamble states that the object of the Act is to define and amend the
law relating to promissory notes, bills of exchange and cheques. Prior to
the passing of this Act, the negotiable instruments were governed by the
English Common law, based on the Law Merchant. Though the law is now
codified, it is based substantially on the English Common Law. .

• Section 1 of the Act states that nothing herein contained affects any local
usage relating to any instrument in an oriental language. Accordingly, the
provisions of the Act do not apply to hundies, since they are governed by
the special customs and usages relating to them.

However, if the parties to a hundi or any other instrument in an oriental

language have agreed in writing in the body of the instrument, that their
legal relations shall be governed by this Act, then, the local usages are
excluded, and the provisions of this Act apply even to such instruments.
The Act is equally well applicable to such instruments when there is no local
custom or usage on a particular point.

1.1
 1.2 Meaning and Kinds of Negotiable Instruments
Meaning of Negotiable Instrument
The Negotiable Instruments Act defines a negotiable instrument in S.
13(1) as follows:

A "Negotiable Instrument" means a promissory note, bill of exchange

or cheque payable either to order or to bearer.

The definition of negotiable instrument as given in sub-section (1) of

S. 13 can hardly be called a definition. The best definition of negotiable
instrument has been given by Thomas in his "Principles of Banking." It is
as follows: "A negotiable instrument is one which is, by a legally recognized
custom of trade or law, transferable by delivery or by indorsement and delivery
in such circumstances that (b) the holder of it for the time being may sue on it
in his own name, and (d) the property in it passes, free from equities, to a bonafide
transferee for value, notwithstanding any defect in the title of the transferor."

According to Willis (The Law of Negotiable Securities, page 6) : "A

negotiable instrument is one the property in which is acquired by anyone
who take it bonafide,and for value, notwithstanding any defect of title in the
person from whom he took it, from which it 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 there by simple delivery
of the instrument".

It may also be noted here that S. 13 of the Negotiable Instruments Act,

1881 is subject to S. 31 of the Reserve Bank of India Act, 1934 which provides
that no person in India other than the Reserve Bank or the Central
Government can (1) make or issue a promissory note 'payable to bearer',
(2) draw or accept a bill of exchange 'payable to bearer on demand'.

Features of a Negotiable Instrument

The above definitions of a negotiable instrument as given by Thomas
and by Willis reveals that a negotiable instrument has the following special
characteristics :

(i) Transferability - It is transferable from person to person by mere

delivery in case it is payable to bearer or by indorsement and delivery in
case it is payable to order. The transferee becomes entitled to the money
and also to the right to further transfer it.

All negotiable instruments are transferable instruments but all

transferable instruments are not negotiable instruments. For example, a
cheque is a negotiable instruments, but the shares of a limited company are
transferable but they are not negotiable instruments.
 Negotiable Instruments, Banking and Insurance 1.3
Instruments payable to order - A promissory note, bill of exchange or
cheque is payable to order which is expressed to be so payable to a particular
person, and does not contain words prohibiting transfer or indicating an
intention that it shall riot be transferable [Explanation to section 13(1). For
example, a bill of exchange payable to A is payable to A or his order.

Where a promissory note, bill of exchange or cheque is originally or by

indorsement is expressed to be payable to the order of a specified person,
and not to him or to his order it is nevertheless payable to him or to his
order at his option [Explanaton III(l) to section 13(1)]. For example, a bill
of exchange payable to order of A, is payable to A or his order.

A negotiable instrument may be made payable to two or more payee

jointly, or it may be made payable in the alternative to one of the two, or
one or some of the several payees [Explanation 111(2) to section 13(1)].

(ii) Right to sue - The transferee of a negotiable instrument is entitled

to sue on the instrument in his own name in case of dishonour without
giving notice of transfer to the original debtor of the fact that he has become
the holder. This special feature of a negotiable instrument distinguishes it
from a transfer or "assignment" of an "actionable claim" (debt) under the
Transfer of Property Act which provides that the notice to the debtor is
. necessary in order to make tire transferee entitled to sue in his own name
otherwise he has also to join his transferor, e.g., the original creditor for
recovering the amount from original debtor. Thus, the Negotiable Instrument
Act makes the transfer of actionable claims" very easy in case of negotiable
instruments as an indorsee of a negotiable instrument need not join his
indorser before he (indorser) can recover the amount of the instrument from
the party liable thereof.

(iii) Independent title - The general principle of transfer of property

is nemo dat quod non habet (no one can transfer a better title than he himself
has). But this principle does not apply in case of negotiable instruments.
A bonafide transferee of a negotiable instrument for yalue without notice
takes it free from all defects in the title of his transferor. For example, if A
is holder of a bill of exchange payable to bearer and it is stolen by B who
transfers it to C who pays value and who is ignorant of the theft, C obtains
a good title to the instrument being the holder in due course of the instrument.
The result would have been different if instead of a negotiable instrument,
say, a cycle or a golden ring had thus been transferred. Rapheal v. The Bank
of England (1857) 104 RR 638, is the leading case on this point. (See Chapter
2 for this case).
 1.4 Meaning and Kinds of Negotiable Instruments

(iv) For off party can sue or be sued - Any far-off party liable on the
negotiable instrument can sue or be sued in his own name. For example,
if a cheque is wrongly dishonoured by a drawee bank, the holder of the
cheque can file a suit against the drawer of the cheque or against any
endorser directly. If in such a case, the suit is filed by the holder against
an indorser, the endorser can also file a suit against the’ drawer and the
drawer can file a suit against the drawee bank.

(v) Presumptions - Until the contrary is proved certain presumptions

as given in sections 118 and 119 of the Act apply.

(vi) Presumptions as the Negotiable Instruments - Just as the Indian

Contract Act presumes undue influence in certain cases, the Negotiable
Instruments Act also has laid down certain presumptions as to negotiable
instruments. These are rebuttable presumptions. As such, the party liable
on the instrument may rebut them. If the defendant, i.e., the party liable
proves the non-existence of the presumptions, then the burden of proving
them shifts on the plaintiff. The presumptions, which are also known as
special rules of evidence, are the following :

(a) Consideration - According to Section 118 of the Act, until the

contrary is proved, it shall be presumed that every negotiable
instrument was drawn or made for consideration. The same
presumption extends to every instrument, accepted, endorsed,
negotiated or transferred, i.e., it was accepted, endorsed or negotiated
for consideration. Thus, in the case of a contractual claim,
consideration should be proved by the plaintiff, but, in the case of
a negotiable instrument, consideration is presumed until it is
disproved by a defendant.

(b) Date - It is also a presumption under the Act, that every negotiable
instrument bearing a date, was made or drawn on such date (S.
118). It means that, though the instrument is anti-dated, or post­
dated or drawn or made on Sunday or a public holiday, the
presumption holds good, unless the contrary is proved.

(c) Time of acceptance - With regard to the time of acceptance, the

presumption is that every accepted bill of exchange was accepted
within a reasonable time after its date, and before its maturity (S.
118).
(d) Time of transfer - Until the contrary is proved, it shall be presumed
that every transfer of a negotiable instrument was made before its
maturity (S. 118).
 Negotiable Instruments, Banking and Insurance 1.5

(e) Order of endorsements - It is also a presumption that with regard

to the endorsements appearing on a negotiable instrument, they
were made in the order in which they appear on the instrument (S.
118).
(f) Stamp - In the case of a negotiable instrument that is lost, the
presumption is that it was duly stamped 0- 118).

(g) Holder is a holder in due course - It shall also be presumed that

the holder of a negotiable instrument is a holder in due course. But
when the instrument is obtained from its lawful owner or from a
person in lawful custody by means of an offeree or fraud, or it has
been obtained from the maker or acceptor, by means of an offence
or fraud, or for unlawful consideration. The burden of proving that
the holder is a holder in due course, lies upon the person claiming
to be the holder in due course (S. 118).

(h) Proof of protest - According to Section 119 of the Act, in a suit upon
an instrument which has been, dishonoured, the court shall, on
proof of protest, presume the fact of dishonour either by non-
acceptance or non-payment. Thus, protest is a prima facie evidence
of dishonour.

Instruments which are not negotiable instruments

There are certain instruments and documents of title which do not have
above characteristics of negotiable instruments and hence they are not
negotiable instruments. These are (i) money orders and postal orders; deposit
receipts; (ii) share certificates; (iii) dock warrants; (iv) bills of lading; (v)
railway receipts; (iv) wharfinger certificates. The last four are capable of
being transferred by indorsement and/or delivery, but the transferee to
such documents does not get a better title than that of the transferor. Such
instruments are sometimes called 'quasi-negotiable instruments".

An Instrument containing the words "I.O.U." (I Owe You) is not a

negotiable instrument because it is merely an acknowledgement of debt
without any promise to pay. This type of instrument can be transferred by
assignment under the Transfer of Property Act and not by "negotiation":
However, if certain words are added to "I.O.U." which, may make it a
negotiable instrument For example in Books v. Erikins (1936), 2 M. & W. 734
a document ran "I.O.U. £ 20, to be paid on the 22nd," and it was held to
be promissory note. .
Negotiability is one of the essential characteristic of a negotiable
instrument. Therefore, a document which is ordinarily "negotiable" can be
 1.6 Meaning and Kinds of Negotiable Instruments

made "non-negotiable" if the negotiability character of it is restricted by

using certain words. For example, a bill of exchange payable to "A only"
or a cheque marked "not negotiable" are not negotiable instruments. In the
first case clearly the intention is against its negotiability, and in the second
case although the cheque can be transferred by indorsement and/or delivery,
but the transferee will not get a better title than that of his transferor.

PROMISSORY NOTE0102
A promissory note is defined by S. 4 of the Act as follows:—

A promissiory note is an instrument in writing (not being a bank note

or currency note) containing an unconditional undertaking signed by the
maker, to pay certain sum of money only to, or to the order of, a certain
person, or to the bearer of the instrument.

The following illustrations are appended to the Section:

A signs instruments in the following terms;

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

(b) "I acknowledge myself to be indebited to B in Rs. 1,000 to be paid

on demand for value received."

(c) "Mr. B.,I.O.U. Rs. 1000."

(d) "I promise to pay B Rs. 500 and all other sums which shall be due
to him."

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

(f) "I promise to pay B Rs. 500 seven days after my marriage with C."

(g) "I promise to pay B Rs. 500 on D's death, provided D leaves me
enough to pay that sum."
(h) "I promise to pay B Rs. 500 and to deliver to him my black horse
on 1st January next"

The instruments respectively marked (a) and (b) are promissory notes.
The instruments respectively marked, (c), (d), (e), (f), (g) and (h) are not
promissory notes.

QI. Discuss the essential characteristics of a 'promissory note’ with reference to the
relevant provisions of law and decided cases. [LL.B., D.U.]
Q2. What do vou understand bv oromissisory not? Discuss. rLL.B., D.U.]
 Negotiable Instruments, Banking and Insurance 1.7
Thus, a promissory note contains a promise in writing by a specified
person to pay a certain sum of money to a specified person or to his order.
As said earlier a promissory note cannot be made payable to bearer except
by the Reserve Bank of India or by the Central Government. The usual form
of a promissory note is as follows:—

Rs. 50,000.00 New Delhi

Jan. 1, 2016

Three months after date, I promise to pay Tarun Seth or order the
sum of rupees fifty thousand with interest thereon at 12 per cent
per annum for value received.

Stamp

Sd/-

Deepak Seth

The promissory note may take any other form as no particular form is
prescribed. But in any case it must satisfy the requirement of the Act which
gives an exhaustive definition of a promissory note. The document must
fulfill all the requisites of a promissory note. Though if is usual to mention
in a note that it is made for "value received", use of such a phrase is not
essential for the validity of a promissory note. To decide whether a document
is a promissory note or not description and language of the instrument as
a whole, the circumstances under which it was executed, the intention of
the parties manifest from the face of the instrument and the surrounding
circumstance have all to be taken into consideration. An instrument which
satisfies the requirements of the definition given in S. 4 must be held to be
a promissory note irrespective of whether it is negotiable or not [Chhabildas
Mangaldas v. Luhar Kohan Aija AIR 1967 Guj. 7].

The necessary parties to a promissory note are (1) the person who
makes the promise, and who is called the maker; (2) the person to whom
the promise is made, and who is called the payee.

From the definition as given above it is clear that the following are the
essentials of a promissory note:

i. The promissory note must be in writing - A promissory note is a

negotiable instrument and therefore it mu^t be in vVriting. An oral promise
to pay a sum of money is not an instrument, much less negotiable. The
wrifiner msv bp in nonril or in ink Th ^Sn<s foment mav bp writfpn in anv
 ] 8 Meaning and Kinds of Negotiable Instruments

language but"when it is a hundi, it may be subject to local usage as provided

in S. 1 of the Act.
2. The promissory note must contain an express promise to payQ3/ Q4, Q5 -
A promissory-note must contain an undertaking or promise to pay. A mere
acknowledgement of debt if it is without an express promise to pay the debt
is not a promissory - note, although it is valid as an agreement and may
be sued upon as such. Thus, the following are not promissory notes :

(i) "Mr. B., I owe you Rs. 500.00"

(ii) "I am liable to pay Rs. 500.00."

(iii) "I have taken Rs. 500.00 from B and I am accountable to him for
the same with interest."

(iv) "Deposited with me Rs. 500.00 by B."

(v) "The amount which I have this day received from you in cash Rs.
100.00. This sum I am bound to pay to you."

The use of the word "promise to pay" is not necessary. Hoioever, it is essential
that the instrument must indicate a promise to pay. Similarly, the word "payable"
i.e. "Rs. 10,000 payable after one year" does not constitute a promissory
note. The words "payable on demand" implies a promise to pay.

Intention of the parties is the most important element for

determination of the question whether the instrument is a promissory
note or not. The parties must have the intention to execute a promissory
note. Thus, a document primarily intnded to be a receipt or bond and not
intended to be negotiable in the ordinary mercantile sense is note a
promissory note. Therefore, a document which is primarily a receipt,
even if coupled with a promise to pay, is not a promissory notes. This
was held in Mohammed Akbar Khan v. Attar Singh (1936 P.C. 1621.C. 454).
The document in question in this case was, according to the authorized
transaction, in the following terms;

"May God protect us.

This one receipt is hereby executed by Bhai Hira Singh, Attar Singh Kharbanda,
residents o/Hotifor Rs. 43,900 (Forty three thousand nine hundred ropees) half of
Q3. Is the following a promissory note: "I acknowledge myself to be indebted to X in Rs.
1,000/- to be payable after two years." [LL.B., D.U.]
Q4. Is the following a prornissoy note: “Mrs. X, I owe you Rs. 5,000/- for value rceived.”
[LL.B., D.U.]
Q5. Is the following a promissory note : "I have received Rs. 5,000/- which I have
borrowed from you and have to be accountable to you for the same with interest."
 Negotiable Instruments, Banking and Insurance 1.9
which comes to tzuenty one thousand nine hundred and fifty received from the firm
of Lala Duni Chand Hari Chand Sethi for and on behalf of Captain Mohammed
Akbar Khan of Hoti. This amount is to be payable after 2 (two) years.' Interest
at the rate of Rs. 5-4-0 (Rs. five annas four) per cent per year to be charged-

Dated this 20th day of chetar (first month of-Hindu Calendar Year Sammat
1974) corresponding to April 1,1917.

Stamp had been duly affixed.

(Sd) Hira Singh Kharbanda

(Sd) Attar Singh Kharbanda"

The Privy Council held that the document was plainly a receipt for
money, containing the terms on which it was to be repaid.

In Bachan Singh v. Ram Avadh, ILR 1949 All, 713, it was held that an
implied undertaking inferred merely by the use of the word "debt" or
"pronote" is not sufficient to make the instrument a promissory note. In this
the document in question ran as follows; "I, of my free zoill and accord
aporoached A and borrozved from him the sum of Rs. 100 bearing interest at the
rate of annas eight per cent per mensem. I have, therefore, executed these fezo
presents by way of a promissory note so that it may serve as evidence and be of
use zohen needed." Held, the document was not a promissory note because
it did not contain an express undertaking to pay the amount mentioned in
the instrument.
As said earlier a mere acknowledgement of indebtedness does not
make a document a promissory note. But if in addition to an
acknowledgement of indebtedness there is an express promise to pay the
amount acknowledged to be due, the instrument is a promissory note. .

Where, however, the acknowledgement of indebtedness contained in

the document is in a defined sum of money payable on demand, that is
enough and the document need not necessarily say that the debtpr promises
to repay the amount [See illustration (b) appended to Section 4 above].

In Surjit Singh and Others v. Ram Rattan Sharma, A.I.R. 1975 Gau. 14,
a stamped document was in the following terms; "We have received the sum
of Rs. 9,240 (nine thousand tzvo hundred and forty only) from Shri Ram Rattan
Sharma ofThangal Bazar, Imphal. We have received Rs.9,240/- in cash today" and
it was signed by the maker. It contained a promise to repay the loan on
demand. It also contained an indorsement by a third party guaranteeing
repayment of the money The Gauhati High Court held that it was a
nromissorv note. The Court observed that "illustration fb) to the definition
 1.10 Meaning and Kinds of Negotiable Instruments

shows that an acknowledgement of a receipt of the amount does not take

away the document from the category of a promissory note."

Thus, the phrase "payable on demand" necessarily implies a promise

to pay, and a promissory note expressed to be payable on demand is a
promissory note within the meaning of S. 4 of the Act. Illustration (b) to
the definition shows that the express words "I promise" or "I undertake"
are not necessary. In Mohammad Akbar Khan v. Attar Singh, Lord Atkin
observed that illustration (b) to the definition has been "taken from an early
English case, Casbome v. Dutton reported in Solwyn's N.P. 11th Edition
page 401, where according to the learned author the Court stated that the
words "to be paid" in the document there sued on amounted to a "promise
to pay". But Lord Atkin added that "it does not appear to form a useful
general illustration, except in the case of a document in that particular form
of words.
In Bhagwandas v. Chaganlal, 46 Bom. L.R. 411, it was held that, a
promissory note must contain a promise to pay at a certain place. In Raff
v. Webb, 1974,1 Esp. 129 it was held that where there is an express promise
to pay a promissory note it will still be a promissory note even if it contains
expressions of politeness or gratitude.

The following are good promissory notes :

(i) "I promise to pay B or order Rs. 500."

(ii) "I acknowledge myself to be indebted to B in Rs. 1000 to be paid

on demand for value received." Casbome v. Dutton (1727) Sel. N.P.
13th ed„ 1st Vol. 329,

(iii) "Rs. 1,000 balance’ due to you I am still indebted and do promise
to pay." Chandwick v. Allen ( 1.725) 1 Stra 706.

(iv) "We shall order the borrowed, moneys to be repaid", Sri Yerrugariti
Chinn a v. Kota Egiri, 1913 MWN 1005.

(v) "Whereas with regard to glass Of Hamiman Glass Works account

is due from us, we therefore acknowledge and promise to pay on
demand Rs. 1,781 with interest at two per cent per mensem." Sushil
Chandra v. Wali Ullah, 1941 All 264.

(vi} "We have executed this promissory note for a total sum of Rs.
2,400........ made up of............ On demand by you (we) will pay the
amount (due on) this promissory note along with compound interest
at 13 annas per cent per month with annual rests. (We) have executed
this promissory note." Balmukund v. Ambadas, AIR 1946 Nag. 81.
 Negotiable Instruments, Banking and Insurance 1.11
(vii) I have already received Rs. 15,000 from Colombo AS shop for doing
-business of my own. I shall pay it after two years on demand by
you with interest at two annas per month per Rs. 100 to you or to
your order and receive back this promissory note/' T. Chettiar v.
A. Chettiar, AIR 1971 Mad. 290.

The expression "on demand" is a technical expression. It means that

the amount mentioned in the instrument is payable immediately. It does
not mean that a demand has to be made before payment can be enforced.
Where a note is payable "after demand" or "when demanded" it is not
deemed to be payable till an actual demand has been made.

In K.A. Lona v. Dada Haji Ibrahim Hilari & Co., AIR 1981 Ker 86, it
was held that though there was no description beneath the signature of a
managing partner on a certain promissory note, yet the intention to bind
the firm was clearly revealed by the usage of the words : "We promise to
pay", and the execution of the promissory note on the letter-head of the
firm. \
3. The promise to pay should be unconditional06'Q7 Q8 Q8A - It is essential
to the validity of a promissory note that the promise to pay should be
unconditional or subject only to a condition which according to the ordinary
expection of mankind is bound to happen, although the time of its happening
may be uncertain (S. 4, para 2). On this point there are two illustrations (f)
and (g) to S. 4. Former of these two is : "I promise to pay to B Rs. 500 seven
days after my marriage with C", the latter is : "I promise to pay B Rs. 500 on
D -s death, provided D leaves me enough to pay that sum." The Act says that
none of these two is a promissory note.

Whether the instrument is merely made payable on the death of D

it will be good promissory note as the event (the death of D) is certain
to happen although the timing of its happening is uncertain. For example,
where A signs an instrument saying "1 promise to pay B Rs. 10,000 one month
after the death of C, it is a valid promissory note.

Q6. Is the following a promissory note: “I promise to pay Johnson Rs. 500/- on the death
of Y provided Y leaven me suffifient to pay the aid sum, or if I shall otherwise be able
to pay." [LL.B., D.U.]
Q7. Is the following a promissory note : "I promise to pay B Rs. 5,000/- on the death of
C." [LL.B., D.U.J
Q8. Is the following a promissory note: "I promise to pay B Rs. 10,000/- one month after
the death of C." [LL.B., D.U.]
Q8A. Is the following a promissory note : “I promise to pay B Rs. 5 lakhs if he goes to
DIR DILI
 1.12 Meaning and Kinds of Negotiable Instruments

The following are not promissory notes :

(i) "I promise to pay B Rs. 500 thirty days after the arrival of the ship
Pargon at Calcutta." Palmer v.Prett, (1824) 27 R.R. 583.

(ii) "I promise to pay B Rs. 500 when he is twenty-one years old."

(iii) "I promise to pay B Rs. 500 out of money due to me from D as soon
as D pays it."

(iv) "I prorms to pay B Rs. 500 on demand at my convenience."

Nathpdbha v. Himatlal, 23 Bom. L.R. 1231.

(v) An instrument containing a promise to pay "on settlement of account

when the litigation comes to an end." Sakaran v. Mathai, AIR 1973
Ker. 22. (The settlement of account is an uncertain event even
though assuming litigation may come to an end one day.

Thus, an instrument contingent on the happening of an event zohich is not

certain to happen, the instrument is not a promissory note. The reasons for this
is that the certainty is one of the main object in commercial instruments.
Thus, a negotiable instrument is a carrier without luggage.

An undertaking to repay the amount only when demanded is not a

conditional promise to pay. (Balmukund v. Munna Lai Ramji Lai, AIR 1970
Punj. 516).

A letter requesting a loan stating that the amount lent will be repaid
is not a promissory note as the repayment is, dependent on the advance
being made (Dhond bhai v. Annaram, 13 Bom. 669). Therefore, the following
is not a promissory note :

• "I have already borrozued Rs. 2,000from you. Please send me Rs. 5,000 more
and the whole amount promise to return within two months."

In R. Kannusamy v. WK Szvamy & Co., AIR 1988 Mad. 336, a note

contained an undertaking to pay a certain sum of money on or before a
specified dae, and that actions on the note would be subject to the jurisdiction
of couts of India, Singapore and Seychelles. It was held that the promise
was not conditional.

4. The promissory note must be signed by the maker - The instrument

to become a promissory note must be 'signed' by the maker. The signature
may be in any part of the instrument although usually it is made at the
bottom. 'Signature' means the writing or otherwise affixing a person's name
or mark to represent his name by himself or by his authority with the
intention of authenticating an instrument.
 Negotiable Instruments,, Banking and Insurance 1.13
5. The maker must be certain - The promissory note must show-clearly
who is the person or are the persons engaging himself or themselves to pay.
Where there are more than one maker, they may bind themselves jointly
or jointly and severally but not in the alternative. Thus, a note in the form
"/, Prem Kumar, promise to pay Rs. 500 to Sajjan Kumar" and signed by Prem
Kumar or also Pawan Kumar is not good as regards Pawan Kumar but is
good note against Prem Kumar.

6. The payee must be certain - The promissory note must point out with
certainty the party who is to receive the money, i.e. the payee must be
"certain person". Para 4 of section 5 says that the person to whom the payment
is to be made be a "certain person", zvithin the meaning of section 4, although he
is misnamed or designated by description only. For example a promissory note
payable to the manager of the bank" is payable to a "certain person" within
the meaning of S. 4. External evidence is admissible to identify the payee
when he is misnamed or designated by description only. The payee must
be capable of being ascertained on the date on which the promissory note
is made. For example, a note payable on a future date "to the members for
the time being" of a firm is invalid as the members are not capable of being
ascertained at the time of the execution. But an instrument may be made
payable, to the holder of an office without naming him.

In Ponnuszvami Chettiar v. Vellaimuthu Chettiar®9'®10, AIR 1957 Mad.

355, it was held that the absence of the name of a payee in promissory note
will not make the instrument invalid when the payee is known withcertainty
at the time of the execution. In this case the payee was described in the note
as "son of Palaniandi Chettiar" and only a particular son of Palaniandi
Chettiar was known with certainty to have lent the amount to the maker,
the instrument was held to be a promissory note.

A promissory note payable to the maker himself is a nullity if it is not

indorsed by the maker either in blank or to the indorsee's order, if specially
indorsed.

Where the payee is misnamed but it is possible to identify him, the instrument
would be a valid promissory note. But where the payee cannot be identified, the
instrument would be invalid. In Lala Jelhaji v. Bhagu, (1901) 3 Bom. LR 699,
the instrument was the plaintiffs accounts book. It contained an unconditional

Q9. Is the following a promissory note : "I promise to pay M’s son Rs. 5,000 for value
received." (M has four sons.). [LL.B., D.U.]
Q10. Is the following a promissory note : "I promise to pay Y’s son Rs. 5,000 for value
---------.... j » /iri------- c------------------- s rir o r> tt 1
I
; 1.14
. .
Meaning and Kinds of Negotiable Instruments

undertaking to pay without mentioning the name of a person to whom the

payment was to be made. It was held not to be a promissory note. Similarly,
in Chandraprasad v. Varjlal, (1906) 8 Bom. L.R. 644, there was an unconditional
promise contained in a khata. The person intended to be "you" could not
be ascertained and therefore, it was held not to be a promissory note. The
position would be different, as held in Jagjivandas v. Gumanbai, AIR 1967
Guj. 1, if the khata is addressed to a specific person and the instrument
contained in a khata is payable to "you".

In K. A. Loha v. Dada Haji Ibrahim Hilari& Co., AIR 1981 Ker. 86, an
instrument was addressed to a particular premisee and contained a promise
to pay without saying that the payment was to be made to "you". It was
held that the instrument clearly indicated the person who was to receive
the payment and was a valid promissory note.

In BrijRaj Saran v. Sahu R. Saran, AIR 1955 Raj. 85, the appellant wrote
a letter to the respondent stating: "In your account Rs. 4.668/15/- are due from
my son Mahesh Chandra. I shad pay the amount by December 1948. You rest
assured " It was held that it is not necessary that the payee is specifically
named after the words "I shall pay", or similar words provided that on
reading the instrument as a whole there is no doubt as to the person who
is the payee. In illustration (b) to S. 4 also, the word "to ivhom " do not appear
after the words "to be paid", but still the law gives this as illustration of a
promissory note. Thus, the contention of the appellant that the name of the
payee was not mentioned after the words "I shall pay " made the payee
uncertain was not accepted by the court.

7. The sum payable in money only and it must be certain - It must

be a promise to pay money only and the sum expressed to be payable must
be certain and not capable of contingent additions or substractions.

. The following are not promissory notes:

(i) "I promise to pay B Rs. 500 and to deliver to him my black horse
on 1st January next." [Illustration (h) S. 4].

(ii) "I promise to pay B Rs. 500 and all other sums which shall be due
to him." [Illustration (d) to S. 4].

(iii) "I promise to pay B Rs. 500, first deducting any sum which he may
owe to me." [Illustratipn (e) to S. 4}.

Para 3 of S. 5 says that the sum payable may be "certain" within the
meaning of S. 4 and S.5 although it includes future interest or is payable
at an indicated rate or exchange, or is according to the course of exchange,
 Negotiable Instruments, Banking and Insurance 1.15.
and although the instrument provides that, on default of payment of an
installment, the balance unpaid shall become due.

In Lakshminath v. Benaras Bank Ltd., AIR 1929 Pat. 136, an instrument

payable "with ten percent interest per annum with quarterly rests" was held
to be a valid promissory note.

In Official Liquidator v. Bishan Singh, 1968 All LJ 171, an instrument

containing a promissory note as the sum, payable was not certain. On this
point there is a different view also as held in Seth Tulsidas v. Rajagopal
(1967) 2 MLJ 66, that if the rate of interest is not mentioned a rate of 6%
per annum would be applicable in terms of S. 80 of the Act. The rate of
interest was raised to 18% by an amendment in 1988 to S. 80.

The Act does not require that the amount should be stated both in
words and figures. But this has become usual. Section 18 of the Act provides
that if the amount undertaken or ordered to be paid is stated differently
in figures and in words, the amount stated in words shall be the amount
undertaken or ordered to be paid.

8. Other formalities - It is usual and proper to state in a note the place

where it was made and the date on which it was made. But these are not
essential in law. Even where an instrument is payable at a certain time after
date, the absence of date does not invalidate the note, and date of the
execution can be independently proved. The expression "value received"
is also not necessary. A note may be ante dated or post dated or it may bear
date on a Sunday. A promissory note can be negotiated even during the
period from its execution to the date it bears on its face because consideration
can be paid at any lime and need not necessarily be left over to be paid
on the date which the note bears. However, stamp at or before the time of
execution is necessary under the Indian Stamp Act as specified in Art. 49
of that Act.
In Nanga v. Dhannalal, AIR 1962 Raj 68, it was held that the proper amount
of stamp duty required for an instrument to be determined according to the law
in force at the time of the execution of the instrument and not xvhen it is tendered
in evidence. Therefore, the law in force at the time of execution of the
instrument will govern the case. Looking to the definition of the promissory
note in the Stamp Act as well as in the Negotiable Instrument Act, it seems
that a promissory note should, in its popular sense as understood by men
of business, be negotiable. The only exception which the Stamp Act provides
is that it need not be negotiable in cases where if falls within the wider
definition as given in that Act. A negotiable instrument besides fulfilling
the requirements as laid down in Section 4 of the Negotiable Instruments
 TO"

B i ^6 Meaning and Kinds of Negotiable Instruments

' Act must also be intended by the parties at the time of its execution to be
a promissory note as understood by commercial persons in its popular sense
which means that unless it falls within the exception provided in the wider
definition of the Stamp Act, or is otherwise expressly or by implication
made not transferable, it must be intended by the parties to be negotiable
instrument.

9. Other than a bank note or currency note011, Q12 - The definition of

promissory note specifically excludes bank notes and currency notes. A
Bank Note is a bill, draft or note which is issued by any banker for the
payment of money to the bearer on demand and which entitles the bearer
or holder thereof to the payment of the sum of money without any further
indorsement.

A currency note is a note issued by the Government, containing an

undertaking by the Government to pay the bearer on demand the sum
specified in the note.

The Reserve Bank of India has the sole right to issue Bank Notes in
India. It also has the right for a period to be fixed by the Central Government
to issue currency notes supplied to it by the Central Government. Thus,
Bank Notes and currency notes are not merely securities for money but
they are themselves money and legal tender for the amount represented
by them. Therefore, they have been excluded from the operation of the
Negotiable Instruments Act.

Government Promissory notes - Government Promissory Notes are

issued by the Government (Union or States) for the loans raised by them
and are generally in the form of Promissory Notes payable to order or to
bearer. Thus, they are in negotiable form, but their transfer is regulated by
Public Debts Act, 1944.

BILL OF EXCHANGE
Section 5 defines a bill of exchange as follows:—

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 instrument.

QI 1. Arc the bank notes valid promissory notes? [LI..B., D.U.]

QI2. Is the following a valid promissory note : “I promise to pay the bearer the sum of
Do i hnn »» r.i t d rx t r1
 Negotiable Instruments; Banking and Insurance 1.17
Section 5 further provides as follows:—

"A promise or order to pay is not "conditional", within the meaning of this
section and section 4 by reason of the time for payment of the amount or any
instalment thereof being expressed to be payable on the lapse of a certain period
after the occurrence of a specified event which, according to the ordinary expect ion
of mankind, is certain to happen, although the time of its happening may be
uncertain.

The sum payable may be "certain", zvithin the meaning of this section and
section 4, although it includes future interest or is payable at an indicated rate of
exchange, or is according to that course of exchange, and although the instrument
provides that, on default of payment of an instalment, the balance unpaid shall
become due.

The person to whom it is clear that the direction is given or that payment is
to be made may be "certain person", zvithin the meaning of this section and section
4, although he is misnamed or designated by description only."

The usual form of a bill of exchange is as follows:

Rs. 50,000 New Delhi Jan. 1, 2016

Three months after date pay to Ashok Kumar or order the sum of
Rupees fifty thousand only, for value received.

To Stamp

Ramesh Chand

105, Chandni Chowk, Sd/- Ram Kumar

Delhi.

Although this is the usual form of a bill of exchange, no particular form

is prescribed. However, the bill must satisfy the requirements of section 5.
On analysis of definition as given in section 5 a bill of exchange must have
the following essentials:—
1. The bill of exchange must be in writing - The bill must be in writing
although it may be written in any language:

2. The bill of exchange must contain an order to pay013 - The bill must
contain an order to pay as the essence of it is that the drawer orders the
drawee to pay money to the payee. Therefore, it must in its terms be

Q13. Is the following a valid bill of exchange: "Please pay X or order Rs. 2 lakhs sixty days
after sight.” A writer to B. [LL.B., D.U.]
 Meaning and Kinds of Negotiable Instruments

imperative and not a mere request although it may be politely worded. For
example in Ruffv. Webb, (1974) 5 RR 773, Ruff was a servant of Webb. Webb
dismissed Ruff from service and for wages Webb gave Ruff an instrument
in the following words:

"Mr. Nelson will much oblige Mr. Webb by paying to J. Ruff or order, twenty
guines on his account." However, the excessive terms of politeness may lead
to an inference that there was no order. In Little v. Slackford (1882) 31, RR
726, an instrument running : "Mr. Little please do let the bearer have seven
pounds and to place them to my account and you ivill oblige..." was held not to
be a bill of exchange as the instrument did not show any “order to pay".

The instrument must contain an order to pay the money at all events
and not merely authorize the other to pay the money. In Hamilton v.
Spottiswood (1849) 80 RR 519 an instrument ran: "To Alexander Spottiswood,
Dear Sir, We hereby authorize you on our account, to the order of William Gentle,
the sum of six thousand pounds." The instrument was held not be a bill of
exchange.

The direction to the drawee need not be expressed by the word 'pay'
but any other word conveying the idea of 'payment', e.g. "credit in cash",
will be sufficient [Edison v. Colingridge, (1850) 19 LJCP 268]. A mere request
to pay to an account does not amount to an order.

3. The order to pay must be unconditional - The order to pay the

amount should be unconditional. The word "unconditional" has already
been explained in case of promissory note and same considerations apply
here also.

Tire following instruments containing an order to pay were held not

valid bills of exchange :

(i) " ninety days after sight or when realised..............................." Alexander

v. Thomas, (1851) 16 QB 333.

(ii) "sixty days after the arrival of the ship 'Victory' at Mumbai.......... "
Palmer v. Pratt (1824) 2 Bing 185.

(iii) "When I marry.." Pearson v. Garett (1693) 4 Mad. 242.

(iv) "Rs. 10,000 on the sale of 3 bales of cotton Hill v. Halford (1801)
2 BSP 413.

(v) "Debt that may come into existence at a future date....." Banburry
v. Lesset (1744) 2 Stark 1211.
 Negotiable Instruments, Banking and Insurance 1 19

A bill of exchange or a promissory note expressed to be payable out

of a particular fund is conditional and invalid, because it is not certain
whether the fund will be in existence or prove sufficient when the bill or
note, as the case may be, becomes payable. Thus, a bill containing an order
to pay 'out of the money remaining in your hands belonging to X Company',
is not valid [Dankes v.Deloraine (1770) 3 Wiles 207],

A promise or order to pay is not "conditional" within the meaning of

section 4 and section 5 by reason of the time for payment of the amount
or any instalment thereof being expressed to be payable on the lapse of a
certain period after the occurrence of a specified event which, according to
the ordinary expectation of mankind, is certain to happen, although the time
of its happening may be uncertain (Section 5, para 2)

For more details see heading "Promissoy Note" given earlier.

4. The sum payable must be money only and it must be certain - The
sum payable must be money only and it must be certain the sum payable
may be "certain" within the meaning of section 4 and section 5 although
it includes future interest or is payable at an indicated rate of exhange, or
is according to that course of exchange, and although the instrument provides
that, on defult or payment of an instalent, the balance unpaid shall become
due. (Section 5, para 3)

5. The bill of exchange must be signed by the drawer - A bill of

exchange must be signed by the drawer. If it is not signed by the drawer,
no action can be maintained against the acceptor or any other party who
has signed the instrument. A bill of exchange requires three parties :

(i) the "drawer", i.e. the person who is the maker of the bill;

(ii) the "drawee" i.e. the person who is directed to pay the bill; and

(iii) the "payee" i.e. the person to whom or to whose order the amount
of the bill is payable, unless it is payable to bearer.

However, it is not necessary that three separate persons should answer

the description of drawer, drawee and payee. One person may be the
drawer and payee, for example, when the bill is drawn "Pay to me or order";
or drawee and payee, for example, when the bill is endorsed in favour of
the drawee; or drawer and drawee for example, when a drawer draws the
bill upon himself. In the last case, it is called ambiguous instrument and
the holder may treat is as a promissory note or bill of exchange.

6. The drawee must be certain. The 'drawee' must be named or otherwise

indicated in the bill with reasonbale certainty. He may be a certain person
 1.20 Meaning and Kinds of Negotiable Instruments

although misnamed or designated by description only. This is necessary

because the payee must know the person to whom he should present the
instrument for acceptance and payment. Similarly, the person who accepts
and pays a bill on account of the drawer should know with reasonable
certainty whether it is addressed to him.

Where an instrument is drawn in the form of a bill and does not conatin
the name of the drawee, but is expressed to be payable at a certain place,
arid is accepted by a person residing at the place, it is a valid bill and the
acceptor is liable [Gray v. Milner, (1819) 2 RR 529]. Where an instrument
is drawn in the form of a bill, and is addressed to no one, it is not a vaid
bill [Fielder v. Marshall, 30 LJCP 158}.

A bill cannot be addressed to two or more drawees in the alternative.

7. The payee must be certain - A bill must state with certainty the
payee, i.e. the person to whom payment is to be made. Where a bill is
payable to bearer, the payee is indicated with certainty. Where a bill is not
payable to bearer, the payee must be named or otherwise indicated with
reasonable cetainty. A bill may be made payable to two or more payees
jointly or it may be made payable in the alternative to one of two or more
payees [S. 13 of the Act],

The person to whom it is clear that the direction is given or that the
payment is to be made may be "certain person", within the meaning of
section 4 and section 5, although he is misnamed a designated by description
only. (Section 5, para 4)

In Criichley v. Clarence, (1913) 14 RR 596, it was held that "a bill of

exchange drawn and issued in blank for the name of the payee, may be filled
up by a bona fide holder with his name and will bind the drawer." The effect
of not writing the name of the payee is that the drawer makes it payable
to bearer.

Distinction between a Promissory Note and a Bill of Exchange

The definition of a bill of exchange is to a major extent similar to that
of a promissory note and that is why for most purposes rules which apply
M to a promissory note are in general applicable to a bill of exchange. But there
Iare certain fundamental points of difference between them which are as
follows:—

1. Number of parties - In a promissory note there are two parties—the

maker (debtor) and the payee (creditor). In a bill of exchange there are three
 Negotiable Instruments, Banking and Insurance 1.21
parties, namely, the drawer, the drawee and the payee. In a bill the drawer
is the maker who orders to pay the bill to the payee or his order. When the
drawee accepts the bill he is called the acceptor.

A promissory note cannot be made payable to the maker himself. But

in a bill of exchange, one person may fill any two of the three positions.

2. Promise and order - A promissory note contains an unconditional

promise by the maker to pay the money to the payee or his order. In a bill
of exchange there is an unconditional order by the drawer to the drawee
to pay the money to the payee or his order.

3. Acceptance - A promissory note does not require any acceptance as

it contains a promise by the maker himself to pay the money. A bill of
exchange being an order upon the drawee to pay the money, is not binding
upon him unless he accepts it, although acceptance is not necessary to the
validity of the bill. If the bill is not accepted by the drawee, it does not
become invalid. It only becomes dishonoured by non-acceptance. Section
7 prescribes that drawee should sign his assent and return it to the holder
or give notice to him that he has done it and then he becomes the acceptor.
The drawee may accept the bill by giving -qualified acceptance.

4. Liability - The liability of the maker of a promissory note is primary

and absolute. The liability of the drawer of a bill of exchange is secondary
and conditional (S. 30 and S. 32). The liability of the drawer arises only when
the acceptor does not honour the bill.

5. Position of the maker - Tire maker of a promissory note stands in

immediate relation with the payee, whereas the drawer of an accepted bill
of exchange stands in immediate relation with the acceptor and not the
payee (S. 44, Explanation).

6. Payable to bearer - A promissory note cannot be made payable to

bearer, while a bill of exchange can be drawn payable to bearer provided
it is not drawn payable to bearer on demand (S. 31 of the Reserve Bank of
India Act).

7. Protest - Foreign bill must be protested for dishonour when such

protest is required by the law of the country where they are so drawn but
no such protest is necessary in case of a note.

8. Notice of dishonour - When a bill is dishonoured, due notice of

dishonour is to be given by the holder to the drawer and the intermediate
indorsers, but no such notice need be given in the case of a note.
 1.22 Meaning and Kinds of Negotiable Instruments

KINDS OF BILLS OF EXCHANGE

Inland Bill and Foreign Bill

Inland bill is a bill (i) which is drawn in India, and (ii) which is either
payable in India or drawn on a person residing in India (S. 11). A bill which
is not an inland bill is a foreign bill (S. 12). The distinction is important
because under S. 104 a foreign bill must be protested for dishonour when
such protest is .required by the law of the place where they are drawn.

Instruments payable to bearer and payable to order

Promissory note, bill of exchange or cheque is said to be payable to
bearer when (i) it is expressed to be so payable or (ii) on which the last or
only indorsement is an indorsement in blank (S. 13, Expl-II).

Where a promissory note, bill of exchange or cheque, either originally

or by indorsement, is expressed to be payable to the order of a specified
person, and not to him or his orders it is nevertheless payable to him on
his order at his option (Sec. 13 Expl. Ill) Thus, a bill is said to be payable
to order when (i) it is expressed to be so payable or (ii) which is expressed
to be so payable to a certain person, without containing words "prohibiting
transfer" or indicating an intention that 'it shall not be transferable (S. 13,
Exp. I), or (iii) which is payable to the order of a certain person.

For example, (a) Pay A, (b) Pay A or order, (c) Pay to the order of A,
(d) Pay A and B, (e) Pay A or B, are various forms in which an instrument
may be made payable to order. But a bill payable to "A only" or payable
to "A and none else" is not a payable to order. However, a cheque crossed
"Account Payee only" is technically negotiable although in practice it is not
transferred.
In Raghunath v. Biharilal, AIR 1972 Mysore 159, an instrument signed
by Raghunath stated, "I promise to pay you (Bihari Lal) on demand the sum
of Rs. 7000/-................. " It was contended that there was no recitals in the
instrument that the amount is payable to the order of a certain person or
to the bearer and therefore it was not a promissory note. But the Mysore
High Court rejected this contention and held that even if the amount is
payable to a specified person it is a valid promissory note.

Bill in sets
When a bill is drawn in sets of three it is said to be "bill in sets". A
bill is drawn in this form when it is to be sent over long distance and there
is a consequent danger of loss or delay.
 Negotiable Instruments, Banking and Insurance 1.23
Bill of exchange may be drawn in parts, each part being numbered and
containing a provision that it shall continue to be payable only so long as
the other remain unpaid. All parts together make a set; but the whole set
constitute only one bill and is extinguished when one of the parts, if a
separate bill, would be extinguished (S. 132).

When a person accepts or indorses different parts of the bill in favour

of different person, he and the subsequent indorsers of each part are liable
on such part as if it were a separate bill (exception to S. 132).

As between holders in due course of different parts of the same set he

who first acquired title to his part is entitled to the other parts and the
money represented by the bill (S. 133).

Time fixed for the payment of bills drawn in one country payable in
another is called "usance”.

Accommodation Bill
/
A bill which is drawn by one person and accepted by another, without
consideration, merely to enable the drawer to raise money on the bill by discounting
it, is an accommodation bill as distinguished from a genuine trade bill. The party
accommodating is called the "accommodation party" and the party
accommodated is called the "accommodated party f'.

"Accommodation" may be effected by a person either by drawing a bill

or accepting a bill or indorsing a bill without consideration.

For example, A may be in need of money amounting to Rs. 5,000 and

approaches his friends B and C. They, instead of lending the money directly,
propose to A to draw an "accommodation bill' in his (A's) favour. The bill
is drawn by B payable to A and accepted by C. A promises to reimburse
C before the period of three months is over. If the credit of B and C is good,
this device enables A to get an advance of Rs. 5,000.00. from the banker at
the commercial rate of discount. The real debtor in this case is not C, the
acceptor, but A the payee who has engaged to jfind the money for its
ultimate payment, and A is here the principal debtor and others merely
sureties.

Thus, there is an inversion (i.e. reversal) of liability, because between

the original parties to the bill, the one who would prime facie be principal
is, in fact, the surety, whether he be the drawer, acceptor, or indorser, the
bill is an accommodation bill. An accomodation party stands in the position
of a surety for the party accomodated, although his ostensible position on
the instrument is that of a principal debtor. The rules regarding
 1.24 Meaning and Kinds of Negotiable Instruments

accommodation bills are provided in Sections 43, 59, 76 and 98 which are
reproduced below:
A negotiable instrument made, drawn, accepted, indorsed, or transferred
without consideration, or for a consideration which fails creates no obligation
of payment between the parties to the transaction. But, if any such party
has transferred the instrument with or without indorsement to a holder for
consideration, such holder, and every subsequent holder deriving title from
him, may recover the amount due on such instrument from the transferor
for consideration, or any prior party thereto (S. 43).

No party for whose accommodation a negotiable instrument has been

made, drawn, accepted or indorsed can, if he had paid the amount thereof,
recover thereon such amount from any person who became a party to such
instrument for his accommodation (S. 43, Exception 1).

Thus, where an accomodated party pays the amount due under the
instrument, he cannot recover that amount from the person who lent his
name to the instrument. For example, if a bill is drawn by A and accepted
by B for the accommodation P (the payee). P endorser the bill to C. The bill
is dishonoured and P pays the amount of the bill to C. P cannot sue the
drawer A or the acceptor B.

No party to the instrument who has induced any other party to make,
draw, accept, indorse or transfer the same to him for a consideration which
he has failed to pay or perform in full shall recover thereon an amount
exceeding the value of the consideration (if any) which he has actually paid
or performed (S. 43, Exception II).
Any person who in- good faith and for consideration, becomes the
holder after maturity, of a promissory' note or bill of exchange made, drawn
or accepted without consideration, for the purpose of enabling some party
thereto raise money thereon, may recover the amount of the note or bill from
any prior party (S. 59, Proviso).
Under S. 76, non-presentment of an accommodation bill to the drawee
for payment does not charge the drawer as it provides that no presentment
for payment is necessary, and the instrument is dishonoured at the due date
for presentment if the drawee could not suffer damage from the want of
such presentment. S. 98(c) provides that no notice of dishonour is necessary
when the party charged on could not suffer damage for want of notice.

Treasury Bill
Treasury bills are those bills which.are drawn by a foreign Government
 Negotiable Instruments, Banking and Insurance 1.25
country at their tender value and are disposed of in India in discharge of
their trading liabilities.

Documentary Bill
When the documents relating to the bill are also attached to it, the bill
is called a documentary bill. These documents may be bill of lading or
railway receipt, invoice, insurance policy etc. The documents are delivered
to the buyer only in acceptance or payment of bill. The documentary bill
is usually used in case of foreign trade.

Bill payable "on demand", "at sight" "on presentment", "after sight",
or "after date", etc.

Demand and Time Instruments

Demand instruments - A bill or note payable "on demand" becomes
payable on the date on which it is drawn. The demand as such is not
necessary and limitation runs from the date of the bill or note. A bill or note
payable "at sight" or, "on presen iment", becomes payable after the
instrument is sighted or presented to the drawee with demand for payment
(S. 21). Thus, a demand in such a case is necessary and limitation runs from
the date the demand is made. These three types of instruments are called
demand instruments. A bill or note, in which no time for payment is
specified and a cheque are payable on demand (S.19).

Time instruments - An instrument payable "after sight" means after

acceptance or noting or protesting for non-acceptance in case of a bill of
exchange and after presentment for sight in case of promissory note (S. 21).
The instrument payable "after sight" must mention the particular period
"after sight" at which it is to be payable. The period is counted from the
date of acceptance or noting or protesting for non acceptance in case of a
bill and from the date of presentment in case of promissory note. (For noting
and protest see S. 99 and S 100). A bill or note payable "after date" means
after the date of the bill or note. The instrument in this case also mentions
the particular period "after date" at which it is to be payable. The period
is counted from the date of the instrument. The instruments may be payable
after the happening of an event which is certain to happen or on a specified
date. In case of such time instruments the period of limitation runs from
maturity date.
 1.26 Meardng and Kinds of Negotiable Instruments

MATURITY OF BILL OR NOTE

Meaning
The maturity of a promissory note or bill of exchange is the date at
which it falls due. Every promissory note and bill of exchange which is
not expressed to be payable on demand, at sight or on presentment is at
maturity on the third day after the day on which it is expressed to be
payable (S. 22). Thus, a cheque, a bill or note payable on demand or at sight
or on presentment are not intitled to days of grace.

Rules for calculating maturity

The following are the rules for calculating maturity :

1. Instruments payable on demand and payable at sight - Negotiable

instruments payable on demand become due or payable on demand, i.e.,
at once. Instruments payable at sight or presentment become payable on
the instruments being presented.

2. Calculating maturity of bill or note payable so many months after

date or sight - In calculating the date at "which a promissory note or bill
of exchange made payable is stated number of months after date or after
sight, or after a certain event, is at maturity, the period stated shall be held to
terminate on the day of the month which corresponds with the day on which the
instrument is dated or presentedfor acceptance or sight, or notedfor non-acceptance,
or protested for non-acceptance, or the event happens, or where the instrument
is a bill of exchange made payable a stated number of months after sight
and has been accepted for honour, with the day on which it was so accepted.
If the month in which the period would terminate has no corresponding day, the
period shall be held to terminate on the last day of such month (S. 23).

Illustrations
fa) A negotiable instrument, dated 29th January, 1878, is made payable
at one month after date. The instrument is at maturity on the third
day after the 28th February, 1878.

(b) A negotiable instrument, dated 30th August, 1878. is made payable

three months after date. The instrument is at maturity on the 3rd
December, 1878.

(c) A promissory note or bill of exchange, dated 31st August 1878 is

made payable three months after date. The instrument is at maturity
on the 3rd December, 1878
 Negotiable Instruments, Banking and Insurance 1.27
3. Calculating maturity of bill or note payable so many days after date
or sight - In calculating the date at which a promissory note or bill of
exchange made payable a certain number of days after date or after sight
or after a certain event is at maturity, the day of the date, or of presentment
for acceptance or sight, or of protest for non-acceptance, or on which the
event happens, shall be excluded. (S. 24).

Illustration
A negotiable instrument, drawn on 1st July and payable thirty days
after sight is presented for acceptance on 10th July. The instrument shall
mature on 12lh August.

4. When day of maturity is a holiday - When the day on which a

promissory note or bill of exchange is at maturity, is a public holiday, the
instrument shall be deemed to be due on the next succeeding business day.
(S. 25).
The expression "public holiday" includes Sundays, and any other day
declared by the Central Government by notification in the Official Gazette,
to be a public holiday.

If the date of maturity is declared as a holiday due to an emergency

like the death of an important person, the instrument shall fall due for
payment on the next succeeding business day.

Illustrations
(a) A negotiable instrument dated 12th July payable one month after
date shall fall due for payment on 14th August.

(b) A negotiable instrument dated 12th July payable one month after
date shall fall due for payment on 16th August if due to the death
of an important leader the Government declares 14lh August as a
holiday.

CHEQUE
Section 6 defines a cheque as follows:

A cheque is a bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than on demand and it includes the
electronic image of a truncated cheque and a cheque in the electronic
form.

From the above definition it is clear that cheque is a kind of bill of

exchange and therefore, it must be drawn in accordance with the
 1.28 Meaning and Kinds of Negotiable Instruments

requirements of S. 5. But a cheque has two additional qualifications namely,

(i) it is always drawn on a bank, and (ii) it is always payable on demand.
Accordingly, all cheques are bills of exchange, but all bills of exchange are
not cheques.

The definition of cheque shows that cheque is a bill of exchange drawn

on a specified banker. Further, it is an order by drawer on his own agent,
z.e., bank for payment of certain sum of money the bearer or to the order
of person in whose favour cheque is drawn. Section 139 of the Negotiable
Instruments Act, 1881 provides that holder of the cheque is presumed to
have received the cheque in dischanrge of whole or part of the debt or
liability, unless the contrary is proved. Cheque is a valid mode of payment
subject to its realization. If payment is made by cheque and the cheque is
paid, i.e., honoured by the drawee bank, the payment relates back, for the
purpose of limitation, to the date of delivery of the cheque to the creditor.

In Vijay Singh and Others v. Manali Malik and Co., 160 (2009) DLT
259, Delhi High Court held that if the cheque is not presented during the
life time of the drawer, it will cease to be a cheque after the death of the
drawer, since it ceases to be an order of a person entitled to make an order
to the bank to pay the money.

A cheque is not invalid if it is ante-dated or post-dated. A post-dated

cheque is payable on presentation on or after the date it bears. A cheque
may bear the date of a holiday.

A banker is a person who carries on the business of accepting, for the

purpose of lending or investment, of deposits of money from the public,
payable on demand or otherwise, and withdrawable by cheque, draft, order
or otherwise. The essence-of the relationship of banker and customer is the
affording of the facility to the customer to draw funds from the bank by
issuing cheques.

In Anil Kumar Sawhney v. Gulshan Rai, (1993) 4 SCC424 it was held

that a post dated cheque remains only a bill of exchange till the date shown
on its face and only from that date it becomes a cheque on being 'payable
on demand7. Lim itation period of six months (now three months as per RBI
Guidelines) under proviso (a) section 138 for presenting cheque for payment
should be reckoned from the date shown on the face of such cheque and
not from the date on which it was drawn. Similarly, in Ashok Yeshwant
Badave v. Surendra Madhavrao Nighojakar (2001) 3 SCC 726 : AIR 2001
SC 1315, it was held that a "post-dated cheque" is not payable till the date
which is shown thereon arrives and will become cheque on the said date
and prior to that date the same remains bill of exchange. Therefore, the post­
 Negotiable Instruments, Banking and Insurance 1.29
dated cheque becomes a cheque within the meaning of Section 138 of the
Act on the date which is written thereon and 6 months' (now three months)
period has to be reckoned for the purposes of proviso (a) of Section 138 of
the Act from the said date.
The definition of cheque has been broadened in 2002 to include the
electronic image of a truncated cheque and a cheque in electronic form
to bring the definition of cheque in tune with the Information Technology
Act, 2000.
"A cheque in the electronic form" means a cheque drawn in electronic
form by using any computer resource and signed in a secure system with
digital signature (with or without biometrics signature) and asymmertic
cripto system or with electronic signature, as the case may be". [Explanation
1(a) to S. 6 as substituted by the Negotiable Instruments (Amendment) Act,
2015].
'A truncated cheque' means a cheque which is truncated during the
course of a clearing cycle, either by the clearing house or by the bank
whether paying or receiving payment, immediately on generation of an
electronic image for transmission, substituting the further physical movement
of the cheque in writing [Explanation I (b) to S. 6].
A few other additions have also been made, such as in sections 64, 81,89
and 131 to facilitate safe handling of electronic cheque by various persons
involved in the transactions.
In Veera Exports v. J. Kalacathy, AIR 2002 SG 38: (2002) 1 SCC 97, it
was held that there is no bar against voluntary revalidation of a negotiable
instrument (including a cheque) by a drawer after the expiry of its validity
period. Thus, it is always open to a drawer to voluntarily revalidate a
negotiable instrument, including a cheque.

Difference between a Cheque and a Bill of Exchange014

1. Acceptance - A cheque does not require any acceptance as is necessary
in case of bill of exchange. In Bank of Baroda Ltd v. Punjab National Bank
Ltd. (1944) 2 All ER 83, it was held that certification of a cheque as good
for payment at the request of the holder does not constitute acceptance
within the meaning of the Act. It simply indicates the genuineness of the
cheque and of the drawer's signature. If the cheque is not post dated, the
certification would be a representation as to the then sufficiency of the
drawer's account to meet the cheque.

Qi4. How is a cheque different from a bill of exchange? Elaborate. [LL.B., D.U.]
 1.30 Meaning and Kinds of Negotiable Instruments
2. Payable on demand - A cheque can be drawn "payable to bearer on
demand", but a bill of exchange cannot be so drawn though it can be made
payable to bearer after a certain time.
3. Days of grace - As a cheque is intended for immediate payment,
it is not entitled to any days of grace whereas in case of a bill of exchange
three days of grace are allowed while calculating the date of maturity in
case of time bills.
4. Crossing - A cheque may be crossed but not a bill except a bank draft.
5. Stopping payment - A cheque is a revocable mandate and its authority
can be revoked by countermanding payment. This is not so in the case of
a bill.

6. Stamp - A bill requires stamp but a cheque does not require any
stamp.

7. Noting and protest - There is no system of noting or protest in case

of cheque.

8. Statutory protection - The drawer of a bill is not normally discharged,

if it is not presented for payment, but the drawer of a cheque is discharged
only if he suffers any damage by delay in presentment for payment (S. 84).
Statutory protection is given to the drawee banker with regard to payment
of cheques under certain circumstances but no such protection is available
to the drawee or acceptor of a bill of exchange (Ss. 85 and 128). Similarly,
subject to certain conditions, statutory protection is available to the collecting
banker against liability for conversion of crossed cheques (S. 131), but no
such protection is available in case of bills.

Bank Draft
A demand draft or bank draft is a bill of exchange drawn by a bank
on another bank or by a bank on its own branch usually instructing the latter
to pay a specified sum of money to the named payee or to his order on
demand. It is a negotiable instrument and similar to a cheque but not a
cheque as such because it cannot be drawn by a private individual. The draft
cannot be made payable to bearer as a cheque can be. It cannot easily be
countermanded as in the case of a cheque either by the person purchasing
it or by the bank to which it is presented. It is always payable on demand
like a cheque.
Section 85 A of the Act provides: "Where any draft, that is, an order
to pay money, drawn by one office of a bank upon another office of the same
bank for a sum of money payable to order on demand, purports to
Negotiable Instruments, Banking and Insurance 1.31
be indorsed by or on behalf of the payee, the bank is discharged by payment
in due course". (For payment in due course see S. 10). S. 131A provides that
sections 123 to 131 relating to crossing of cheques shall apply to any draft
as defined in S. 85 A as if the draft were a cheque.

The draft is drawn either against cash deposited at the time of their
purchase or against debit to current account with the banker. Banker charges
a small commission for its services.

Letter of Credit (LC)

Letter of credit is an order by a banker on another banker or its branch
to grant a specific credit to the holder of the letter. Letter of credit may be
(a) clear letter of credit, and (b) documentary letter of credit. If such a credit
is allowed without any conditions it is called a clear letter of credit and if
conditions are attached to it e.g.z an invoice or bill of lading should accompany
the same, it is called documentary letter of credit. Lettr of credit may be
(a) revocable and (b) confirmed. Where the authority granted by the bank
to the holder is revocable by the bank it is.called a revocable letter of credit
and where the authority cannot be revoked it is called confirmed or
irrevocable letter of credit. Letters of credit are very common as they are
very useful in international trade. A letter of credit is not a negotiable
instrument.

Ambiguous Instrument
Section 17 provides that, "Where an instrument may be construed either
as a promissory note or bill of exchange the holder may at his election treat
it as either and the instrument shall be thenceforth treated accordingly." In
the following cases an instrument is treated as ambiguous:

1. Where in a bill the drawer and drawee are the same person;

2. Where the drawee is a fictitious person; or

3. Where drawee is a person not having capacity to contract.

Illustrations
(a) A bill is drawn by an agent acting within the scope of his authority
upon his principal. The instrument is ambiguous as the drawer and
drawee are the same person.
(b) A draws a bill on Y, a fictitious person; and negotiates it. The holder
may treat it as a note made by A.
 1.32 Meaning and Kinds of Negotiable Instruments

The holder may treat an ambiguous instrument as a bill of exchange

or a promissory note, but once he has made his choice he must abide by
it, and cannot afterwards fall back and treat the instrument of the other kind.

Amount stated differently in figures and words

S. 18 provides that "If the amount undertaken or ordered to be paid
is stated differently in figures and in words, the amount stated in words
shall be the amount undertaken or ordered to be paid." In case of cheques,
in practice, bankers generally return cheques containing discrepancy between
the amount in words and that in figures, giving the reason: words and figure
differ.

LEADING CASES
Mohammad Akbar Khan v. Attar Singh
AIR 1936 PC 171
(A document which is primarily a receipt for money containing the terms on
it was to be repaid, even if coupled with a promise to pay it is not a promissory
note.)

Facts
The instrument in question in this case was in the following terms:

"May God protect us.

This one receipt is hereby executed by Bhai Hira Singh, Attar Singh Kharbanda,
residents of Hoti for Rs. 43,900 (forty three thousand nine hundred rupees) half
of which amount comes ta twenty one thousand nine hundred and fifty received
from the Firm ofLala Duni Chand Hari Chand Sethi for and on behalf of Captain
Mohammed Akbar Khan of Hoti. This amount to be payable after 2 (two) years.
Interest at the rate of Rs. 5.40 (Rs. five annas four) per cent per year to be charged.

Dated this 20th day of chetar (first month of Hindu Calendar (Year) Sammat
1974 corresoponding to April I, 1917.

The document bore only an (Sd) Hira Singh Kharbanda

affixed stamp of one anna (Sd) Attar Singh Kharbanda "

Issue
Whether the impugned instrument was a promissory note or not?
 Negotiable Instruments, Banking and Insurance 1.33
Decision of the Privy Council
Section 4 of the Negotiable instrument Act, 1881 says : A "promissory
note" is an instrument in writing (not being the bank note or a currency
note) containing an unconditional undertaking, signed by the maker, to pay
a certain sum of money only to, or the order of a certain person, or to the
bearer of the instrument." There are certain illustrations appended to the
section lettered (a) to (h) of which three only be set out:
"A signs instruments in the following terms:
(a) I promise to pay B or order Rs. 500/-.
(b) I acknowledge myself to be indebted to B in Rs. 1000 to be paid
on demand, for value received.
(c) Mr. B„ I.O.U. Rs. 1,000/-"
In the course of judgment their Lordships observed:
"It is indeed, doubtful whether a document can properly be styled
promissory note which has to be inferred from the words used. It is plain
that the implied promise to pay arising from an acknowledgement of a debt
will not suffice, for third illustration indicates that an I.O.U. is not a
promissory note, though of the implied promise to pay there can be no
doubt. Tire second illustration, however, seems to show that the express
words "I promise" or "I undertake" are unnecessary. The form of word is
taken from an early English case, Casbome v. Dutton reported in Selwyn's
N.P 11th Edition page 401 where according to the learned author the Court
stated that the words "to be paid" in the document there sued on amounted
to a promise to pay. Observing that the same words in a lease deed would
amount to a covenant to pay rent. It does not appear to form a useful general
illustration, except in the case of a document in that particular form of
words."
The Privy Council held that the document was a receipt for money containing
the terms on which it was to be repaid; and being primarily a receipt even if coupled
with a promise to pay it was not a promissory note, or a document which was
negotiable within the meaning of sections 4 and 13. In the course of his judgment
Lord Atkin said:
"Their Lordships prefer to decide this point on the broad ground that
such a document as this is not, and could not be intended to be brought
within a definition relating to documents which are to be negotiable
instruments. Such documents come into existence for the purpose of only
recording an agreement to pay money and nothing more, though of course,
zinneirioroFinn anH a crrpprnents eenerallv are not
F
5, J .34 Meaning and Kinds of Negotiable Instruments

intended to be negotiable, and serious embarrassment would be caused in

commerce if the negotiable net w’ere cast too wide. This document plainly
is a receipt for money, containing the terms on which it was to be repaid;
It is not without significance that the defendants who drew it, and who were
experienced money lenders, did not draw it on papers with an impressed
stamp, as they would have had to if the document were a promissory note,
and they affixed a stamp which is sufficient if the document is. a simple
receipt. Being primarily a receipt, even if coupled with a promise to pay,
it is not a promissory note."

Surjit Singh and Others v. Ram Ratan Sharma

AIR 1975 Gau. 14
(An acknozvledgement of a receipt of the amount does not take away the
document from the category of a promissory note.)

Facts
One of the defendants (defendant No. 1) in the suit, in his capacity as
a partner of a two member registered partnership firm, Messers Bharat
Hardware Stores at Thangal Bazar Imphal, and on its behalf borrowed a
sum of Rs. 9,240 from the plaintiff and executed a promissory note promising
to repay the loan on demand. Another defendant (defendant No. 4) stood
surety guaranteeing the repayment of the loan. When the demand for
repayment was made by the plaintiff through registered letters a copy of
which was sent to the surety (defendant No. 4), defendants (defendant No.
1 and defendant No. 2), the other partners refused to accept the letters and
denied the alleged loan. They, however, admitted that defendant No. 1
received a sum of Rs. 7,808 payable with interest of Rs. 1,432. They however,
averred that by way of acknowledgement, defendant No. 1 and 2 put their
signatures on a blank piece of paper which was forged into a promissory
note. It has also been averred that the sum of Rs. 9,240 had been repaid to
the plaintiff but the defendants could not prove it. They also could not
explain as to why they refused to accept the registered notices issued to
them by registered post at their correct address. The plaintiff proved the
execution of the promissory note by the defendant No. 1 and also payment
of Rs. 9,240. He also proved the issue of registered letter to defendant Nos.
1 and 2.

The promissory note was in the following terms:—

"We have received the sum of Rs. 9,240-(nine thousand two hundred and forty
only) from Shri Ram Rattan Sharma of Thangal Bazar Imphal. The above amount
7dH1 Iip wnriid nvt darrin-nd TA7z> J-irrviz? z>/■’/>? <7O ^/f/T/ x-zrr’l* /z
 Negotiable Instruments, Banking and Insurance 1.35

The above writing was followed by adequate revenue stamps on which

defendant No. 1 put his signatures followed by the expression, 'Tor Bharat
Hardware Stores, Manipur". Below it there was an endorsement by defendant
No. 4 guaranteeing the repayment of the money.

On behalf of the defendants it was pleaded that in view of the

acknowledgement of the receipt of the amount and of the guarantor's
indorsement, the said document was not a promissory note within S. 4 of
the Negotiable Instrument Act; but a bond.

Issue
Whether the impugned document was a promissory note within the
definition of S. 4 of the Act?

Decision of the Gauhati High Court

To decide the question the Court quoted the relevant part of S. 4
together with illustration (b) which are reproduced below:

"A "promissory note" is an instrument....... containing an unconditional

undertaking, signed by the maker, to pay a certain sum of money only, to
or to the bearer of the instrument."

Illustration (b) "I acknowledge myself to be indebted to B in Rs. 1.000

to be paid on demand for value received."

The essential ingredients of a promissory note are: (1) that the promise
to pay must be unconditional, (2) that the note must be in writing and signed
by the maker, (3) that the promise to pay must be of a certain sum of money,
and (4) that the promise to pay must be to, or to the order of, a certain person
or-to the bearer of the instrument.

The Court held that the impugned document has fulfilled all the above essential
ingredients of a promissory note. It further held that illustration (b) to the
definition shows that an acknowledgement of a receipt of the amount does
not take away the document from the category of a promissory note. The
Court observed that under S. 118 of the Act payment of consideration under
a promissory note is presumed, and it was the burden of the defendant to
disprove it.

Thus, the Court held the document in question was a promissory note
and decreed the suit against the partners and the firms but not gainst this
guarantor as he was not a partner of the firm.
 1.36 Meaning and Kinds of Negotiable Instruments

Ponnuswami Chettiar v. P. Vellaimuthu Chettiar^15

AIR 1957 Mad 355
(Absence of the name of the payee in the promissory.note would not make the
instrument invalid, when the payee was knoivn with certainty at the time of
execution.)

Facts
In this case, a suit was brought against the petitioner by one Velaimuthu
Chettiar for the recovery of Rs. 1,177.80, the principal and interest due on
a promissory note dated 16.11.1950, for Rs. 1,000. The description of the
payee in the impugned promissory note was "son of Palaniandi Chettiar"
and a particular son of Palaniandi Chettiar was known to have lent the
amount to the maker although Palaniandi Chettiar had three other sons also
who never lent a pie to the petitioner and had not come into the picture
at all. Tire main plea on behalf of a petitioner was that the promissory note
was not executed in favour of a known and certain person and, so would
be invalid. It was vehemently urged that a promissory note in favour of
a person without his name being mentioned should be held to be totally
invalid and in operative, even though full consideration might have been
passed and the person lending was known with precision borrowing, and
though the description in the context, could refer only to him.

Issue
Whether the absence of the name of the payee in a promissory note will
make the note invalid though the payee was known with certainty even at
the time of execution?

Decision of the Madras High Court

The Court held that the absence of the name of the payee in the
promissory note would not make the instrument invalid, when the payee
was known with certainty at the time of execution. When the payee was
described in the note as "son of Palaniandi Chettiar" and a particular son
of Palaniandi Chettiar was known to have lent the amdunt to the maker,
the instrument could not be held unenforceable. Section 92, Proviso 6, of
the Evidence Act would apply to the case and evidence regarding the name
of the payee could be let in, when the description was defective.

QI5. Is the following a promissory note : "I promise to pay Rs. 1 lakh to P's daughter.1’
(P has two danphtersY
 Negotiable Instruments, Banking and Insurance 1.37
In this case "son of Palaniandi Chettiar" who lent the money was the
plaintiff Vallaimuthu Chettiar, who swore to it, and it was not alleged by
the borrower, the defendant, that any of the three sons of Palaniandi Chettiar
had lent him a pie out of the amount in the promissory note. The other three
sons were far away and had nothing to do with the petitioner or the
promissory note. In this case though the name of the plaintiff was not
mentioned (perhaps by sheer slip or accident), the lender and borrower
knew it, and there was the description.

In the course of his judgement, PANCHAPAKES AYYAR J said:—

"Many a Hindu woman will not name her husband, to say from that
she had no husband will be absurd. Many a man is known by his caste
or village or official name, or surname, like Mudaliar, Ayyar or Rao,
Ambedkar, Gandhi, Nehru, Kirloskar, Prime Minister, Rajesh or Sandur etc.
and not by his personal name. To say that hundred of Raos. Mudulaiars,
Ayyars, Gandhis, Nehrus etc., might have been the persons who lent the
money, when the particular man who has lent the money is known, even
at that time beyond all doubt, to the lender and borrower is, in my opinion
disingenuous and meaningless."

Nanga v. Dhannalal
AIR 1962 Raj. 68
(There must be intention to create a promissory note.)

Facts
The document in question was executed on 5th December, 1951 and
according to the law then in force it required a stamp of Rs. ~/5/~ (five annas)
whereas it bore a stamp of Rs. -/4/- (four annas) only. The document was
held to be inadmissible in evidence by the learned Munsif, Gangapur,
holding that it was insufficiently stamped. On appeal, the learned Civil
Judge, Gangapur held that the provisions of Section 35 of the Stamp Act
related to procedural law and therefore, the admissibility of the document
should be determined according to the Stamp Law which is in force on the
date of the document is sought to be tendered in evidence and not according
to the law in force at the time of its execution. As the admissibility of the
document came in for consideration on 2nd November, 1957, and on that
date the stamp duty required was four annas he held that it was properply
stamped and was admissible in evidence. Against this decision, the
defendants, appealed to the High Court.
 1.38 Meaning and Kinds of Negotiable Instruments

The document in question is on a page of the creditors account book

and is written in Hindi. Translated into English it reads thus:

"Account of Badri son of Loharia and Jhunta son of Deva Patel by caste
Kharwal resident ofAmarpur Hitim datedMagsur Sudi Samvat 2008 corresponding
to 5th December, 1951. Interest at the rate of Rs. l/-per cent, p.m.

Rs. 1300/- in cash in words (Rupees thirteen hundred). British coin, borrowed
from Pannalal Phulchand Munim, Gangapur. This amount is payable on demand.
Shall pay this money to Pannalal Phulchand Munim of Gangapur with interest
wherever he shall demand it."

Left hand impression of Badri, Jhunta of Lakhan Two Two annas stamp

"Whatever is recorded above is correct. After taking the money we have put
our thumb impressions. By the pen of Btrdhichand scribe at the instance of Badri
and Jhunta."

Issues
1. Whether the instrument is a promissory note or not?

2. Whether once the question regarding the admissibility of a document

on the ground whether it is sufficiently stamped or not has been
judicially determined by a court, can that question be agitated again
either before the same Court or before the superior courts in appeal
or revision?

Decision of the Rajasthan High Court

The Court said:

"It is, therefore, clear that even if a promissory note is payable to a

particular person it will be deemed to be payable to order and will be
negotiable instrument under the Negotiable Instruments Act unless expressly
or by implication its transfer is prohibited. Therefore, looking to the definition
of the promissory note in the Stamp Act as well as in the Negotiable
Instruments Act, it seems that a promissory note should, in its popular sense
as understood by men of business, be negotiable. The only exception which
the Stamp Act provides is that it need not be negotiable in cases where it
falls within the wider definition as given in that Act. If it does not fall within
the wider definition of the Stamp Act, then under the Negotiable Instruments
Act it need not be negotiable in those cases only where expressly or by
implication it is not transferable. In all other cases a promissory note should
stand the test of negotiability. There can be promissory notes which may
not be negotiable but such notes can only be those which fall within the
ft
 Negotiable Instruments, Banking and Insurance 1 39

above mentioned exceptions. Barring these exceptions, if they are intended

to be promissory notes they should be negotiable/'

The Court was of the view that a promissory note besides fulfilling the
requirements as laid down in Section 4 of the Negotiable Instruments Act
must also be intended by the parties at the time of its execution to be a
promissory note as understood by commercial persons in popular sense
which means that unless it falls within the exception provided in the wider
definition of the Stamp Act, or is otherwise expressly or by implication
made not transferable, it must be intended by the parties to be negotiable
instrument. If the instrument does not fall within the above mentioned
exceptions and does not stand the test of negotiability, it will not be a
promissory note even though it contains an unconditional undertaking to
pay money.
Applying these tests to the document in question the Court found:

1. The maker of this document is an illiterate villager ignorant of the

mercantile custom and usage and probably may not have even
heard of promissory notes.

2. The document is not in the form in which promissory notes are

generally written by the mercantile community. On the other hand
it is in the form in which moneylenders keep accounts of their
customers in their account books.

3. It is contained on a page of an account book where there is also an

account of another person.

The Court held that the parties in the instant case never intended to
create a promissory note as understood in its popular sense. Merely because
they affixed a stamp of four annas which; was the requisite stamp duty
before the amendment of the Jaipur Stamp Law it cannot be inferred that
they intended to create a promissory note. Generally promissory notes are
not executed in account books of the nature which has been produced before
the Court in this case. Therefore, the document was held not a promissory
note.

Section 36 of the Stamp Act provides:

"Where an instrument has been admitted in evidence such admission

shall not except as provided in Section 62, be called in question at any stage
of the same suit or proceeding on the ground that the instrument has not
been duly stamped."
 l;40 Meaning and Kinds of Negotiable Instruments

The Court pointed that Section 36 of the Stamp Act has not been enacted
for protecting the rights of the parties but in the interests of the Government
revenue.
It was held that when a Court has determined the question that the
document admissible in evidence, it should be deemed to be admitted in
evidence for the purposes of Section 36 of the Stamp Act even though the
document has not been formally proved. The appeal, therefore, should be
rejected on this ground alone.

Ashok Yeshwant Badeve v. Surendra Madhavrao Nighojakar

(2001) 3 SCC 726: AIR 2001 SC 1315
(A "post-dated cheque " is not payable till the date which is shown thereon
arrives and will become a cheque on the said date and prior to that date the same
remains bill of exchange.)

It was held in 1776 in Da Silva v. Fidler [Sei Ca 238 MS] referred to

in Chitty on Bill of Exchange, 11th Edition, (1S8) that a banker was not
justified in paying a post-dated cheque before its actual date. In 1868 the
Court Queen's Bench in Emanuel v. Robarts [(1868) 9 B & S 121] observed
that a banker was justified in refusing payment of a post-dated cheque
before its due date.

In Bull v. O' Sullivan [LR 6 QB 209], the Court laid down that a post­
dated cheque payable to order was an instrument payable to order on
demand on its date. Later in 1877 in Gatty v. Fry [1877) 2 Ex D 265] the
Court held that a post-dated cheque is not payable on the day it is issued
but on the day of its date. After passing of the Bill of Exchange Act, 1882
it was held by the Court of Appeal in Re, ex p Richdnle [(1882) 19 Ch.D
409] that a post-dated cheque was equivalent to a bill of exchange payable
on a future date, namely, the date of the cheque.

In Halsbwy's Laws of England, 4th Edn. (Reissue) Vol. 3 (1), at p. 143,

procedure to be adopted by the bank in relation to post-dated cheque has
been enumerated which reads thus:

"Post-dated cheques are not invalid, but the banker should not pay such
a cheque if presented before the date it bears. If, therfore, a cheque dated
on a Sunday is presented on the previous business day, it should be returned
with the answer 'post-dated'. A post-dated cheque, however, if presented
at or after its ostensible date, should be paid though the banker knows it
to be post-dated, and even if it has been presented before the date and
re: payment."
 Negotiable Instruments, Banking and Insurance 1.41
In Chalmers and Guest on Bills of Exchange, Cheques and Promissory
Notes, 15th Edition, at p. 74, the concept of "post-dated cheques" has been
explained as under:

"Post-dated cheques".—Cheques are often issued post-dated, that is to

say, bearing a date later than that on which they are in fact issued. The
purpose of issuing a post-dated cheque is to prevent the drawee banker
from paying the cheque to the payee or a holder before the date written
on the cheque. It is clear that the instrument is a cheque once the date
written on it arrives...."

In Thomson's Dictionary of Banking, 12th Edn., p. 463 "post-dated" has

been defined as follows:

"Post-dated. —A cheque which is dated subsequent to the actual date

on which it is drawn, and which is issued before the date it bears, is called
a post-dated cheque.

A post-dated cheque should not be paid before the date appearing

thereon....

A cheque presented for payment before the date has arrived should be
returned 'post-dated'."

In J iw art I al Acharyq v. Ramehswarlal Agarwalla [AIR 1967 SC 1118]

a cheque dated 25.2.1954 was delivered on 4.2.1954 and encashed soon after
25.2.1954. The Supreme Court considered question of payment envisaged
within the meaning of Section 20 of the Indian Limitation Act, 1908. It was
held that "where the cheque is not accepted as an unconditional payment,
it can only be treated as a conditional payment. In such a case the payment
for the purposes of Section 20 would be the date on which the cheque would
actually payable at the earliest, assuming that it will be honoured....... As
the payment was conditional it would only be good when the cheque is
presented on the date it bears, namely, 25.2.1954 and is honoured. The
earliest date, therefore, on which the respondent could have realised the
cheque which he had received as conditional payment on 4.2.1954 was
25.2.1954 if he had presented it on that date and it has been honoured."

The Supreme Court held that a "post-dated cheque" is not payable

till the date, which is shown thereon arrives and will become cheque on
the said date and prior to that date the same remains a bill of exchange.

EXAMINATION QUESTIONS
1. What is meant by a negotiable instrument? Explain its essential
r
B 1 42 Meaning and Kinds of Negotiable Instruments

2. Is the following promissory note: "Pay to Mr. X Rs. 500 after the
death of Mr. Y provided he leaves me Rs. 300."

3. "Certainty on the face of the instrument is the most important

ingredient of a negotiable instrument." Comment.

4. Is the bank note a valid promissory note?

5. Are the following instruments valid promissory notes?

(a) I acknowledge to return the sum of Rs. 10,000 which I had

borrowed from you.

(b) Mr. B, I.O.U. Rs. 5,000 to be paid on demand.

(c) 'Received from Naresh Jain of Karol Bagh, New Delhi, Rupees
one thousand only payable after two years with interest @
12% p.a.

SdV- M.R Gupta (revenue stamp affixed)

Dated: 10-3-2015

(d) M/s Shyam & Co., Cloth Merchants, Chandni Chowk, Delhi

10-3-2015

To

Ramesh Chand
Nai Sarak, Delhi.

'We promise to pay Rs. 10,000 for value received'

S.d/-

Partner
(revenue stamp affixed)

(e) "I promise to pay Rs. 5,000 to you with interest and any
amount which I have borrowed last month from you."

(f) "I promise to pay B or order Rs. 5,000 with interest."

(g) "We shall order the borrowed money to be repaid."

Hints: (a) Yes, to make a promissory note, there must be an

undertaking or a promise to pay. A mere acknowledgement of debt
is not sufficient. If the acknowledgement of debt is followed by an
undertaking to pay, the instrument will be a promissory note. In
the present problem, the acknowledgement of debt is followed bv
Negotiable Instruments, Banking and Insurance 1.43
(b) Yes. There is acknowledgement of debt followed by an
undertaking to pay ('to be paid on demand').

(c) No. The phrase "payable" does not indicate an undertaking or

promise to pay.

(d) Yes. There is a promise to pay a certain sum of money.

(e) No. The sum of money is not certain due to the use of the
expression "any other amount".

(f) Where a document acknowledged a debt and contained a promise

to repay the debt with interest, but rate of interest was not specified,
it was held not a promissory note as the sum payable was not
certain. (Official Liquidator v. Bishan Singh 1968 All LJ 171).
However, in Seth Tulsidas Laichand v. Rajagopal (1967)2 MLJ 66,
it was held that where the rate of interest is not specified, the rate
of interest as mentioned in S. 80 would be applicable. The rate of
interest was revised from 6% to 18% by an amendment to S. 80 in
1988. The author is of the opinion that where an instrument is
payable with interest but no rate is specified or if the rate of interest
is left blank is for a sum certain and not an incomplete one.

(g) Yes. In this problem there is acknowledgement of debt followed

by an undertaking to pay.

6. (a) What are salient feature of a valid promissory note?

(b) A signs the instrument in the following terms:

(i) I acknowledge myself to be indebted to B in Rs. 1000/-, to

be paid on demand, for value received.

(ii) I promise to pay B or order Rs. 500 with interest.

Whether above instruments are valid promissory notes?

Hints: (b) (i) A mere acknowledgement of debt does not constitute

a promissory note. However, if in addition to acknowledgement of
debt there is an express promise to pay the amount acknowledged
as being due, the instrument is a promissory note. Therefore, the
impugned instrument is a promissory note within the meaning of
S.4 [See illustration (b) to S.4]. (b) (ii) See hint to Q. No. 5(f).

7.Distinguish between the following:

(a) Promissory Note and Bill of Exchange

1.44 Meaning and Kinds of Negotiable Instruments
8. Whether the following are promissory notes ?

(a) "I promise to pay B Rs. 5,000 on A's death provided he leaves
me sufficient money to pay the said sum."

(b) "I promise to pay B Rs. 5,000 out of money due to me from
C as soon as C pays it."

(c) "I promise to pay B Rs. 5,000 at my convenience."

(d) "I promise to pay B Rs. 5,000 in instalments with a proviso

that no payment shall be made after my death.

Hints: (a), (b), (c) and (d): The instruments are not promissory notes
as they are not unconditional.

9. Whether the following are promissory notes ?

(a) "I promise to pay B Rs. 10,000 and to deliver 500 kgs of
basmati rice."

(b) "I promise to pay B Rs. 1,000 and all fines according to rule."

Hints: (a) No. The amount promised to be paid is not in money

only, (b) No. The amount is uncertain.

10. Whether the following are promissory notes ?

(a) "I am liable to B in a sum of Rs. 10,000 which is to be paid

by instalments for rent.

(b) "I of my free will and accord approached B and borrowed

from him the sum of Rs. 10,000 bearing interest at the rate of
12% per annum. I have, therefore, executed these few presents
by way of a promissory note so that it may serve as evidence
and be of use when needed.'

Hints: (a) No. There is no promise to pay.

(b) No. There is no undertaking to pay.

11. Whether the following is a promissory note ?

"Rs. 10,000 already received Rs. 5,000 is also required. Please send
it per bearer. The amount will be returned with 12% interest without
delay."

Hint: It is not a promissory note because the repayment is dependent

o,n the advance being made.
Negotiable Instruments, Banking and Insurance 1.45
12. Whether the following is a promissory note?

"I promise to pay myself."

Hint: It is not a promissory note.

13. Whether the following is a promissory note?

"I promise to pay B the proceeds of shipment of goods of value Rs.

2000."

Hint: It is not a promissory note as the sum payable is not certain.

[Jones v. Simpson (1923) 2 B&C 318].

14. Define a bill of exchange and explain the statement that 'a cheque
is a bill of exchange with two special features."

15. Distinguish between a promissory note and a bill of exchange.

16. Distinguish between a cheque and a bill of exchange.

17. Briefly describe essential characteristics of a bill of exchange and

decide whether the following instruments are valid Bills of Exchange:

(a) "Please pay X or order Rs. 6,000 sixty days after sight."

(b) "Pay D Rs. 20,000 on the death of Z."

Hints: (a) It is a bill of exchange.

(b) It is a bill of exchange.

18. Define 'promissory note'. Are the following instruments signed by

A valid promissory notes?

(a) "I acknowledge myself to be indebted to B in Rs. 10,000 to be

paid on demand for value received."

(b) "Received from B Rs. 10,000 which I promise to pay on demand

with interest."

(c) "I promise to pay B Rs. 5,000 and all other sums which may
be due to him."

(d) "I promise to pay B Rs. 5,000, first deducting there out any
money which he may owe me."

Hints: (a) It is a promissory note as acknowledgement of debt is

followed by an undertaking to pay.
1.46 Meaning and Kinds of Negotiable Instruments

(b) It is a promissory note. An instrument payable with interest but

rate is not specified is for a certain sum [Seth Tulsidas Laichand
v. Rajagopal (1967) 2 MLJ 66). Also see hint to Q. No. 5(f)]♦

(c) It is not a promissory note as the sum is uncertain.

(d) It is not a promissory note as the sum is uncertain.

19. Discuss the essential characteristics of a Bill of Exchange.

20. Are the following valid Bills of Exchange? Decide giving reasons.

(i) "Mr. X, kindly pay the bearer Rs. 5,000/- and place the amount
to my account, for that I shall be very grateful to you. Yours
sincerely Y."

(ii) "Mr. P, pay to my order a sum of Rs. 20,000/- on receipt of

the consignment of goods, which is at present, in transit."

(iii) "A writes to B "Kindly pay X or order Rs. 5,000/- on the death
of Z."

Hints: (i) It is not a bill of exchange as the communication contained

in the instrument is not an order (Little v. Slackford)

(ii) It is not a bill of exchange as the order contained in the bill is

not unconditional.

(bi) It is a bill of exchange, (iv) It is a bill of exchange.

21. A signs the instrument in the following terms:

(a) I promise to pay X Rs. 500/- if he supplies me goods.

(b) I promise to pay X Rs. 1,000/- and to deliver my Maruti Car

on 1st June next

(c) I acknowledge myself to be indebted to X in Rs. 1,000/- to be

payable after 2 years.

(d) I promise to pay Rs. 1,000/- to "Son of X". There are two more
sons of X, however, it is admitted by A, that B's eldest son
of X had lent said sum to him.

Whether the above are valid promissory notes?

Hints: (a) No; (b) No; (c) No; (d) Yes

22. (a) ,What are the salient features of a promissory note ? •

Negotiable Instruments, Banking and Insurance 1 47

(b) Are the following valid promissory notes? A signs instruments

in the following terms:

(i) "I.O.U. Rs. 500 to be paid oh demand."

(ii) "I promise to pay Rs. 500 to P's son" (P had three sons).

Hints: (i) Yes. Acknowledgement of debt is accompanied by an

undertaking to pay.

(ii) It is a promissory note if it is assumed that a particular son of

P was known to have lent the amount to the maker. (Ponnuswatni
Chettiar v. P. Vellaimuthu Chettiar, AIR 1957 Mad. 355).

23. Are the following instruments valid promissory notes ?

(a) Received Rs: 1,000 from "A" payable after two years.

(b) Dev writes a letter to his friend in which he mentions many

things about his marriage and his girl friends. In the last para
of his letter, he says, "I have already borrowed Rs. 2,000 from
you, kindly send Rs. 10,000 more and whole of the amount
(Rs. 2,000 + Rs. 10,000), I promise to return just after my
marriage which is to take place after one month."

(c) I promise to pay Rs. 11,000 to you after the death of D provided
he leaves sufficient funds to pay.

Hints: (a) No. There is no promise to pay.

(b) No. The promise is not unconditional.

(c) No. The promise is not unconditional.

24. (a) What are the salient features of a valid Bill of Exchange?

(b) Discuss the nature of the following Negotiable Instruments;

Support your answer with reasons:

(i) "I promise to pay M's son Rs. 500/- for value received."
(M has three sons).

(ii) "I promise to pay X Rs. 5000/- on the death of Y."

(iii) "I promise to pay the bearer the sum of Rs. 5000/-"

(iv) A writes to B "Please pay X or order Rs. 5000/- sixty days

after sight."

25. (a) Distinguish between a bill of exchange and a promissory note.

 1.48 Meaning and Kinds of Negotiable Instruments

(b) Are the following instruments, signed by A, valid negotiable

instruments? Also state the nature of instruments respectively;
(i) "Three months after date pay to C or order Rs. 5,000/- only
with interest thereupon at 6% per annum."
(ii) "Mr. X, I owe you Rs. 5,000 for value received."
(iii) "I have received Rs. 5,000/- which I have borrowed from
you and I have to be accountable to you for the same with
interest."
(iv) "I promise to pay Y's son only Rs. 5,000/- for value
received."
26. Are the following instruments signed by A valid promissory notes?
Give reasons and refer to decided cases :
(a) "Mr. Pay, I owe you Rs. 5000 for value received".
(b) "I promise to pay Z's sum Rs. 10,000 for value valued." (Z has
four sons)
(c) "I promise to pay Johnson Rs. 10,000 on the death of Y, provided
Y leaves me sufficient to pay the said sum, or if I shall be
otherwise able to pay."
27. Discuss the nature of the following Negotiable. Support your answer
with reason :
(i) "I promise to pay M's sum Rs. 8,000 for value received." (M
has four sons)
(ii) I promise to Pay X Rs. 5,000 on the death of Y."
(iii) A writes to B "Please pay X or order Rs. 2,000 thirty days after
sight."
(iv) "Mr. B, I owe you Rs. 5,000 for value received."
28. Discuss the nature of the following instruments signed by the
excutant A :
(i) "I promise to pay B Rs. 5 lakh if he goes to Canada for a Job."
(ii) "I owe Rs. 5,000 to B which is payable after two years."
v (iii) "Please pay X or order Rs. 2 lakh sixty days after sight", A
writer to B.
(iy) "I promise to pay Rs. 1 lakh to P's daughter". (P has two
| daughters)
 M ■ ’ .1- ■ . —
CHAPTER 2

HOLDER ANDHOLDER IN DUE COURSE

Parties to Bill of Exchange

There are generally three parties to a bill of exchange: (i) drawer, (ii)
drawee, and (iii) payee. Section 7 says that the maker of a bill of exchange
or cheque is called the "drawer", the person thereby directed to pay is
called the "drawee". "Payee" is the person named in the instrument, to
whom or to whose order the money is by the instrument directed to be
paid. Apart from these parties, however, there may be other parties to a
bill of exchange which are as follows:—
Drawee in case of need - When in the bill or any indorsement thereon
the name of any person is given in addition to the drawee to be resorted
to in case of need, such person is called a "drawee in case of need". (S.
7).
Acceptor - After the drawee of a bill has signed his assent upon the
bill or if there are more parts thereof than one, upon one of such parts,
and delivered the same, or given notice of such signing to the holder or
to some person on his behalf, he is called the "acceptor" (S. 7).

Acceptor for honour - When a bill of exchange has been noted or

protested for non-acceptance or for better security, and any person accepts
it supra protest for honour of the drawer or of any one of the indorses,
such person is called the "acceptor for honour"(S.7).

Holder - The "holder" of a promissory note, bill of exchange or cheque

means any person entitled in his own name to the possession thereof and
to receive or recover the amount due thereon from the parties thereto
(S. 8). He is either the original payee or any other person to whom the
instrument has been negotiated.

Indorser - When the holder of a negotiable instrument indoreses the

instrument to any other person, he becomes the indorser (S. 15).

2.1
 2.2 Holder and Holder in Due Course

Indorsee - The person to whom the negotiable instrument is indorsed,

is called the indorsee (S. 16).

Payment for honour - When a bill of exchange has been noted or

protested for non-payment, any person may pay the same for the honour
of any party liable to pay the same: provided that the person so paying
or his agent in that behalf has previsouly declared before a notary public
the party for whose honour he pays, and that such declaration has been
recorded by such notary public. (S. 113).

Parties to Promissory Note

There are generally two parties to a promissory note; (i) maker, and
(ii) payee. "Maker" is the person who makes or executes the note promising
to pay the amount stated therein. "Payee" is the person to whom or to
whose order the amount stated in the note is payable, i.e., the creditor The
other parties to a promissory note may be the holder, the indorser, or the
indorsee. These have been explained above.

Parties to Cheque
The maker of a cheque is called the "drawer” i.e., the customer. "Drawee"
is the drawer's banker on whom the cheque is drawn. "Payee” is the person
named in the cheque to whom or to whose order the money is by the
cheque directed to be paid. The other parties to a cheque may be the holder,
the indorser and the indorsee which have been explained above.

The liability under section 138 of the Negotiable Instruments Act, 1881
is essentially against the drawer of the cheque. In Arsh Electronics Pvt. Ltd.
v. Telematica Star Ltd. .and Another, 172 (2010) DLT 340, it was held by
the Delhi High Court as follows :

"A conjoint reading of sections 7 and 138 of the said Act clearly indication
that it is only the drawer of the cheque who can be held responsible for
the offence under section 138 of the said Act. Exception to this rule is
provided in section 141 of the said Act which makes the persons other than
drawer liable for the offence under section 138 of the said Act, but only if
drawer is a company or firm or association of individual and in such an.
eventuality all such persons who at the time when the offence is committed,
were incharge or responsible for the conduct of the business of such company
or firm or association of individuals, would be deemed to be guilty for the
offence under section 138 of the said Act."

In Santhi C. Santhi Bhavan v. Mary Sherly and Anothers, AIR 2011

 Negotiable Instruments, Banking and Insurance 2.3
(NOC) 425 (Ker.), it was held that, if a person has issued a signed cheque
leaf, it cannot be concluded that the cheque was 'drawn' by the drawer
(accused under section 138). "Execution" or "drawing" of cheque is different
from "issuance" of cheque. Proof of giving of cheque by accused to
complainant alone was not sufficient to constitute offence under section 138
of the Act.

HOLDER01-02» °3-°4-Q4A
As said above the "payee" is the person named in the instrument, to
whom or to whose order the money is by the instrument directed to be
paid. Thus, an instrument originally belongs to the payee and he is entitled
to its possession. The payee may transfer it to any person in discharge of
his own debt. This transfer, if it is made in accordance with the provisions
of this Act, is called negotiation. Negotiation takes place in two ways. A
bearer instrument can be transferred by mere delivery and the person to
whom it is delivered becomes the holder. An order instrument can be
negotiated by indorsement and delivery and the indorsee becomes the
holder. Hence the holder means either the payee or the transferee (bearer
or the indorsee of an instrument. Accordingly, S. 2 of the (English) Bills
of Exchange Act, 1882, says that "holder means the payee or indorsee of a bill
or note, who is in possession of it or the bearer thereto." Tire definition contained
in S. 8 of our Negotiable Instrument Act, 1881 is of the same effect although
expressed in different words. It is reproduced below: .

The "holder" of a promissory note, bill of exchange or cheque means

any person entitled in his own name to the possession thereof and to
receive or recover the amount due thereon from the parties thereto.

QI. Give a critical analysis of the concept 'Holder' in the Negotiable Instruments Act,
1881. [LL.B, D.U.]
Q2. D borrowed Rs 5,000 from E and executed a promissory note in E's favour. E
renounced the world and disappeared. Can E's son S enfo'rce payment against D on
the maturity of the said promissory note? Decide. [LL.B, D.U.]
Q3. "The existing definition of the term 'holder' has given rise to various ambignities and
conflict of judicial opinions."
Comment and suggest improvement in the definition, if possible. [LL.B., D.U.j
Q4. How is the 'Holder' defined in the Negotiable Instruments Act, 1881? What are the
ambignities pointed out by the Law Commission in this definition and the relevant
amendments recommended by it? [LL.B., D.U.]
Q4A. What do you mean by the term 'Holder' of a negotiable instrument? Is the definition
of holder given in the Negotiable Instruments Act, 1881 free from anamalies? How
are the recommendations of Law Commission of India and the English Law on the
point helpful in this regard? [LL.B., D.U.]
 2.4 Holder and Holder in Due Course
Where the note, bill or cheque is lost or destroyed, its holder is the
person so entitled at the time of such loss or destruction.

Thus, in order to be called a "holder" a person must satisfy the following

two conditions:

1. he must be entitled in his own name to the possession of the

instrument; and

2. he must have the right to receive or recover the amount due thereon
from parties thereto.

The term holder would include the following :

1. The payee,

2. The bearer (i.e. the transferee of a bearer instrument) and

3. The indorsee (i.e. the transferee of an order instrument).

Entitled to possession. Actual possession of the instrument is essential

under the Bill of Exchange Act in England, but it is not so under the
Negotiable Instruments Act in India. In India holder must be entitled in his
own name to the possession of the instrument. Therefore, a person may be
entitled to the possession of the instrument although he does not have
actual possession. He should be a de jure holder and not necessarily a de
facto holder. He should be owner thereof at lazv, whatever be his position in equity.
For instance, real or beneficial owner cannot claim to be the holder on the
ground that the actual holder is only a benamidar or name lender. Similarly,
where a bill payable to order is, without indorsement, entrusted by the
payee to his agent the agent does not become the holder and the payee
is entitled in his own name to the possession of the bill. However, a person
may, by operation of law, become holder of a negotiable instrument although
he is not the bearer, or the payee or indorsee thereof. Thus, the heir or legal
representative of a deceased payee can claim as holder.

Right to receive or recover amount due. To be a holder a person must

also have the right to receive or recover the amount of the instrument. It implies
that a holder has right of suit on the instrument. Thus, a person in possession
of a negotiable instrument without having the right to recover the amount
due thereon from the parties liable thereto cannot be called a holder. Thus,
a thief, or a finder having no claim to the instrument, or a person zvho takes an
instrument under a forged indorement or the payee or indorsee if he is prohibited
by court order from receiving the amount due on the instrument, is not a holder.

Suit by someone other than the holder. There are considerable differences
of judicial opinioin on the question whether a beneficial owner can maintain a suit
 Negotiable Instruments, Banking and Insurance 2.5
on a negotiable instrument if he is not the holder. Some High Courts have held
that only a holder can bring a suit on a negotiable instrument, and no
person can sue on a negotiable instrument unless his name appears thereon
as the payee or indorsee, or unless the instrument is made payable to bearer
and he is in possession thereof. The prevalent view is that the beneficial owner
of an instrument if he is not the holder cannot therefore, bring a suit on it. Even
if the benamidar holder is impleader in the suit, the defect is not removed.

In Subhu Narayan v. Ramaswami (1907) 30 Mad 88 (FB), it was pointed

out that the expression "in his own name" was introduced by the Legislature
with a view to prevent any one from claiming the rights of a holder under
the Act on the ground that the ostensible holder is a mere name lender.
A reference to sections 27,28, 32 and 78 confirms this view. The application
of the doctrine of "benami" will introduce an element of uncertainly greatly
hampering the free circulation of negotiable instruments. This view was
followed by Nagpur, High Court in Vishnu v. Achat, AIR 1928 Nag. 54,
and in Indrasingh v. Ramnarayan, AIR 1944 Nag. 325.

Similarly in Sarjoo Prasad v. Rampayari Debi, AIR 1950 Pat. 494, it was
held that the payee mentioned in the instrument or indorsee thereof is the
only person to sue, and the real owner or defendant will not be allowed
to prove that he is only a name lender. In this case A advanced a sum of
Rs. 2,459 to B under a hand note. The note was executed not in the name
of A but in the name of C who was name lender or a benamidar. On maturity
A brought an action to recover the amount. The High Court of Patna
rejected his claim as he was not entitled to the possession of the note "in
his own name" and therefore not the holder. To the same effect were the
decisions of Batcha Prasad v. Janki, AIR 1957 Pat. 380; Harikishore v. Gura
Mia (1930) 58 Cal. 752; Virappa v. Mahadevappa, AIR 1934, B. 356. In
Subbaraya v. Abirami, AIR 1965 Mad. 157, it was held that beneficial
ownership does carry with it a legal title to the property concerned and
a declaration that a person is the beneficial owner does not operate as
transfer of the right in the instrument by operation of law.

On the other hand some High Courts have held a different view namely that
S. 78 of the Act does not preclude any one other than the holder from suing on
a negotiable instrument and that a suit by a real owner is maintainable as he is
in a position to obtain a valid discharge of liability from the person liable thereon
(Lachmichand v. Madanlal, AIR 1947 All 52). This view was endorsed in
Bhagirath v. Gulab Kanwar, 1956 Raj 174, where it was said that a true owner
<an maintain a suit on a negotiable instrument if the holder is impleaded
in the suit as a co-plaintiff or as a defendant. In Pudma Prakash v. Lok Nath,
AIR 1964 Punj. 497 (F.B.) and in Lala Ram v. Ram Swamp, AIR 495, it was
 2.6 Holder and Holder in Due Course
held that the crux of the problem is whether the plaintiff can give a valid
discharge.

When the holder of a negotiable instrument dies, his right passes to

his heirs by devolution and all of them must join in a suit to enforce the
deceased holder's right. If any one of them does not join as plaintiff, he
should be impleaded as a defendant. In Singheshwar Mandat v. Gita Devi,
AIR 1975 Pat. 81, it was held that the daughter of the deceased payee of
a promissory note could not sue its maker on the note since she did not
qualify as a holder thereof. If she was the sole heir of the payee, or if the
property in the note had been bequeathed to her, she would had a valid
claim against the maker.
The Law Commission Report. The Law Commission in its 11 Report
in 1958 has opined that the existing definition of the term 'holder" has
given rise to conflict of judicial opinions. It says that the expression "person
entitled in his own name to the possession of the instrument and to receive
and recover the amount" is ambiguous. It points out that the word 'entitled'
is the source of difficulties. The word 'entitled' is of a very wide implication.
Therefore, the Law Commission has suggested a new definition of the term
holder as follows :
"Holder" means the payee or indorsee of an instrument who is in
possession of the instrument or the bearer thereof, but does not include
a beneficial owner claiming through a benamidar.
The definition suggested by the Law Commission does not seek to alter
the law but to obviate the conflict of judicial opinion and the criticism or
comment which the existing definition has give rise to (For details—see
Appendix).

HOLDER IN DUE COURSE05 06 07 Q7A

Holder in due course is defined by S. 9 as follows:
Q5. 'The despotic but necessary principle relating to Negotiable Instruments is that "a
person taking a negotiable instrument in good faith and for value obtains a valid title
to it, though he takes it from one who had no title to it or who was merely a thief.”
How far is the above principle applicable in India? Discuss with reference to the
definition of "Hoder in due course' in the Negotiable Instruments Act, 1881 and the
relevant case law, if any. [LL.B., D.U.J
Q6. Critically examine the concept 'holder in due course' and bring out the differences,
if any, between the Indian and English law referring to the statutory provisions and
the case law on the subject. [LL.B., D.U.]
Q7. What is the definition of 'Holder in due course’ in Negotiable Instruments Act, 1881?
Bring out the differences, if any, between the Indian Law and the English law. Refer
to the statutory provisions and judicial decisions on the subject. [LL.B., D.U.]
 Negotiable Instruments, Banking and Insurance 27

"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 bearer or the payee or indorsee 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.

1 Thus, according to the section a holder in due course may be either

(a) the possessor of a promissory note, bill of exchange or cheque payable
to bearer, or (b) the payee or indorsee thereof in other cases. In each case,
however, the following three conditions must be satisfied for a holder in
due course :

1. he must be a holder for valuable and lawful consideration;

2. he must become the holder before the amount become payable i.e.
before maturity; and

3. he must become the holder without having sufficient cause to believe

that any defect existed in the title of the person from whom he
derived his title.

1. Consideration - Holder in due course must be a holder for valuable

consideration as defined in S. 2(d) of the Indian Contract Act, 1872. The
consideration, however, need not be adequate. It should not be unlawful
under S. 23 of the Indian Contract Act. 1872.

A donee by way of gift of an instrument is not a holder in due course

for want of consideration, although he is a holder. However, if the donor
is a holder in due course, by virtue of the rule contained in S. 53 of the
Act the donee ipso facto acquires all the rights of the holder in due course.
A debt due on a wagering agreement is not valid consideration, and a
person who acquires an instrument in consideration of such a debt, is not
a holder in due course. The discounter of a bill of exchange may become
a holder in due course if the other requirements of the section are satisfied.

In Danlat Ram v. Nagindas, (1913) 15 Bom. L.R. 333, it was held that
if a debtor hands over a negotiable instrument to his creditor in discharge

contd. from previous page

Q7A. Critically examine the concept of "holder in due course" in India.
Is X a “holder in due course” in the following cases :
(i) 'A' give a bearer cheque of Rs. 50,000/- to X on his birthday to purchase a
good laptop.
(ii) ‘A’ is the payee of a bearer cheque. 'A' misplaces the cheque in the Delhi Metro.
<T2’ it . ~ ;♦ ♦ « <-V> rr r rx rx rr i
 2.8 Holder and Holder in Due Course
of a pre-exiting debt, the creditor can claim to be a holder in due course
of the instrument.
If a holder holds a negotiable instrument as a pledgee, he is deemed
co be holder for value to the extent of his advance or loan.

In Anil Kumar S. v. N. Ramakrishna Karba Gokulam and Another,

AIR 2009 (NOC) 5541 (Ker.), it was held that in order to make a person other
than a payee, a holder in the course of a cheque payable to order, there must
be indorsement in his favour and a delivery of the cheque as provided
under section 48 of the Negotiable Instruments Act. Delivery alone is not
sufficient to make the a holder in due course. In this case, a cheque for Rs.
1,00,000 was payable to Krishnadas. There was no indorsement by Krishnadas
in favour of first respondent. The first respondent claimed that for
consideration he received the cheque from the brother of the payee
(Krishnadas) as the payee was out of India. He presented, the cheque for
encashment and it was dishonoured for insufficiency of funds. He sent
notice to the drawer, demanding the amount. The drawer did not make the
payment to him. Later, he lodged a complaint under section 138 of the Act.
Kerala High Court held that a person who was neither payee nor the
indorsee of a cheque payable to order is not entitled to file a complaint
under section 138 of the Act, as he is not a holder in due course.

In Bank of India v. State, 2010 (7) AD (Delhi) 885, it was held by the
Delhi High Court that if a cheque is handed over by a person to Bank with
clear understanding to the Bank that the cheque was towards the debt
payable to the bank it s not necessary that the cheque should be enclosed
in favour of the Bank. In such a case, the Bank was held to be a holder in
due course even when there was indorsement on the cheques. In Babulal
Jain v. Kewal Chand Jain, AIR 2008 (NOC) 434 (MP), a self-cheque was
issued and the words "or bearer" were not stuck off. The complainant, to
whom the cheque was issued was held to be a holder in due course.

2. Before maturity - The person must become the holder before the
amount becomes-payable. A person who takes a bill or note on the day
on which it becomes payable is not a holder in due course because he takes
it after it becomes payable as the instrument can be discharged at any time
on that day.
A bill of exchange payable on demand is deemed to be overdue when
it appears on the face of it to have been in circulation for an unreasonable
length of time. What is unreasonable length of time for this purpose is
question of fact [S. 36(3) of the (English) Bill of Exchange Act, 1882].
 Negotiable Instruments, Banking and Insurance 2.9
A cheque is always payable on demand. However, a cheque is intended
for immediate or early payment and not for circulation. It can remain in
circulation for a maximum period of three months, according to RBI
Guidelines, from the date of the cheque. Earlier, this period was six months
according to trade custom and practice.

A promissory note payable on demand is not overdue unless a demand

for payment has been made. A note payable on demand may be outstanding
for a long period at the time of its negotiation to the holder which will not
necessarily debar him from claiming to be a holder in due course because
according to custom and practice it is treated as a continuing security.

As said above a promissory note payable on demand is not overdue

unless a demand for payment has been made. If the demand for payment is
made and it is dishonoured the fact of zvhich is not noticed on the note and is
negotiated to a bonafide holder for consideration, he becomes the holder in due
course. Thus, the bonafide person is not to be prejudiced by any dishonour of zvhich
he had no notice. If the demand for dishonour is apparent from the face of the note
or from other circumstances, he cannot become the holder in due course.

Even if an instrument has been paid off and it has not been withdrawn
from circulation, there is nothing to prevent a person to whom it has been
negotiated, for valuable consideration from becoming the holder in due
course provided he had no knowledge of payment, nor it was apparent
from the face of the instrument (Nunna Gopalan v. Vuppuluri
Lakshinarasamma, AIR 1940 Mad. 651, S.D. Asirvatham v. Palniraju, AIR
1973 Mad. 439).

A person can be a holder in due course of a post-dated cheque. According

to S. 59, "the holder of a negotiable instrument, who has acquired it after
dishonour whether by non-acceptance or non payment, with notice thereof,
or after maturity, has only, as against the other parties, the rights thereon
of his transferor."

3. Without having sufficient cause to believe that any defect existed

in the title of the person from whom he derived his title.08 - This is
explained below:

English Law
Under the English law the only question to be considered is whether
the holder took the instrument in good faith (i.e. honest belief that the title

Q8. The test of good faith in Indian Law on 'Holder in due course' is stricter than the
English Law. Explain. \ fLL.3., D.U.]
 2.10 Holder and Holder in Due Course
of the transferor is good) and once it is established that he did so, he is
entitled to the rights of a holder in due course notwithstanding that he was
careless, that he made no enquiry, and that he was informed of facts which
would have led a reasonable man to make further inquiry. According to
Section 90 of the (English) Bill of Exchange Act, "A thing is deemed to be
done in good faith within the meaning of this Act, where it is in fact done
honestly, whether it is done negligently or not."

Section 29 (1) of the (English) Bill of Exchange defines a holder in due course
asfbllows :

■ “A holder in due course is a holder who has taken a bill, complete and regular
on the face of it, under the following conditions, namely—

(a) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonoured, if such was the fact;

(b) That he took the bill in good faith and for value, and that at the time the
bill was negotiated to him, he had no notice of any defect in the title of
the person who negotiated it."

Section 29(2) of the (English) Bill of Exchange Act provides that, "In
particular the title of the person who negotiates a bill is defective within
the meaning of the Act when he obtained the bill, or the acceptance thereof,
by fraud, duress or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith, or under such
circumstances as amount to fraud." According to Section 29(3) of the
(English) BE Act "A holder (whether for value or not), who derives title
to a bill through a holder in due course, and who is not himself a party
to any fraud or illegality affecting it, has all the rights of that holder in due
course as regards the acceptor and all parties to the bill prior to that
holder."

Thus, where there is evidence of malafides or bad faith, then it is

immaterial whether at the time of taking the instrument he was negligent
or not. In Raphael v. Bank of England, (1855) 17 CB 161, it was held that
"one who takes a blank note or other negotiable security bonafide that is,
giving value for it and having no notice at the time the party from whom
he takes it has no title, is entitled to recover upon it even though he may
at that time have had the means of knowledge of that fact of which means
he neglected to avail himself." In this case some bank notes, issued by the
Bank of England were stolen from B.S.&Co. of Liverpool, on 13Ih November,
1852. Notice regarding the robbery of bank notes was given to the Bank
of England. The notice was circulated to various banking institutions in
 Negotiable Instruments, Banking and Insurance 2.11
Liverpool, London and Paris. Such a circular was also received by St. Paul,
a money changer in Paris in April, 1853. One of the bank notes for £ 500
was presented to St. Paul on 25th June, 1854. The money changer after
verifying that the holder had the passport and obtaining his signatures
made the payment of the bank note to the holder in the currency of France.
At the time of payment St. Paul did not look at the file containing notice
of robbery of the bank note. Held, these circumstances of his forgetting or
omitting to look for notice was no notice of malafides. Raphael, who was
St. Paul's agent in London, was held entitled to claim the money of the
impugned bank note from the Bank of England.

Indian Law
As regards requirement of good faith our law is stricter than English
Law on the. subject. English law only requires "good fiath" on the part
of the holder at the time of taking the instrument But under our Act
as the words used are "withour having sufficient cause to believe" etc.,
it seems that the intention of the legislature is to make due care and
caution on the part of the holder a test of his bonafides and that mere
good faith on his part will not suffice. Under the Indian law it is not
sufficient to show that the holder acquired the instrument honestly, if
in fact he was negligent or careless. In this respect, the Act seems to have
followed the old English rule laid down by Lord Tenterden in Gill v.
Cubitt, (1824)3 BSC 466, according to which due care and caution was
made the test of bonafides.

The Supreme Court in U. Ponnappa Moothan & Sons v. Catholic

Syrian Bank Ltd., AIR 1991 SC 441, after reviewing the case law and
leading authorities on the subject, held that the Indian definition of
'holder in due course' (based on Gill v. Cubitt), imposes a more stringent
condition than the English definition. The Indian definition requires
that he should act in good faith and with reasonable caution. Under the
Indian Law, a holder to be a holder in due coure must acquire the bill,
note or cheque without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title. However,
mere failure to prove bonafide or absence of negligence on his part would
not negative his claim as a holder in due course.

In the above Indian case, the plaintiff bank (the respondent)had allowed
credit facilities including cheque purchases upto a limit of .Rs. 35,00,000
to the firm, defendant 1. A promossory note was executed by defendants
2 to 4 being partners of the firm,in favour of their mother, defendant 5 for
an amount of Rs. 35,00,000 and the same was indorsed in favour of the
 2.12 Holder and Holder in Due Course
plaintiff as security for the facilities granted to the first defendant. The first
defendant firm was supplying goods to defendant 6 (the appellant) and
used to receive payments by way of cheques. Accordingly defendant 6
drew two cheques on a Bank (Union Bank of India) in favour of the first
defendant payable to it or order. The cheques were purchased by the
plaintiff bank (the respondent) from the first defendant on valid
consideration and proceeds were credited by the bank (the respondent) on
account of the first defendant. On presentation the drawee bank (Union
Bank of India) returned the cheque with the remark "full cover not received".
The appellant (defendant 6) contended that the cheques were issued on
the understanding that the same would be presented only after consignment
of goods was despatched and first defendant having failed to despatch the
goods, defendant 6 could not pay the money in the bank and therefore the
cheques were not honoured; the plaintiff was only a collection agent; the
plaintiff was not a holder in due course and that the plaintiff acted negligently
and in disregard of the provisions of law.

The Supreme Court held that "in the instant case, there was an express
contract for providing the credit facilities. It should, therefore, necessarily
be inferred that there is also an implied contract to credit the proceeds of
the cheques in favour of the first defendant to his account before actually
receiving them. In such a situation the plaintiff need not make enquiries
about the transactions of supply of goods, etc. that were going on between
defendants 1 and 6. Even if defendant 1 has not supplied the goods in
respect of which the cheque in question were not issued by defendant 6
there was no cause, at any rate sufficient cause, for the plaintiff to doubt
the title of the first defendant nor can it be said that the plaintiff acted
negligently disregarding 'red flag' raising suspicion. Viewed from this
background it cannot be said that there was sufficient cause to doubt the
title nor is any scope to infer gross negligence on the part of the plaintiff."
The court summarised the legal position as follows

"A holder's failure to prove his bonafides or absence of negligence

ivould not negate his claim to be a holder in due course, yet, in the
circumstances of a given case, if there is a patent gross negligence on his
part which by itself indicates lack of due diligence, it can negate his claim,
for he cannot negligently disregard a 'red flag' which arouses suspicion
regarding the title."

The Supreme Court in the instant case agreed with the Allahabad High
Court's decision in Durga Shah Mohal Lal Bankers v. Governor, General­
in-Council, AIR 1952 All. 590, that mere failure of the plaintiff to prove
bonafides or absence of neelierence on his oart would not negative his claim
 Negotiable Instruments, Banking and Insurance 2.13
as a holder in due course. The Court overruled Raghavji Vizpal v. Narandas
Parmanandas, (1906) 8 Bom. LR 921, in which the Mumbai High Court has
held that mere negligence would not invalidate the title of a person taking
a negotiable instrument in good faith and for value. Thus, the decision in
Raghavji case was agains the rule of "due care and caution".

In Praveen Metal Agencies v. M. B alasubram anyam, (1955) 84 Comp.

Cas 782, the Karnataka High Court held that the plaintiff was not bound
to enquire about the genuineness of the transaction between the drawer
and drawee; the court saw no 'red flag' that should have put the plaintiff
on inquiry. In this case the defendant had left blank cheques with his
employee, who, exceeding his authority completed and issued them to a
third party. The plaintiff took the cheques for valuable consideration under
the payee's indorsements.

In the English case Gill v. Cubitt, (1824) 3 B&C 466, a bill of exchange
was stolen during the night and taken to the office of a discount broker
early in the following morning by a person whose features were known,
but whose name was unknown to the broker and the latter being satisfied
with the name of the acceptor, discounted the bill, according to his usual
practice, without making any inquiry of the person who brought it. On
these facts it was held that the plaintiff had taken the bill under circumstances
which ought to have excited the suspicion of a prudent and careful man.
In England, the law laid down in Gill v. Cubitt is not law at present.

Thus, if a person takes an instrument which is incomplete or irregular

on the face of it, or an instrument which is torn to pieces and then pasted
together or an instrument which contains erasures or an instrument from
which the payee's indorsement is altered and the alteration is apparent
on the fact of it, does not make him a holder in due course. Extent of
consideration may be of vital importance in determing the question of
bonafides. Where a person offers to take up a bill for a considerable under­
value it should put an honest holder on his guard. If he takes up such a
bill without sufficient enquiry, he does so at his own peril. There can be
no holder in due course under a forged indorsement. The time at which the
person should take due care and caution or he should not have any
knowledge about defect is when he takes the instrument; notice received
subsequent to his perfecting the title will not affect his title. The defect zvhich
disqualifies a person from claiming to be a holder in due course, must be a defect
in the title of his immediate transferor and the defect in title of any prior party
does not affect the title of the holder. Thus, if a holder knew when he took
the intrument, of any fraud practised by any party prior to his transferor,
he would not be affected by it.
 2.14 Holder and Holder in Due Course
In Simmons v. London Joint Stock Bank, (1891) 1 Ch. 270 Kakewich,
J, observed that this stricter rule of Indian law makes it difficult for
dishonest transferors to part with negotiable instrument, and honest
transferors will not suffer from it, as they have no real difficulty in
persuading the transferees to take the instrument as their title is good.
Commenting on this Bhashyam and Adiga in their book : The Negotiable
Instruments Act, Edition 14th Page 169 say that "the law should be framed
not only for the purpose of putting difficulties in the way of dishonest
brokers, but also to protect people who acting honestly take such instrument
for vaiue; for otherwise, the rapidity with which the commercial business
is transacted, will be seriously impeded and the very object of negotiable
instruments will be defeated."

Privileges of Holder in Due Course09’010

A holder in due course occupies the most important position in law
of negotiable instruments as he enjoys the following exclusive privileges—

1. Privilege in case of inchoate stamped instrument - According to

S. 20, "When a person signs and delivers to another a paper stamped in
accordance with the law relating to negotiable instruments then in force
in India, and either wholly blank or having written thereon an incomplete
negotiable instrument, he thereby gives prima facie authority to the holder
thereof to make or complete, as the case may be, upon it a negotiable
instrument, for any amount specified therein and not exceeding the amount
covered by the stamp. The person so signing shall be liable upon such
instrument, in the capacity in which he signed the same, to any holder in
due course for such amount: Provided that no person other than a holder
in due course shall recover from the person delivering the instrument
anything in excess of the amount intended by him to be paid thereunder."

Thus, if the holder of an inchoate stamped instrument fills more

amount than authorized he cannot enforce the instrument for the whole
amount and only authorized amount can be recovered. However if the
instrument is negotiated to a holder in due course he can claim the full
amount provided it is covered by the stamp affixed thereon. For example,
A signs and gives to B a blank instrument and authorized him to fill it as
a promissory note for Rs. 5,000 to secure an advance from C. B fills it up
for Rs. 15,000 payable to C who in good faith advances Rs. 15,000 to B.

Q9. A 'holder in due course’ enjoys certain rights and privileges. Explain?[LL.B., D.U.]
Q10. Who is entitled to the protection granted to a holder in due course? [LL.B.; D.U.]
 Negotiable Instruments, Banking and Insurance 2.15
A is estopped from setting up B's fraud and C is entitled to recover Rs.
15,000 from A.

2. Privilege in case of fictitious payee - According to S. 42, "An

acceptor of a bill of a exchange drawn in a fictitious name and payable
to the drawer's order is not, by reason that such name is fictitious,
relieved from liability to any holder in due course claiming under an
indorsement by the same hand as the drawer's signature, and purporting
to be made by the drawer." The expression "a bill of exchange drawn in
a fictitious name and payable to the drawer's order" means that both the
drawer and the payee are fictitious persons. "Fictitious payee" means a
person who is not in existence or being in existence is never intended by
the drawer to have the payment.

Thus, where the drawer of a bill of exchange payable to drawer's order

is also the payee and is a fictitious person, the acceptor is liable on the bill
to a holder in due course, if the latter can show that signature of the
supposed drawer and the first indorsement are in the same hand.

The leading authority on this is the case of Bank of England v. Vagliano

Brothers (1891) AC 107, 153. According to the facts of the case, Vagliano
used to accept bills drawn on him by a foreign agent and payable to a
foreign firm P & Co. Vagliano's clerk obtained acceptance on certain false
bills, all purporting to be drawn by the foreign agent and payable to the
foreign firm. He indorsed the bills in the name of foreign firm. Thus, the
clerk forged the signature of the foreign agent and that of the foreign firm
P&Co. The clerk obtained payment from the Bank of England where
Vagliano's bills were payable and the Bank accordingly debited Vagliano's
account. This was opposed by Vagliano contending that the bills were
fictitious. But it was held that the Bank of England being the holder in due
course, was protected against all such defences.

If payee is not fictitious payee, the privilage under section 42 is not

available to a holder in due course. For example, D draws a cheque in favour
of P, an existing person A, who induced D to draw the cheque. D, instead
of sending the cheque to P, forges P’s signature and pays the cheque in his
own bank. In this case, P is not a fictitious payee. D can recover the amount
of the cheque from A's bankers.

3. Privilege in case of conditional delivery - If a negotiable instrument

is negotiated to a holder in due course, the other parties to the instrument
cannot avoid liability on the ground that the delivery of the instrument was
conditional or for a special purpose only (Sections 46 and 47). The plea of
conditional delivery or delivery for a special purpose is available against
 2.16 Holder and Holder in Due Course
immediate parties and also against remote parties who take it with notice
of the condition of special purpose or other defect in the title but not against
a holder in due course.

For example, A, the holder of a bill, indorses it "B or order" for the
specific purpose that B may get it discounted. B does not do so and
negotiates it to C, a holder in due course. C acquires a good title to the
bill and all prior parties are liable to him.

4. Liability of prior parties - S. 36 provides that "Every prior party

to a negotiable instrument is liable to a holder in due course until the
instrument is duly satisfied." The expression prior party in this section
means the maker or drawer, the acceptor and all the intervening indorsers.
Every prior party remains liable on the instrument to every subsequent
party, and to a holder in due course, entie the instrument is duly satisfied
by payment or satisfaction thereof by the maker or acceptor at or after
maturity.

5. Holder deriving title from a holder in due course - S. 53 says that

"A holder of a negotiable instrument who derives title from a holder in
due course has the rights thereon of a holder in due course." Thus, a person
who takes a negotiable instrument from a holder in due course can recover
the amount from all prior parties, although he had knowledge of the prior
defects, e.g., no consideration was paid by some of the prior parties or any
of them was a thief.
But, a forged instrument, even if passes through the hands of a holder in due
course, cannot be cured of its defects because there is no defect of title but there
is complete absence of title. Similarly, to acquire the rights of a holder in due
course the holder must not himself have been a party to any fraud or
illegality affecting the instrument. Courts will not help a party to reap the
advantage of his own fraud. For example, A by fraud, induces B to make
a promissory note in his favour. A indorses the note to C who takes it as
a holder in due course. C subsequently indorses the note to A for value.
A cannot sue B on the note.

6. Instruments obtained by unlawful means or for unlawful

consideration011. S. 58 provides that "When a negotiable instrument has
been lost or has been obtained from any maker, acceptor or holder thereof
by means of an offence or fraud, or for an unlawful consideration no

Q11. A, by fraud, induces B to make a promissory note in his favour. A negotiates the note
to C who takes it as a ‘holder in due course’. C consequently, donates the note to D.
Discuss the rights of D against C, A and B with the help of statutory provisions.
 Negotiable Instruments, Banking and Insurance 2.17
possessor, or indorsee who claims through the person who found or so
obtained the instrument is entitled to receive the amount due thereon from
such maker, acceptor or holder, or from any party prior to such holder,
unless such possessor or indorsee is, or some person through whom he
claims was holder in due course."
It means that the pleas on the part of the person liable on negotiable
instrument which had been lost or obtained by means an offence (say theft)
or fraud or for an unlawful consideration, cannot be set up against a holder
in due course. Here it must be noted that a holder in due course can purify a
defective title but he cannot create any title unless the instrument is payable to
bearer. For details see "Negotiation by unauthorised parties" in the next
chapter.
For example, a bill is payable to "A or order." It is stolen from A and
the thief forges A's signatures and indorses it to B who takes it as a holder
in due course. B cannot recover the money. On the other hand, if the bill
is payable to bearer and it is stolen and the thief delivers it to B, a holder
in due course, D can recover the amount of the bill.
In Firm Kalka Prasad Ram Charon v. Kanwar Lal, AIR 1957 All 104,
it was held that the indorsement on a negotiable instrument through which
a holder in due course claims must be genuine and, therefore, a forged
indorsement creates no title in favour of the holder in due course.
7. Estoppel against denying original validity of instrument - No
maker of a promissory note and no drawer of a bill of exchange or cheque,
and no acceptor of a bill of exchange for the honour of the drawer shall,
in a suit thereon by a holder in due course, be permitted to deny the
validity of the instrument as originally made or drawn (S. 120). This
specific provision is subject to general rule enacted in section 26. Therefore,
a person can deny the validity of a note on the ground that he was a minor
on the date of the note.
8. Estoppel against denying capacity of payee to indorsee - No maker
of a promissory note and no acceptor of a bill of exchange payable to order
shall, in a suit thereon by a holder in due course be permitted to deny the
payee's capacity, at the date of the note or bill (S. 121). Therefore, if a holder
in due course files a suit on a note, the maker of the note will not be
permitted to say that payee was a minor, a that he was of unsound mind
at the time of making of the note. Similarly, if a holder in due course files
a suit on a bill of exchange, the acceptor of bill of exchange cannot deny
the capacity of the payee.
9. Estoppel against denying signatures or capacity of prior party - No
**
• ' ~x— A-4 ~ Lw 1 *^11
> r»-» o ai il^co/Ti 1 1-
 2.18 Holder and Holder in Due Course
holder, be permitted to deny the signatures or capacity to contract of any
prior party to the instrument (S. 122).

Difference between Holder and Holder in Due Course

The following are the points of difference between a holder and holder
in due cousre :

1. Nature - A holder means any ,person entitled in his own name to

the possession of a negotiable instrument and to receive or recover the
amount due thereon from the parties thereto. A holder in due course means
a holder who has taken the instrument in good faith with due care and
caution for value and before maturity.

2. Consideration - In case of holder, consideration is not necessary, but

a holder in due course must acquire the instrument for lawful consideration.

3. Maturity - A holder may acquire the instrument after maturity, but

a holder in due course must acquire the instrument before maturity.

4. Title - A holder does not get a better title than that of his transferor,
but a holder in due course gets a better title than that of his transferor.

5. Notice of defect in the transferor's title - A holder in due cousre

must act in good faith and with reasonable caution at the time of taking
a negotiable instrument. A holder may diave notice of defective title but
he must not be a party to it.

6. Privileges - A holder does not enjoy special privileges, but a holder

in due course enjoys certain special privileges._________

PAYMENT IN DUE COURSE

Payment is one of the ways of discharge of liability provided it is
"payment in due course" which is defined in S. 10 as follows.

"Payment in due course" means payment in accordance with the

apparent tenor of the instrument in good faith and without negligence
to any person in possession thereof under circumstances which do not
afford a reasonable ground for believing that he is not entitled to receive
payment of the amount therein mentioned."

Thus, payment in order to operate as discharge of liability must satisfy

the following conditions:

1. In accordance with the apparent tenor - The first requirement of

an effective payment is that it should be in accordance with the apparent
 Negotiable Instruments, Banking and Insurance 2.19
tenor of the instrument. Apparent tenor means in accordance with what
appears on the face of the instrument to be the intention of the parties.
Therefore, it is essential that payment should be made at or after maturity.
Payment must be made by or on behalf Of the drawee or acceptor in money
only unless otherwise agreed upon by the holder. A payment before maturity
is not in accordance with the apparent tenor and therefore not paymen in
due course. If an acceptor pays the bill before maturity he may indorse the
bill to any person and then all other parties remain liable to a bona fide
indorsee.

2. In good faith and without negligence - Secondly, the payment

should be made in good faith, without negligence and under circumstances
which do not afford a reasonable ground for believing that the person to
whom it is made is not entitled to receive the amount. Thus, if there are
suspicious circumstances and the person making the payment fails to make
the necessary inquiry, the payment is not a payment in due course. For
example, any payment by the acceptor of a bill after receiving orders from
the drawer to stop payment or payment of a cheque bearing forged
signatures of customer as drawer without the banker exercising due care
is not a payment in due course.
3. To the person in possession of instruments - Lastly, the person to
whom payment is made should be in possession of the instrument. Section
78 says the payment should be made to the holder of the instrument as
defined in S. 8. Section 82(c) says that if the instrument is payable to bearer
or indorsed in blank, payment is a good discharge if it is made in due
course. S. 8 says that holder is a person who is entitled in his own name
to the possession thereof and to receive or recover the amount due thereon
from the parties thereto. Thus, the inteption of the Act is that the payment
should be made to the right person, i

In case of instrument payable to bearer it is very difficult to know

whether the person in possession of the instrument is rightfully entitled
to it. S. 10 provides that the payment may be made to the person in
possession if there is nothing to show that he is not entitled to receive it.
T1' us, payment even to a thief or finder will discharge the maker, acceptor
or banker if there is nothing to arouse the suspicion of a prudent man.

However, in case of an instrument payable to order, it is must that the

payment be made to the genuine person. If payment: is made to a person
who has got the instrument through a forged indorsement it will not
discharge the payer and he will remain liable to the true owner of the
instrument. The only exception is in favour of a banker as provided in S.
 2.20 Holder and Holder in Due Course
85 which says, "Where a cheque payable to order purports to be indorsed
by or on behalf of the payee the drawee is discharged by a payment in due
course." S. 85A extends this provision to bank drafts.

To whom payment should be made

As said earlier S. 78 lays down that 'Subject to the provisions of S. 82
clause (c), payment of the amount due on a promissory note, bill of exchange
or cheque must, in order to discharge the maker or acceptor, be made to
the holder of the instrument" S. 82(c) prescribes that the maker, acceptor
or indorser respectively of negotiable instrument is discharged from liability
thereon to all parties thereto if the instrumeni is payable to bearer, or lias
been indorsed in blank, and such maker, acceptor or indorser makes payment
in due course of the amount due thereon.

In Lachmi Chand v. Madanlal, A.I.R. 1947 AM 52, a promissory note

was executed in the name of an individual person, who was described as
the owner and manager of certain religious institution which, later-on
became a registered society and a suit on the note was instituted in .the
name of the registered society, through its secretary, but the payee of, the
note was not made a party to the suit. It was held that it could not be said
that the plaintiff registered society was in a position to secure a discharge
of the maker of the note from all liability under the note and hence the
suit as brought was not maintainable.

In Sangeshwar v. Gita Devi, AI.R. 1975 Pat. 81, it was held that the
maker of a promissory note can obtain the discharge of his debt by making
payment to the holder of the instrument alone and to no one else.

Payment by cheque
In K. Saraswuli alias K. Kalpana (Dead) v. P. S. S. Somasimdharam
Chettiar, (1989)4 S.C.C. 527, it was held that payment by cheque is an
ordinary incident of present day life, whether commercial or private, and
unless it is specifically mentioned that payment must be in cash payment
by cheque should be taken to be due payment if there was nothing to show
that if the cheque was presented for encashment on the date it was delivered
the cheque would not have been encashed, or that the bank had any time
declined to honour it for want of funds in the ordinary course, or that under
the arrangements made for payment of the cheque, even if it had been put
for encashment on the date it was delivered the cheque would not have
been encashed. Therefore, the submission that there was no money on the
date of delivery of the cheque to support payment of it and that it was
 Negotiable Instruments, Banking and Insurance 2.21

subsequently when arrangements were made that the cheque was realized,
cannot be sustained.

LEADING CASES
Lachmi Chand v. Madan Lal Khemka
AIR 1947 AH. 52
(The term "holder" does not include a person who though in possession of
the instrument has not the right to recover the amount due thereon from the parties
thereto, though he is in possession of the instrument)

Facts
A promissory note was executed by Lala Lachmi Chand (defendant­
appellant) on 25-8-1928 for a sum of Rs. 10,000 carrying a certain rate of
interest in favour of Shri 108 Baba Kali Kamliwala Ramnath Maniramji of
Rishikesh. On 28-7-1930 a sum of Rs. 4,000 was paid by the defendant. The
impugned note was renewed from time to time by the appellants and his
son Onkar Prasad. Lastly in 1939 a pronote was executed by them for a
sum of Rs. 13,302-11-00 by way of renewal of the pre-existing liability
under the former pronote. All the pro-notes were executed in favour of Shri
108 Baba Kali Kamliwala Ramnath Maniramji of Rishikesh, the payee. The
payee was the owner and manager of what became a registered society
as Baba Kali Kamliwala Panahaiti Khhetra Rishikesh in the year 1932. The
suit was instituted in the name of the registered body by its secretary and
the payee was not a party to the suit. The plaintiff-respondent contended
that he was the real creditor while the holder of the promissory note was
its benamidar and therefore could maintain the suit. The defendant-appellant
contended that the plaintiff not being the payee of the pronote could not
by reason of S. 78 read with S. 8 of the Act successfully enforce the liability
of the defendant under the pronote.

Decision of the Allahabad High Court

After quoting S. 8 and S. 78 of the Act Wali Ullah, J., observed -as
follows:

"Reading the two sections together it is clear that the person to whom the
payment should .be made in order to discharge the maker or the acceptor from all
liability under the instrument is the "holder " of the instrument or his accredited
agent, such as a banker acting as an agent for collection. The "holder" of a
promissory note is essentially the person xvho is entitled "in his own name". The
 2.22 Holder and Holder in Due Course
words entitled "in his own name" are obviously most significant. The legislature
appears to have clearly intended to prevent any one from claiming the right
of a "holder" under the Act on the grounds that the ostensible holder is
the mere name-lender. The term "holder" therefore, does not include a
person who though in possession of the instrument, has not the right to
recover the amount due thereon from the parties thereto. The principle
enshrined in S. 78 of the Act is clearly in accord with the basic principle
underlying the law relating to negotiable instrument, viz. that the doctrine
of benami will introduce an element of uncertainty greatly hampering the
free circulation of negotiable instruments."

His Lordship quoted several decided cases and pointed out that the
principle enunciated in these cases is that "where a hand note is executed
in favour of a benamidar, it is not open to the promisor to assert that the
holder of the note is not the beneficial owner. Conversely, if a suit is to be
based upon the hand note it must be instituted by the holder zvhose name appears
on the note and not by any person who alleges that the original holder is his
benamidar and that he is the beneficial owner.

Further, it was observed that it has also been held that the real owner
is entitled to sue provided he is in a position to obtain a good discharge
from liability from the maker or acceptor of the instrument. If the person
who is ostensibly the holder of the promissory note is made a party to the
suit and in his presence it is alleged that the plaintiff is the real beneficiary
and he can prove his allegation by evidence or by the admission of the
ostensible holder of instrument there is no reason why such a suit should
not be maintainable.

Tirus, the Court held that the judicial opinion on the question whether
a suit lies at the instance of the real holder as distinguished from payee
or the indorsee of a promissory note is far from unanimous. The broader
view, however, which has been accepted in some cases was also followed
by the Court. Applying the principles enunciated above to the facts the
Court held that in the impugned case it is "impossible to hold that the
plaintiff (the registered society) was (while the suit was pending in the
Court below) or even now in a position to secure a discharge of the
defendant from all liability under the pronote in suit." The Court accordingly
held that the present case does not fall even within the scope of the
"broader principle" referred to above. The suit as instituted by the plaintiff­
respondent could not succeed and the appeal was thus allowed.
 Negotiable Instruments, Banking and Insurance 2.23
Singheswar Mandal v. Sint.Gita Devi
AIR 1975 Pat. 81
("Holder" of a promissory note means a person entitled in his own name to
the possession thereof and to receive or. recover the amount due thereon from the
parties thereto.)

Facts
A holder of a hand note made an arrangement that the plaintiff
respondent, one of his heirs (i.e., his daughter) and not other heirs (i.e. two
wives), would bte entitled to get the amount due under the hand note. But
no indorsement was made on the hand note in favour of the plaintiff. After
the holder's death, plaintiff filed the suit for recovery of the amount under
the hand note and the defendant second party (i.e. co-widows) admitted
about the said arrangement. Defendant No. 1 (the appellant) contested the
suit on various grounds, inter alia; that the plaintiff being not the holder
of the hand note in question, she had no right to institute the suit in
question.

Issue before the Patna High Court

Whether the suit for recovery of loan filed by one of the heirs pleading
arrangement under an instrument, not being indorsee or transferee by the
holder is maintainable ?

Decision
The Court held that the suit was not maintainable as the plaintiff was
not an indorsee under section 82(c) of the Negotiable Instruments Act, nor
a transferee under Section 130 of the Transfer of Property Act.

The Court said:

"Under the provisions of Section 78 of the Negotiable Instruments Act,

payment of the amount due on a promissory note, etc. in order to discharge
the maker or acceptor, must be made to the holder of the instrument or
if the same is indorsed, then to the indorsee as provided under Section 82(c)
of the Act which is not the case here. The provisions of the Negotiable
Instruments Act are specific."

In the present case hand note was not indorsed in favour of the plaintiff
nor did the recital in any way indicate intention of the creditor for the
payment of the ultimate dues by the debtor to the plaintiff. According to
 2.24 Holder and Holder in Due Course
S. 8 "holder" of a promissory note means a person entitled in his own name to
the possession thereof and to receive or recover the amount due thereon from the
parties thereto. As the plaintiff did not answer any of the description mentioned
above, the defendant was not bound to make the payment to her and the plaintiff
had no right to institute the suit.

It was further observed that it was not a case either of any transfer of
the debt or claim which under the provisions of Transfer of Property Act
would be an actionable claim by the father to the plaintiff. In view of the
provisions of Section 130 of the Transfer of Property Act the transfer of
a actionable claim has to be effected only by the execution of an instrument
in writing signed by the transferor or his duly authorized agent and only
thereafter the rights and remedies of the transferor is to vest in the transferee.

Therefore, it was held that as the said arrangements failed to satisfy

the conditions of an indorsee under S. 82(c) of the Negotiable Instruments
Act and/or of a transferee under S. 130 of the Transfer of Property Act,
the plaintiff was not entitled to file the suit.

Nunna Gopalan v. Vuppuluri Lakshminarasamma

AIR 1940 Mad. 631
(Where the maker had discharged a promissory note but did not insist on its
return and left it in the hands of the payee, who indorsed it to a holder in due
course, the maker must suffer in preference to the holder in due course.)

Facts
On Dec. 10, 1933 the respondent executed a promissory note payable
on demand in favour of one Maldipati Tattabayan, defendant No. 2. Tire
respondent (maker) paid the amount due on the note after two days but
left the note in the hands of the payee. The payment was not noted on the
promissory note. After receipt of such payment the payee next day indorsed
the promissory note to another who had no knowledge of the fact of
payment The indorsee (petitioner) instituted the suit on the promissory
note against the maker (respondent).

Issue
Whether the indorsee was entitled to recover the money either from
the payee or the maker ?
 Negotiable Instruments, Banking and Insurance 2.25
Decision of the Madras (now Chennai) High Court
It was held that under Sections 9, 22 and 60 the indorsee was entitled
to recover the amount both from the payee and the maker. Chief Justice
Leach quoted S. 9 and interpreted S. 22, S. 60 and S. 118 as follows:—

"Section 9 of the Act states that the term "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 bearer or the payee or
indorsee, 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. Section
22 says that the maturity of a promissory note or bill of exchange is the
date at which it falls due. It is to be observed that in the case of a
promissory note which is payable on demand, it does not become payable
until demand is made. On demand being made it falls due immediately.
Section 60 provides that a negotiable instrument may be negotiated (except
by the maker, drawee or acceptor at or after maturity) until payment or
satisfaction by maker, drawee or acceptor at or after maturity, but not after
such payment or satisfaction. Such payment means at or after maturity.
Section 118 says that until the contrary is proved, it shall be presumed that
every transfer of a negotiable instrument was made before its maturity; and
that the holder of a negotiable instrument is a holder in due course. In this
case, there is no evidence of any demand having been made on the
respondent before she paid the amount to the payee of the instrument
and it must, therefore, be taken that the indorsement to the petitioner
took place before maturity. According to the sections of the Act to which
reference has been made the petitioner is clearly entitled to recover from
the maker."

Chief Justice Leach cited certain cases and held as follows:—

"The respondent had discharged the promissory note on 12.12.1933 but

it was indorsed to the petitioner without knowledge of this fact the next
day and the respondent as the maker of the note should have insisted on
its return to her when she paid the amount. She did not do so and she left
the instrument in the hands of the payee and thus gave him an opportunity
to commit a fraud, she must suffer in preference to the petitioner. In this
connection I may point out that S. 10, Negotiable Instruments Act, provides
that any person liable to pay amount due on a promissory note, is before
payment entitled to have it shown and is on payment entitled to have it
delivered upto him, or if the instrument is lost or cannot be produced to
be indemnified aeainst anv fnrthAr rlafm <-ko.-x.~~ ~— nri__
 2.26 Holder and Holder in Due Course
respondent having paid the promissory note without insisting on its return
to her or with out obtaining from the payee a guarantee, acted at her own
risk."

S. D. Asirvatham and Another v. Palaniraju Mudaliar

AIR 1973 Mad. 439
(When an instrument has been paid off, and it has not been withdrawn from
circulation, there is nothing to prevent the person to whom it has been endorsed
for value from becoming the holder in due course provided he had no knoioledge
of payment, nor it was apparent from the face of the instrument.)

Facts
The defendant (appellants) executed a demand promissory note dated
6-4-1960 for a sum of Rs. 5,000 payable with interest at 12% per annum
in favour of one Peter Manickam. The said Peter Manickam indorsed the
promissory note for full amount in favour of the plaintiff respondent on
10.9.1964. Before the indorsement the amount of suit promissory note
was partially discharged to the extent of Rs. 3000 on 7.8.1961 apart from
the payment of interest upto 27.9.1961 to the original payee which was
not known to the indorsee and there was no mentioning of it on the
promissory note. It was urged on behalf of the appellants that the suit
promissory note had matured on the date of the indorsement by the original
payee in favour of the respondents herein namely on 10.9.1964 that
consequently S.59 of the Negotiable Instruments Act applied to the facts
of this case and therefore the respondent herein was entitled to claim only
the balance of amount-due under the promissory note after giving credit
for the sum of Rs. 3000 paid by the appellants to the original payee, and
not the full amount for which the promissory note was executed.

Issue
Whether the plaintiff-respondent was a bonafide holder in due course
and to what amount, if any, he was entitled?

Decision of the Madras High Court

Ismail J. quoted relevant portion of S. 59 which is as follows:

"The holder of a negotiable instrument, who has acquired it after

dishonour, whether by non-acceptance or non-payment with notice thereof
or after maturity has only, as against the other parties, the rights thereon
MU*"
jxjegotiable Instruments, Banking and Insurance 2.27
Regarding S. 22 of the Act dealing with maturity of a promissory note
it was observed by his Lordship, on the authority of Nunn a Gopalan v.
V. Lakshminaramma AIR 1940 Mad. 631, and some earlier decided cases,
that in the case of promissory note which is payable on demand the note does not
become payable until demand is made and on demand being made it falls due
immediately. Based upon this legal position it was contended on behalf of
the appellants that S. 59 of the Act is attracted to the facts of the case and
that consequently the respondent had only such rights against the appellants
as the original payee,-(that is, the indorser in this case) had against the
appellants. His Lordship observed that S. 59 applies only to a holder and
not to a holder in due course.

Then Ismail J. quoted S. 118(g) regarding presumption that a holder

is a holder in due course, and S. 9 which defines a holder in due course.
Having regard to S. 9 and S. 118 of the Act it has to be proved that the
respondent was not a holder in due course. In this case at the time when
the respondent became an indorsee of the promissory note in question on
paying the full amount due thereunder he had no knowledge of the demand
for payment being already made or of partial payment. With reference to
a promissory note payable on demand whether a demand for payment of
the same has been actually made or not will not be apparent on the face
of the document and consequently the promissory note can not be said to
be overdue under S. 59 of the Act so as to affect the indorsee.

It ivas held that the note xoas not overdue when the plaintiff took it
and could proceed as a holder in due course. Where payment by the maker
was not noted on the note and the indorsee was not aware of the payments,
he could claim as a holder in due course. The bonafide holder for value of
a promissory note cannot be affected by any previous demandfor payment
of which he had no notice. If a negotiable instrument remains current even
though it has been paid, there is nothing to prevent a person to whom it
has been indorsed for value without knowledge that it has been paid, from
suing. If the actual payment in discharge of the note cannot be set up
against such a holder much less 'can a demand for payment which was
not honoured be set up. "Where an indorsee of a promissory note payable
on demand is not aware that the promissory note has been discharged or
that any demand was made, he must be deemed to be a holder in due
course even if as a matter of fact the indorsement in his favour was made
after the discharge "

Therefore, it was held that the right of the respondent herein to sue
on the promissory note and recover the full amount due thereunder
fSTinnt hp sairl frn havp lipon zt-ffof+oA Kiz Q nt t-Ko A
 2.28 Holder and Holder in Due Course
It was further observed that "Where the promissory note has no
indorsement of any payment and there is nothing to show that the indorsee
was aware of any payments to the indorser and he is a holder in due course;
he is entitled to recover according to apparent tenor of the instrument. If
the instrument has been discharged, the remedy of the persons paying is
to sue the original payee to refund the amount which he had to pay over
again. In the present case when the appellant paid sum of Rs. 3,000 to the
payee on 7.8.1961, and did not make an indorsement the same to the
respondent herein for full value, they alone must suffer the loss in preference
to the respondent herein."

U. Ponnappa Moothan Sons v. Catholic Syrian Bank Ltd.

(1991)1 SCC 113
(The Indian definition of 'holder in due course' imposes a more stringent
condition on the holder as laid down in an old English case, Gill v. Cubitt, (1824)
3 E&C 466. Under the Indian law, a holder, to be a holder in due course, must
not only have acquired the bill, note or cheque for valid consideration but should
have acquired the cheque without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title. This condition
requires that he should act in good faith and with reasonable caution. Hozvever,
mere failure to prove bona fide or absence of negligence on his part would not
negative his claim.)

Facts
..The plaintiff Bank had allowed credit facilities including cheque
purchases upto a limit of Rs. 35,00,000 to the firm, defendant 1. A promissory
not was executed by defendants to 4 being partners of the firm, in favour
of their mother, defendant 5 for an amount of Rs, 35,00,000 and the same
was endorsed in favour of the plaintiff bank as security for the facilities
granteed to the first defendant firm. Defandant 5 had also deposited the.
title deeds of her properties to create an equitable mortgage to secure the
repayment of the amounts due from the first defendant. The first defendant
was supplying goods to defendant 6 and used to receive payments by way
of cheques. Accordingly defendant 6 drew cheques on a Bank (Union Bank
of India) in favour of the first defendant firm payable to it or order. The
cheques were purchased by the plaintiff Bank from the first defendant firm
on valid considerations and proceeds were credited by the Bank on account
of the first defendant firm. On presentation, the Bank of defendant 6
returned the cheque with the remark "full cover not received". The appellant-
j_r—j—x z: a wprp issued on the understanding
 Negotiable Instruments, Banking and Insurance 2.29
that the same would be presented only after consignment was depatched
and the first defendant having failed to despatch the goods, defendant 6
could not pay the money in the Bank and therefore the cheques were not
honoured; that he would not admit the purchase of cheques by the plaintiff
and that the plaintiff was only a collection agent and there being no
consideration for purchase, the plaintiff was not a holder in due course,
and the plaintiff acted negligently and in disregard of the provisions of law,
therefore, there was no vaild cause of action against the defendant.

Issue
Whether the instrument has been taken with due caution?

Decision of the Supreme Court

English law requires that the holder in taking the instrument should
act in good faith and that he had no notice of any defect in the title and
if he has acted honestly, he is deemed to have acted in good faith whether
it is negligently or not.

In English law, Section 29 of the Bills of Exchange Act, 1882 defines

'holder in due course'. The relevant part of Section 29(l)(b) reads thus:

"29. Holder in due course.—(a) holder in due course who has taken a
bill, complete and regular on the face of it, under the following conditions,
namely.

(b) that he took the bill in good faith and for value, and that at the time
the bill was negotiated to him he had no notice of any defect in the title
of the person who negotiated it."

Section 90 of the Bill of Exchange Act reads as under:

"90. Good faith.—A thing is deemed to be done in good faith within

the meaning of this Act, where it is in fact done honestly, whether it is done
negligently or not."

These provisions have been understood and interpreted to mean that

the holder should take the bill in good faith and he is deemed to have acted
in good faith and if he acts honestly then negligence will not affect his title.

With the above ground of English law, the Supreme Court examined
the Indian law on the subject.

In Bhashyam and Adiga on The Negotiable Instruments Act (15th Edri.,

p. 171), the authors have dealt with the position in Indian law and it is
 2.30 Holder and Holder in Due Course
observed that it would be seem that the Indian legislature has adopted the
older English law as laid down by Abbott, C.J. (Later Lord Tenterden) in
Gill V. Cubit [107 ER 806: (1824J3B&C466).

Gill case, is a case where a bill of exchange was stolen during the night,
and taken to the office of a discount broker early in the following morning
by a person whose features were known, but whose name was unknown
to the broker and the latter being satisfied with the name of the acceptor,
discounted the bill, according to his usual practice, without making any
inquiry of the person who brought it. On these facts it was held that the
plaintiff had taken the bill under circumstances which ought to have excited
the suspicion of the prudent man and careful man. Abbot, C.J. said:

"It appears to me to be for the interest of commerce, that no person

should take a security of this kind from another without using reasonable
caution. If he takes such security from a person whom he knows, and
whom he can find out, no complaint can be made of him. In that case he
has done all any person could do. But if it is to be laid down as the law
of the land, that a person may take a security of this kind from a man of
whom he knows nothing, and of whom he makes no enquiry at all, it
appears to me that such a decision would be more injurious to commerce
than convenient for it, by reason of the encouragement it would afford to
the purloining, stealing, and defrauding persons of securities of this sort.
The interest of commerce requires that bonafide and real holders of bills;
known to be such by those with whom they are dealing, should have no
difficulties thrown in their way in parting with them. But it is not for the
interest of commerce that any individual should be enabled to dispose of
bills or notes without being subject to enquiry."

The Supreme Court held as follows:

The Indian definition imposes a more strigent condition on the holder

in due course than the English definition and as the learned authors have
noted the definition is based on Gill case. Under the Indian law, a holder,
to be a holder in due course, must not only have acquired the bill, note
or cheque for valid consideration but should have acquired the cheque
without having sufficient cause to believe that any defect existed in the
title of the person from whom he derived his title. This condition requires
that he should act in good faith and with reasonable caution. However,
mere failure to prove bonafide or absence of negligence on his part
would not negative his claim. But in a given case it is left to the court
to decide whether the negligence on part of the holder is so gross and
extraordinary as to presume that he had sufficient cause to believe under
 Negotiable Instruments, Banking and Insurance 2.31
such title was defective. However, when the presumption in his favour
as provided under Section 118(g) gets rebutted under the circumstances
mentioned therein then the burden of proving that he is a 'holder in due
course' lies upon him. In a given case, the court, while examining these
requirements including valid consideration must also go into the question
whether there was a contract express or implied for crediting the proceeds
to the account of the bearer before receiving the same. The enquiry regarding
the satisfaction of this requirement invariably depends upon the facts and
circumstances in each case. The words "without having sufficient cause to
believe" have to be understood in this background."

In the instant case there was an express contract for providing the
credit facilities. It should, therefore, necessarily be inferred that there is also
an implied contract to credit the proceeds of the cheques in favour of the
first defendant to his account before actually receiving them. In such a
situation the plaintiff need not make inquiries about the transactions of
supply of goods etc. that were going on between defendant 1 and 6. Even
if defendant 1 has not supplied the goods in respect of which the cheque
in, question were issued by defendant 6 there was no cause, at any rate
sufficient cause, for the plaintiff to doubt the title of the first defendant nor
can it be said that the plaintiff acted negligently disregarding 'red flag'
raising suspicion. Viewed from tJ4is background it cannot be said that there
was sufficient cause to doubt the title nor is there any scope to infer gross
negligence on the part of the plaintiff.

There is no material which amounts to rebuttal of the presumption in

his favour as provided under Section 118(g). On the other hand, the plaintiff
has discharged the necessary burden to the extent on him and has proved
that he is a holder in due course for valid consideration. Therefore, it was
held that he could validly maintain an action against all the defendants
including defendant 6.

Appeal was dismissed.

Federal Bank v. Panicker Simor Carves Ltd.

AIR 1976 Ker. 5
(Every -prior party to a negotiable instrument is liable to a holder in due course
until the instruments is satisfied. The plea of avoidance of the liability for zvant
of consideration is available only to the immediate parties to the transaction and
to no more.)
 2.32 Holder and Holder in Due Course

Facts
For disbursement of wages a company (the second defendant) issued
a cheque dated 20.6.1984 for an amount of Rs. 593-93 in the name of an
employee, the first defendant, and drawn on State Bank of Travancore. The
first defendant who had an account in another bank by name in the Federal
Bank Limited, assigned the cheque for valid consideration in favour of that
Bank and collected the proceeds. In the meantime, the company (the second
defendant), the drawer, got information that the first defendant did
*not
pay off the workmen, advised the drawee bank to withhold payment when
cheque was presented. The holder bank thereupon sued for realization of
the amouht from the first defendant and the company. The first defendant
did not contest. The company resisted the action on the ground of failure
of consideration.

Issue
Whether the drawer (second defendant company) can be sued for
recovery of the amount of the cheque?

Decision of the Kerala High Court

The Court discussed S. 22 dealing with maturity and S. 59 dealing with
instruments acquired after dishonour or when overdue and held that the
rights of the holder in this case were not to be adjudged on the basis of
S. 59 because the impugned instrument being a cheque that is payable on
demand it cannot be held that it became mature forthwith. In the instant
case it cannot be held that the plaintiff (Federal Bank Ltd.) acquired after
maturity especially because the instrument was assigned before the payee
demanded from the drawee.

The Court held that provision applicable to the case is given in S. 43

which has to be read in conjunction with S. 36. Both of these sections are
reproduced below:

"S. 36. Every prior party to a negotiable instrument is liable thereon

to a holder in due course until the instrument is duly satisfied."

"S. 43. A negotiable instrument made, drawn, accepted, indorsed or

transferred without consideration, or for a consideration which fails creates
no obligation of payment between the parties to the transaction. But if any
such party has transferred the instrument with or without indorsement to
a holder in due course, such holder, and every subsequent holder deriving
Negotiable Instruments, Banking and Insurance 2.33
title from him, may recover the amount due on such instrument from the
transfer for consideration, or any prior party thereto".

The first part of S. 43 provides that where there is initial want of

consideration or" where there is subsequent failure of the consideration
for a negotiable instrument such instrument does not create an obligation
for payment as between the parties' to the transaction. The expression
"parties to the transaction" clearly indicates that the plea of avoidance of
the liability is available only to the immediate parties to the transaction
and to no more. The intention of the legislature is clear from the second
part df the section, which safeguards the rights of a holder in due course.
Such a positive provision is necessary because S. 36 provides that every
prior party to a negotiable instrument is liable to a holder in due course
until the instrument is satisfied.

The rights conferred to a holder in due cojurse under S. 36 are not

intended to be defeated on the ground that a pnor transaction relating to
the instrument was bad for want of consideration. The latter part of S. 43
is to preserve intact the rights conferred on a holder in due course under
general provision contained in S.36.

Tirus, by virtue of S.36 and the later part of S. 43 the plaintiff is entitled
to recover the amount due not only from the first defendant but also from
the second defendant, the drawer company, even though as between the
first defendant and the second defendant there was a failure of consideration.

EXAMINATION QUESTIONS
1. Write a short note on the concept of 'holder'.

2. (a) Distinguish between a holder and holder in due course.

(b) Ram executed a promissory note in favour of Shyam for Rs.

1,000. Shyam had two wives and a daughter. Shyam made an
oral family agreement that after his death only his daughter
would receive payment of the promissory note. Whether this
family agreement made the daughter "holder" under the
Negotiable Instruments Act, 1881?

Hint: No. Singheshivar Mandat v. Gita Devi, AIR 1975 Pat. 81

3. (a) What are the necessary ingredients to be proved by a person

to be called a holder in due course?

(b) A executed a promissory note for Rs. 1,000/- in favour of B

on 1.1.2016. A paid the said sum to B on 3.1.2016, however,
2.34 Holder and Holder in Due Course
the promissory note was left in the hands of B, who on 4.1.2016
endorsed it in favour of X for consideration before date of
maturity. Can X recover the amount on the basis of the said
promissory note?

Hint: Yes. Nunna Gopalan v. Vuppuluri Lakshminarasamma, AIR 1949

Mad. 631 s

4. (a) Who is a holder in due course?

(b) A gave a cheque of Rs. 1,000 to his sister on her birthday. Is
she a holder in due course?

Hint: No. There is no consideration. Hence she is not a holder in

due course.

5. Comment on the following:

'The holder of a negotiable instrument means any person entitled

in his own name to the possession thereof, and to receive or recover
the amount due thereupon from the parties thereto."

6. What factors are essential to decide whether a person is or is not,

a 'holder in due course'? Bring out the difference, if any, between
the Indian Law and the English Law referring to statutory provisions
and the case law on the subject.

7. 'The existing definition of the term 'holder' has given rise to various
ambiguities and conflict of judicial opinions." Comment and suggest
improvement, if possible.

8. State the factors which are essential to determine whether a person

is, or is not, a 'holder in due course'. Is K a holder in due course
in. the following cases?

(a) A issues a pronote to C in respect of gambling transaction. C

indorses it to K who has no notice of this fact.

(b) A is the payee of a bearer cheque. A lost the cheque on his

way to his office. B finds it and delivers it to K.

Hints: (a) A person who claims to be a holder in due course must

show that he acquired the instrument for valuable and lawful
consideration. A debt due on a wager is not a valid consideration,
and a person who acquires a note or bill in consideration for such
a debt is not a holder in due course. However, under S. 58 when
a, negotiable instrument has been lost, or has been obtained from
any maker, acceptor or holder thereof by means of an offence or
Negotiable Instruments, Banking and Insurance 2.35
fraud, or for an unlawful consideration no possessor or indorsee
who claims through the person who found or so obtained the
instrument, is entitled to receive the amount due thereon from such
maker, acceptor, or holder, or from any prior party, unless such
possessor or indorsee is, or some person through whom he claims
was, a holder thereof in due course. Thus, a person liable to pay
an instrument cannot, as against the holder in due course, contend
that he had lost the instrument or that it was obtained from hiijn
• by means of an offence or fraud, or for an unlawful consideration.
See Federal Bank v. P. S. Carves Ltd, AIR 1976 Ker. 5. As K has
no notice of the defect in title, he can acquire a better title than his
transferor. Thus, he is a holder in due course.

(b) A bearer cheque can be transferred by mere delivery. Thus, if

a finder of a lost bill or note which is payable to bearer is negotiated
to a bonafide transferee for value, the latter acquires, a better title
to it. Therefore, K is a holder in due course.

9. Write a short note on privileges of holder in due course .

10. (a) Give a critical analysis of the concept of'Holder in due course'
referring to the statutory provisions and judicial decisions on
the subject.

(b) A, by fraud, induces B to make a promissory note in his i.e.

A's favour. A negotiates that promissory note to C, who takes
it as a holder in due course. Subsequently C negotiates.the
same promissory note to D, who takes it with full knowledge
that the title of A was defective.

Can D sue B on the promissory note? Discuss and decide.

Hint: Yes, Sections 53 and 58. D has the knowledge that the title
of A was defective but he i.e. D is not a party to the fraud. In May
v. Chapman, (1847) M&W 355, a partner in a firm fraudulently
indorsed ai firm bill to D, in payment of a private debt. F was
cognizant of the fraud, but was not a party to it. D, indorsed the
bill to E who took it for value and without notice. E indorsed it to
F. It was held that F acquired E's rights.

11. Whether a forged indorsement on a negotiable instrument makes

the indorsee for value, in good faith, a holder in due course?

Hint: Forgery conveys no title. Therefore, there can be no holder

in due course under a forged indorsement if the forged indorsement
is one essential to nass title. For examnlp. fhprp is a bill navablp tn
 Holder and Holder in Due Course
or order. A indorses it to B and C forges B's indorcement and
transfers it to D, D is not a holder in due course. Similar will be
the result if B's indorsement is genuine, but As indorsement is
forged. However, the position would be different if the bill was
drawn payable to bearer.
12. A demand draft for Rs. 6,000 payable to Kamal came into the hands
of Anil who forged the indorsement purported to be made by
Kamal and transferred the draft by that indorsement to a firm AB
& Co. who get the same encashed. Kamal filed suit for recovery as
owner against AB & Co. Is the company liable to pay the amount
to the owner of the draft?
Hint: A forged indorsement does not convey any title to the indorsee
of a negotiable instrument even if he takes the instrument in good
faith and for value. Therefore, in the instant problem. AB & Co. is
liable to pay the amount to the owner of the draft (Finn Katka
Prasad Ram Charan v. Kunwar Lal Thapar, AIR 1957 All. 104). See
next chapter for details of this case.
13. Write short note on Privileges of Holder in Due Course
14. (a) "A holder in due course gets a better title than that of the
transferor" Discuss.
I
(b) B executed a promissory note for Rs. 800 in favour of "N or
i order" on 1.1.2000. Two days later B paid Rs. 800 to N but
did not take the promissory note from N. N later negotiated
that promissory note to M for Rs. 100 only as M knew that
B had made payment to N. Can M claim payment of such
promissory note from B again? Decide.
Hint: No. M knew that B had made the payment to N.
15. 'The term 'Holder' does not include a person who, though in
possession of the instrument, has no right to recover the amount
due thereon from the parties thereto." Comment. State briefly the
anomalies in the definition of the term 'Holder'.
16. (a) State briefly the anomalies in the definition of the term'Holder'
in the Negotiable Instruments Act; suggest necessary
modifications.
(b) B borrowed Rs. 5,000 from C and executed a promissory note
in C's favour. C renounced the world and disappeared. Can
C's son S enforce payment against B on the maturity of the
said promissory note.
Negotiable Instruments, Banking and Insurance 237

17. Critically examine the concept 'Holder in due course' and bring out
the difference, if any, between the Indian law and the English law
referring to the statutory provisions and the case law on the subject.

18. What do you mean by the term 'Holder' of a negotiable instrument?

Is this .definition given in the Negotiable Instruments Act, 1881 free
from anomalies? How are the recommendations of the Law
Commission of India and the English law on the point helpful in
this regard?

19. (a) A "holder in due course' enjoys certain rights and privileges.
Explain.

(b) The test of good faith in Indian law on 'holder in due course'
is stricter than the English law. Elucidate.

20. Critically examine the concept "Holder in due course" and bring
out the differences "if any", between the Indian Law and the English
Law referring to the statutory provisions and the case law on the
subject.

21. (a) A 'holder in due course' enjoys certain rights and privileges.
Explain.

(b) The test of good faith in Indian Law on 'holder in due course'
is stricter than the English Law. Explain.
 2.38 Holder and Holder in Due Course

11th Law Commission Report

44. We have shifted the definitions of "cheque", "drawer", "drawee"
and "drawee in case of need", "acceptor", "acceptor for honour", and
"payee", to the Definition Clause proposed by us without any change in
principle.

In the definition of "Payee", we have added the word "undertaken"

since that would be more appropriate when the instrument is a promissory
note.

45. While similarly transferring the definition of "holder", we have

made substantial changes, which require a fuller explanation.

It may, however, be observed at the outset that the changes introduced

do not seek to alter the law but to obviate the conflict of judicial opinions
and the criticism of commentators which the existing definition has given
rise to.

The expression "persons entitled in his own name to the possession of

the instrument and to receive and recover the amount" is ambiguous. If
the expression be literally construed, a bearer would be excluded from the
definition as his name does not appear on the instrument. But if all that
is meant by the expression is that he should be entitled to possession in
his own name and to sue upon it though his name does not appear on it,
a bearer may then be within the definition1. As pointed out by a Full Bench
of the Madras High Court,2 the expression "in his own name" was introduced
only for the purpose of ruling out the plea that the holder of an instrument
was a benamidar for some-other person. That the beneficial owner cannot claim
to be a holder, may now be taken as the prevailing view.3 We have adopted this
view in order to put a stop to all controversy on the point, and have
expressly excluded the beneficial owner from the definition of "holder".

46. The principal source of difficulties is the use of the word "entitled".
This word is of a very wide implication. A person may be entitled to an
instrument either as a payee or indorsee or, as a bearer if the instrument
is one payable to bearer. He may be entitled to it also by other modes of

1. Ramanandan Chettiar v. Gundu Ayyar A.I.R., 1928 Mad, 1238 (1243)

2. Subba Narayana v. Ramaswami, (1907)30 Mad, 88 (F.B.)
3. Harkishore v. Gura Mia, (1930) 5, Cal. 752; Virappa v. Mahadebappa, A.I.R. 1934
Bom. 356; Bacha Prasad v. Janki, A.I.R. 1957 Pat. 380 (F.B.)
 Negotiable Instruments, Banking and Insurance 239
transfer of the interest in the instrument, such as assignment as an actionable
claim, in accordance with sections 30 and 132 of the Transfer of Property
Act or legal devolution. It may not be in accordance with the scheme of
the Act to recognize persons other than a payee, indorsee or a bearer as
holders, even though they may be entitled to the possession of the instrument
and to recover the debt due under the instrument. A person may become
owner of the debt and sue for its recovery if there is an assignment of the
debt or if there is legal devolution, but that does not make him a '"holder"
within the meaning of the Act. Of course, a single Judge of the Madras High
Court1 and a Bench of the Calcutta High Court2 have held that an assignee
is a holder within the meaning of section 8, but the contrary view, which
has been consistently maintained by the Allahabad High Court, appears
to be preferable. In these cases, the Allahabad High Court has made it clear
that a transferee by legal devolution is entitled to recover the amount due
on the instrument not because he is the "holder" but because he, as the
owner of the Debt, is entitled to give a valid discharge even apart from
the provisions of Section 78 of the Negotiable Instruments Act.

The right of negotiation is conferred by the Act only upon a maker,

drawer, payee or indorsee (vide S. 51) and in the case of a bearer instrument,
upon the bearer. In the case of an instrument payable to order, Section 48
lays down that it is negotiable by a 'holder' by indorsement and delivery
thereof. The "holder" in this context does not mean an assignee or a person
who has acquired rights under the instrument by legal devolution. An
assignee, not being an indorsee, cannot claim any rights under the Act
against prior parties and his rights are governed by the provisions of the
Transfer of Property Act which lay down that the transferee takes the rights
under the assignment subject to the equities to which the transferor was
subject at the time of the transfer. In this connection, it must be remembered
that the Transfer of Property Act expressly saves the mode of transfer by
negotiation though it does not prevent the assignment of rights under a
negotiable instrument qua an actionable claim.

We, therefore, think that the position should be made clear, by omitting
from the definition of "holder" the words "entitled in his own name to the
possession thereof and expressly enumerating the persons who are entitled
to be a holder, as in Section 2 of the Bills of Exchange Act, viz., "the payee
or indorsee of an instrument who is in possession of the instrument or the
bearer thereof."

1 Seshachalam Naidu v. Venkatachalam Chetty, (1954) 2M.L.J. 471.

2 Surathchandra v. Narayan Chandra. (1934) 61 Cal. 425.
B 2.40 Holder and Holder in Due Course
47. The English Act, however, defines "bearer" as meaning "a person
in possession of a bill or note which is payable to bearer." In the case of
instruments payable to order, it is clear that a person cannot be a holder
unless he is the payee or the indorsee thereof and the indorsement is on
the instrument itself; a person whose name does not appear on the instrument
as indorsee cannot claim his rights thereunder. But in the case of a bearer
instrument, since negotiation is only by delivery and no indorsement is
required, possession alone is material. The English definition of "bearer"
does not require that possession shotfld be a lawful possession.

The possession of a finder or a thief may, therefore, be a good possession

to make him a bearer and, therefore, a holder under the existing provisions
of our Act, such persons are excluded because of the word "entitled" in
the definition of "holder". Section 58 of the Act makes it clear that such
a person is not entitled to receive the amount due thereon from the maker,
acceptor, or holder, or from any party prior to the holder. He is, therefore,
not entitled to sue and recover the money but, as it very often happens,
a third party dealing with such a person may presume the latter's possession
to be lawful acquire rights under the instrument from him for consideration
and thus become a "holder in due course". The rights of a third party who
thus becomes a holder are protected by section 48. But suppose a person
makes a payment to finder or a thief, believing him to be the lawful holder
of the instrument. Such a payment is also protected, because under Section
82(c), if an instrument is payable to bearer or has been indorsed in bank,
the maker, acceptor or indorser who makes a payment in due course of
the amount due thereof gets, a complete discharge. These provisions, thus,
amply protect under our law a third party dealing with a person in
possession of a bearer instrument but do not give that person a right to
recover the amount due under it in his own right by suing upon the
instrument unless his possession is lawful.

48. As stated above, the English law is different. But there is no

justification, is our opinion, to cloth any person in mere possession with
a right to sue and enable him to recover the amount. We, therefore, propose
to adopt an altered definition of "bearer" as meaning a person who comes
into possession of an instrument payable to bearer by negotiation, that is,
by delivery from the lawful holder. Finders, thieves, and such other persons
as are enumerated in Section 58 will thus be excluded as they cannot be
"holders" under our Act. The implications of the word "entitled" in the
existing definition of "holder" will thus be fully covered by the changes
proposed by us.
 Negotiable Instruments, Banking and Insurance 2.41
49. We have omitted the words "and to receive or recover the amount
due thereon from the parties thereto" as the rights of a "holder" have been
specified in a separate section proposed by us?

50. The language of the second paragraph of section 8 is also

unsatisfactory. It has been criticized by Chalmers thus:—

"It is a strain, upon language to describe, the original owner of a lost

instrument as the holder of it. Suppose a cheque payable to bearer is lost,
and the person who finds it negotiates it to some other person who takes
it in good faith and for value. The latter becomes the holder in due course
of the instrument. There are then two holder of the same cheque in this
case, according to the Act."

As Bhashyam and Adiga12 suggest, this absurdity may be avoided if we

construe the word 'lost' as "lost to the world" and "not found again". We
have made a verbal change to this effect and also made it clear that the
holder before such loss or destruction "shall be deemed to continue to be
its holder."

51. In the definition of "holder in due course" we have substituted the

words "became overdue" for the words "became payable", as the latter
cannot aptly be applied to the case of instruments payable on demand. It
is well established that in the case of an instrument payable on demand
limitation for an action on the instrument starts, immediately after its
execution. If that rule were to be applied to section, it would exclude the
possibility of a person ever becoming a holder in due course in the case
of instruments payable on demand, for they become due immediately after
execution.3 To overcome this difficulty, we have considered it advisable
to adopt the language of the English Act and the American Uniform
Negotiable Instruments Law, viz., "became overdue". Further, we have
added a section (on the lines of S.36(3) of the English Act) laying down
the test to be applied in determining when an instrument payable on
demand becomes overdue.4

11th Law Commission suggests, definition of "holder" as under:—

"Holder" means the payee or indorsee of an instrument who is in
possession of the instrument or the bearer thereof, but does not include
a beneficial owner claiming through a benamider.

1. Negotiable Instruments in British India, 2nd Ed., p.46

2. Negotiable Instruments Act, 10 Edn., p. 72
3. RamSarupv. Hardeo, 50 All; 309 (312); Dungarmal v. Sambhu A.I.R. 1951 Cal. 55.
 ~ ~ NEGOTIATION- • i—_

Meaning of Negotiation01102
According to S. 14, when a promissory note, bill of exchange or cheque
is transferred to any person, so as to constitute that person the holder
thereof, the instrument is said to be negotiated."

It thus requires two conditions to be fulfilled: (i) there must be a

transfer of the instrument to another person, and (ii) the transfer must be
made in such a manner as to constitute the transferee the "holder" of the
instrument. The transfer must be with an intention to pass title and in the
manner prescribed by the Act.

Two modes of transfer are prescribed by the Negotiable Instruments

Act for this purpose in S. 47 and S. 48 read with S. 46. The transfer of
negotiable instrument payable to bearer, according to S. 47, can be effected
by mere delivery, but if it is payable to order, then S. 48 says that it can
be negotiated by indorsement and delivery of the instrument. Thus, in both
the modes of negotiation, delivery of the instrument with intention of
transferring ownership of the instrument to the person to whom it is
delivered is essential.

Delivery means transfer of possession, actual or constructive, from one

person to another. Actual delivery consists in the physical act of handing
over the instrument by one person to another or to his agent on his behalf.
Constructive delivery takes place without change of actual or physical
possession. A person is said to have constructive possession of a thing
when it is in the actual possession of his agent, clerk or servant on his
behalf. Section 57 says that the legal representative of a deceased person
cannot negotiate by delivery only a promissory note, bill of exchange or
cheque payable to order and indorsed by the deceased but not delivered.

QI. Write a short note on Negotiation. [LL.B., D.UJ

Q2. Explain the meaning of negotiation of an instrument [LL.B„ D.U.J
 3.2 Negotiation
Sections 46, 47 and 48 are reproduced below: -

S. 46 Delivery—The making, acceptance or indorsement of a

promissory’ note, bill of exchange or cheque is completed by delivery,
actual or constructive.

As between parties standing, in immediate relation, delivery to be

effected must be made by the party making, accepting or indorsing the
instrument, or by a person authorized by him in that behalf.

As between such parties and any holder of the instrument other than
a holder in due course, it may be shown that the instrument was delivered
conditionally or for a special purpose only, and not for the purpose of
transferring absolutely the property therein.

A promissory note, bill of exchange or cheque payable to bearer is

negotiable by the delivery thereof.

A promissory note, bill of exchange or cheque payable to order is

negotiable by the holder by indorsement and delivery thereof."

S. 47 Negotiation by delivery—Subject to the provision of Section

58, a promissory note, bill of exchange or cheque payable to bearer is
negotiable by delivery thereof.

Exception—A promissory note, bill of exchange or cheque delivered

on condition that it is not to take effect except in a certain event, is not
negotiable (except in the hands of a holder for value without notice of
the condition) unless such event happens."

S. 48 Negotiation by indorsement - Subject to the provisions

of Section 58, a promissory note, bill of exchange or cheque payable to
order is negotiable by the holder by indorsement and delivery thereof.
' ' According to S. 60, "A negotiable instrument may be negotiated (except
: • by the maker, drawee or acceptor after maturity) until payment or
i ... satisfaction thereof by the maker, drawee or acceptor at or after maturity,
' but not after such payment or satisfaction."

Thus, the delivery of the negotiable instrument with the intention of passing
the property in the instrument is essential whether the instrument is payable to
| bearer or payable to the order of a certain person. The contract on a negotiable
instrument until delivery remains incomplete and revocable. The delivery is essential
not only at the time of negotiation but also at the time of making or drawing of
| negotiable instrument.
 Negotiable Instruments, Banking and Insurance 3.3
In Bromage v. Llyod, (1847) 1 Exch 32, A owed B Rs. 1,000 and he made
a promissory note for the amount payable and died. The note was afterwards
found among his papers. It was held that B could not sue on it. In Bank
of Van Diemen's Land v. Bank of Victoria, (1871) L.R. 3 P.C. 526, A, a
drawee, after receiving a bill from B, a holder wrote his acceptance on it.
Before delivery he came to know that the drawer has become bankrupt and
cancelled his acceptance and returned the dishonoured bill to B. It was held
that there was no acceptance as A never delivered the bill so as to make
himself liable upon it.

In Arnold v. Cheque Bank, (1876) 1 C.P.D. 578, A, the holder of the Bill,
specially indorsed it to B and put it in a letter addressed to B. The letter
was put in the office letter box from where it was stolen. B's indorsement
on the bill was forged. It was held that the property in the bill remained
in A.
However, under S. 7 delivery is not essential to complete the contract
of acceptance on a bill, and the mere giving of notice of the acceptor's
acceptance to the holder or any person on his behalf is sufficient to complete
the contract because unlike the drawer or indorser he has no property in
the bill. But in other cases of contracts on negotiable instruments delivery
is essential for the completion of the contract. It may be noted here that
the drawee after his writing acceptance on the bill may change his mind
and cancel it before delivery or communication of acceptance, to the holder.
In Pragdas v. Dowlatram, (1887) ILR 11 Bom 257, it was held that such
communication of acceptance need not necessarily be to the holder of the
instrument at the time, it is enough if it is made to some party liable on
the instrument for it is meant for the benefit of all parties.

It was held in Latter v. White, (1872) L.R. 5 H.L. 578, that delivery to
a stake holder, or as held in Brind v. Hampshire, (1836) 1 M & W 365 to
the transferor's own agent for delivery is not such a delivery to the holder
as is contemplated by the section.

In Exparte Cote, (1873) 9 Ch. Aupp 27, Mellish L.J. said: "In this
country, where the sender of a letter cannot get it returned after it has
been posted, if the indorsee of a bill authorizes, the indorser to send the
bill through the post office, the bill as soon as it is posted becomes the
property of the indorsee..." In Norman v. Rickets, (1863) 3 TLR 182, the
plaintiffs wrote from London to the defendant in Suffolk asking her to send
a cheque for the amount due. The cheque was stolen in transit, and the
thief got it cashed. It was held that the posting of cheque was a good
delivery to the payee and the cheque operated as payment, In C.I.T. v.
 3.4 ■ Negotiation
Ogale Glass Works Ltd., AIR 1954 S.C. 429, it was held that posting of
cheques in Delhi at the request of the addressee in payment of goods
supplied from a Native State amounted to payment in Delhi by the sender.
The Court laid down that as between the sender and the addressee it is
the request of the addressee that the cheque to be sent by post that makes
post office the agent of the addressee.

Negotiation and Assignment distinguished03

A negotiable instrument may be transferred from one person to another
(i) by negotiation under the Negotiable Instrument Act as discussed above;
or (ii) by assignment of the instrument as an ordinary chose in action under
S. 130 of the Transfer of Property Act read with S. 131 and S. 132 of that
Act. These sections have been reproduced below :

"S. 130. Transfer of actionable claim—(1) The transfer of an actionable

claim whether with or without consideration shall be effected only by
execution of an instrument in writing signed by the transferor or his
duly authorized agent, shall be complete and effectual upon the execution
of such instrument, and thereupon all such rights and remedies of the
transferor whether by way of damages ,or otherwise, shall vest in the
transferee, whether such notice of the transfer as is hereinafter provided
be given or not:

Provided that every dealing with the debt or other actionable claim
by the debtor or other person from or against whom the transferor
would, but for such instrument of transfer as aforesaid, have been entitled
to recover or enforce such debt or other-actionable claim (save where the
debt or other person is a party to the transfer, or has received express
notice thereof as hereinafter provided) be valid against such transfer.

(2) The transferee of an actionable claim may, upon execution of

such instrument of transfer as aforesaid, sue or institute proceedings for
the same in his own name without obtaining the transferor's consent to
such suit or proceedings, and without making him a party thereto.

Exception—Nothing in this section applies to the transfer of a marine

or fire policy of insurance, or affects the provisions of Section 38 of the
Insurance Act, 1938."

"S. 131. Notice to be in writing, signed—Every notice of transfer of

an actionable claim shall be in writing, signed by the transferor or his
agent duly authorized in this behalf, or in the case of the transferor
 Negotiable Instruments, Banking and Insurance 3.5
refuses to sign, by the tmasferee or his agent and shall state the name
and address of the transferee."

"S. 132. Liability of transferee of actionable claim—The transferee

of an actionable claim shall take it subject to all the liabilities and
equities to which the transferor was subject in respect thereof at the date
of the transfer?"

Thus, of the two methods of transfer of negotiable instrument, the one

prescribed by the Negotiable Instruments Act is better. The following are
the points of distinction between negotiation and assignment:

1. Formalities - Negotiation requires mere delivery of a bearer

instrument and indorsement and delivery of an order instrument to
effectuate a transfer; assignment requires a written document signed by
the transferor.
2. Notice - Notice of assignment of debt (actionable claim) must be
given by the assignee to the debtor in order to complete his title; no such
notice is necessary in a transfer by negotiation.

3. Title - In case of assignment the transferee of an "actionable claim"

takes it subject to all the defects in the title of, and subject to, all the equities
available against the transferor. In case of negotiation, the transferee takes
it free from all defects if he is a holder in due course.

4. Consideration - Consideration is always presumed in case of

negotiable instruments; in case of assignment the onus lies 011 the transferee
to prove consideration for the transfer.

INDORSEMENT OR ENDORSEMENT
When the maker or holder of a negotiable instrument signs the same,
otherwise than as such maker, for the purpose of negotiation on the back
or face thereof or on a slip of paper annexed thereto, or so signs for the
purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to indorse the same, and is called the "indorser"
(S.15).
An indorsement is the signature by the maker or holder of a negotiable
instrument for the purpose of negotiation. It is usually done on the back
of the instrument, although it may be even on the face thereof, or if no space
is left on the instrument, on a slip of paper attached to it, call "allonge".
By S. 8 the payee of an instrument is also holder, and so he may indorse
it. Section 51 prescribes that "every sole maker, drawer, payee or indorsee
 3.6 Negotiation
or all of several joint makers, drawers, payee or indorsee, of a negotiable
instrument may, if the negotiability of such instrument has not been
restricted or excluded as mentioned in S. 50, indorse and negotiate the
same". Section 50 says in its first part that the unconditional indorsement
of a negotiable instrument followed by unconditional delivery transfer to
the indorsee the property therein with the right of further negotiation. The
second part of S. 50 deals with restrictive indorsement.

Who may Negotiate

Section 51 provides that every sole maker, drawer, payee or indorsee,
or all of several joint makers, drawers, payees or indorsees of a negotiable
instrument may, if the negotiability of such instrument has not been
restricted or excluded as mentioned in S. 50, indorse and negotiate the
same. The Explanation to the section further provides that nothing in this
section enables a maker or drawer to indorse or negotiate an instrument,
unless he is in lawful possession or is holder thereof; or enables a payee
or indorsee to indorse or negotiate an instrument, unless he is holder
thereof. Therefore, a person who steals or finds a lost instrument, cannot
indorse and negotiate it, as he is not the holder.

Kinds of Indorsements
An indorsement may be (i) "in blank" or (ii) in full. It may be (i)
absolute, (ii) restrictive, or (iii) conditional.

Indrosement 'in blank' and Indorsement 'in full' (Sections 16, 49, 54,
55 and 85(2))Q1 - S. 16 says that "if the indorser signs his name only, the
indorsement is said to be "in blank" and if he adds a direction to pay the
amount mentioned in the instrument to, or to the order of a specified
person, the indorsement is said to be "in full" and the person so specified
is called the "indorsee" of the instrument. In case of blank or general
indorsement, so long as the indorsement continues in blank, the property
in the instrument may pass by mere delivery in the same manner as an
instrument payable to bearer (S. 54) except in case of crossed cheques. An
indorsement in full or special indorsement specifies, in addition to the
signature of the indorser the person to whom or to whose order, the
instrument is payable. The efffect of indorsement in full is that the instrument
can be paid only to the indorsee and can be further negotiated by his
indorsement. The instrument remains payable to order.
 Negotiable Instruments, Banking and Insurance 3.7
Section 49 provides that "holder of a negotiable instrument indorsed
in blank may, without signing his own name by writing above the indorser's
signature a direction in blank into an indorsement in full; and the holder
does not thereby incur the responsibility of an indorser.—For example, A
is the holder of a bill indorsed by B in blank. A writes above the indorser's
signature the words "Pay C or order". A is not liable as an indorser, but
the writing operates as an indorsement in full from B to C

Section 55 says that if a negotiable instrument, after having been

indorsed in blank is indorsed in full, the amount of it cannot be claimed
from the indorser in full, except by the person to whom it has been indorsed
in full, or by one who derives title through indorsement by such person.
For instance, A is the payee holder of a bill. A indorses it in blank and
delivers it to B. B indorses it in full to C or order. C without indorsement
transfers the bill to D. D as the bearer is entitled to receive payment or to
sue drawer, acceptor, or A who indorsed the bill in blank, but he cannot
sue B or C. C can sue B as he received the bill from B by indorsement in
full. If, however, C instead of passing the bill to D without indorsement
passes it by a regular indorsement, D can claim against all prior parties.

Thus, if an indorsement in blank is followed by an indorsement in full,

the instrument still remains payable to bearer and negotiable by delivery
as against all parties prior to the indorser in full, though the indorsement
in full is only liable to a holder who made title directly through his
indorsement, and person deriving title through such holder.

Sections 85(2) provides that "Where a cheque is originally expressed

to be payable to bearer the drawee is discharged by payment in due course
to the bearer thereof notwithstanding any indorsement whether in full or
in blank appearing thereon or notwithstanding that any such indorsement
purports to restrict dr exclude further negotiation."-

Restrictive indorsement (Section 50)QS. Section 50 provides :

"The indorsement of, a negotiable instrument followed by delivery

transfers to the indorsee the property therein with the right of further
negotiation; but the indorsement may, by express words, restrict or exclude
such right, or may merely constitute the indorsee an agent to indorse the
instrument, or to receive its content for the indorsee or for some other
specified person."

Q5. Write a note on restrictive indorsement. [LL.B., D.U.]

 3.8 Negotiation
The section carries the following illustrations:

B signs the following indorsements on different negotiable instruments

payable to bearer :

(a) "Pay the contents to C only".

(b) "Pay C for my use".

(c) "Pay C or order for the account of B".

(d) "The within must be credited to C".

The above indorsements exclude the right of further negotiation by C.

(e) "Pay C".

(f) "Pay C value in account with the Oriental Bank".

(g) "Pay the contents to C, being part of the consideration in a certain

deed of assignment executed by C to the indorser and others".

The indorsement (e), (f) and (g) do not exclude the right of further
negotiation by C.

The effect of restrictive indorsement is that the indorsee gets the

right to receive payment of the instrument when due, to sue any party
thereto that his indorser could have sued, but he has no power to transfer
his rights to any other person, unless he is expressly authorized to do
so. The instrument comes to the end of negotiability, and the last indorsee
is the person who is to sue upon it. If a restrictive indorsement authorizes
further transfer, all subsequent indorsees take the bill with the same rights
and subject to the same liabilities as the first indorsee under the restrictive
indorsement. For example, if A indorses a bill "Pay to B or order for my
use". B indorses it on his own account and discounts it with C. C receives
the amount of the bill at maturity. A can recover the amount of the bill
from C.

Conditional Indorsement (Section 52)06' Q7. Section 52 provides that

"The indorser of a negotiable instrument may, by express words in the
indorsement, exclude his own liability thereon, or make such liability or
the right of the indorsee to receive the amount due thereon depend upon
the happening of a specified event, although such event may never happen".
The section further provides that "where an indorser so excludes his liability

Q6. Write a note on conditional indorsement. [LL.B., D.U.]

Q7. Write a note on sans recourse indorsement. [LL.B., D.U.J
 Negotiable Instruments, Banking and Insurance 39
and afterwards becomes the holder of the instrument, all the intermediate
indorsers are liable to him".

The section carries the following illustrations.

(a) The indorser of a negotiable instrument signs his name adding the
words "without recourse." Upon this indorsement he incurs no
liability.

(b) A is the payee and holder of a negotiable instrument. Excluding

personal liability by an indorsement "without recourse" he transfers
the instrument to B, and B indorses it to C, who indorses it to A
A is not only reinstated in his former rights, but has the rights of
an indorsee against B and C.

Thus, an indorser can exclude or limit his liability in any of the three
ways:

(1) by excluding his liability by making a sans recourse, indorsement.

(2) By making his liability depend upon the happening of a specified

event which may never happens. In such a case his liability arises
only on the happening of the specified event. If the happening of
the event becomes impossible his liability is extinguished. But the
indorsee can sue the prior parties before the happening of the event.

(3) By making the right of indorsee to receive payment depend upon

the happening of a specified event which may never happen. In this
case indorsee cannot sue prior parties before the happening of the
specified event.

Facultative Indorsement. In case of such an indorsement the indorser

enlarges his liability as indorser, e.g., "Pay A or order, notice of dishonour
waived".

Partial Indorsement (Section 56)QS. A part of the amount of an instrument

cannot be indorsed. For instance, an indorsement in favour of A, for Rs.
500 only out of a bill of Rs. 1,000 is invalid. The only exception is where
a part of the amount of the bill has been paid or received by the holder
in which case a bill can be indorsed for the balance. S. 56 deals with this
aspect which says that "no writing on a negotiable instrument is valid for
the purpose of negotiation if such writing purports to transfer only a part
the amount appearing to be due on the instrument; but, where such
amount has been partly paid, a note to that effect may be indorsed on the
instrument, which may then be negotiated for the balance.

Q8. Write a note on partial indorsement. FLL.B.. D.U.l

 3.10 Negotiation
'Sans frais'Indorsement. Where the indorser does not want that indorsee
or any other holder to incur any expense on his account, it is called 'sans
frais' indorsement.

Effect of Indorsement
Section 50 provides that "The indorsement of a negotiable instrument
followed by delivery transfers to the indorsee the property therein with
the right of further negotiation". Thus, the indorser impliedly represents
to his immediate indorsee that the instrument, when presented in due
course be paid when it falls due and if it is not paid at maturity, the indorser
will indemnify the indorsee provided that due notice has been given or
received by him.
Where the holder, without the consent of the indorsee, destroys or
impairs the indorser's remedy against a prior party, the indorser is
discharged from liability as if the instrument had been paid at maturity
(s.40).
For example, A is the holder of a bill of exchange made payable to the
order of B, which contains the following indorsements in blank:
First indorsement, "B"
Second indorsement, "C"
Third indorsement, "D"
Fourth indorsement, "E"
This bill A puts in suit against E and strikes out, without E's consent,
the indorsement of "C" and "D". A is not entiled to recover anything
from E.

Irregular indorsement
In Arab Bank Ltd. v. Ross, (1952) 1 All ER 709, a bill was drawn in
favour of "AB & Co." but was indorsed "AB", without the addition of the
words "& Co.". It was held that the indorsement was irregular and that
the indorsee was not a holder in due course, though he might be holder
for value.

Negotiation Back
If A indorses a bill to B, B in favour of C and C in favour D and D
in favour of E and E thereafter transfers the instrument by negotiation to
A, the result is to make A liable as original indorser and also as last
indorser. In other words, the instrument has been "negotiated back" to the
 jslegotiable Instruments, Banking and Insurance 3.11
original holder. This is called negotiation back or taking up a bill. In the
above example, A cannot enforce, by a suit, payment of the instrument
against an intermediate party—B, C, D or E to whom he was previously
liable by reason of his prior indorsement, as the law does not permit
circuity of action. But such a result does not follow when the indorsement
of A is 'sans recourse', because in such a case A cannot be made liable as
an indorser and can therefore sue as indorsee all previous indorsers on the
bill except himself.

NEGOTIATION BY UNAUTHORISED PARTIES

Lost instruments
The following rules are applicable in case of lost instruments:
1. Section 45 A provides that "Where a bill of exchange has been lost
before it is overdue, the person who was the holder of it may apply to the
drawer to give him another bill of the same tenor, giving security to the
drawer, if required, to indemnify him against all persons whatever in case
the bill alleged to have been lost shall be found again".
The Section further provides that if the drawer on request as aforesaid
refuses to give such duplicate bill, he may be compelled to do so.
2. The holder of the lost instrument should give notice of loss to all
the parties liable on it.
3. Section 81 provides that any person liable to pay, and called upon
by the holder thereof to pay, the amount due on the promissory note, bill
of exchange or cheque is before payment entitled to have it delivered up
to him. If the instrument is lost qr cannot be produced the person liable
to pay is entitled to be indemnified against any further claim thereon
against him.
4. Section 58 provides that when a negotiable instrument has been lost,
no possessor or indorsee who claims through the person who found the
instrument, is entitled to receive the amount due thereon from maker,
acceptor, or holder, thereof by means of an offence or fraud, or for an
unlawful consideration, no possessor or indorsee who claims through the
person who found or so obtained the instrument, is entitled to receive the
amount due thereon from such maker, acceptor or holder, or from any
party prior to such holder. Thus, the finder of the lost instrument gets no
title to it and cannot sue the party liable thereon for its payment. The true
owner is entitled to get back the instrument from the finder. Section 82
provides that the maker, acceptor, indorser respectively of a negotiable
 3.12 Negotiation
instrument is discharged from liability to all parties to the instrument, if
the instrument is payable to bearer, or has been indorsed in blank, and such
maker, acceptor or indorser makes payment in due course of the amount
due thereon.
5. A finder of the lost instrument cannot lawfully transfer the instrument.
However, if he negotiates an instrument payable to bearer or one indorsed
in blank, to a holder in due course, the holder in due course gets a good
title to it and is entitled to get payment from the party liable thereon (S.58).
In case a finder transfers an order instrument, even the bona fide transferee
for value gets no title to it and is not entitled to sue on the instrument as
forgery does not convey any title. The indorsee in such a case will not be
a holder in due course. If the party liable to pay on the instrument makes
the payment to an indorsee under forged indorsement, he (i.e. the liable)
shall continue to be liable to the true owner.

Stolen Instrument
The position in case of stoten instruments is almost the same as explained
above in respect of lost instruments. The only difference is that the thief
is guilty of criminal offence and a finder is not. The thief does not acquire
any title to the instrument and therefore cannot enforce payment of it
against any party thereto. The true owner can sue the thief for recovering
the instrument or the money if he (i.e. the thief) has received it from the
maker, acceptor or drawee. But if the thief transfers an instruments payable
to bearer to a transfreee for value without notice of the theft, or to a holder
in due course, such a transferee or the holder in due course, as the case
may be, acquires good title to it against the thief and any party prior to
him.

Instruments obtained by fraud

According to S. 58 when a negotiable instrument has been obtained
from any maker, acceptor or holder by means of fraud, he is not entitled
to enforce its payment as his title is defective. But if such instrument,
whether payable to bearer or payable to order, is negotiated to a holder in due
course, he will acquire a good title to it. According to S.53 once the instrument
passes through the hands of a holder in due course it is purged of all
defects. Thus, if a holder deriving title from a holder in due course has the
notice of the fraud, but a not a party to the fraud, he gets a good title to
the instrument.

Instruments obtained for unlawful consideration

Where a promissory note, bill of exchange or cheque has been obtained
for unlawful consideration, the instrument is void. But a holder in du**
 Negotiable Instruments, Banking and Insurance 3.13
course gets a good title to an instrument which was originally made or
drawn or later on negotiated for an unlawful consideration.

Forged instruments
Where the signature of the maker, drawer or acceptor is forged on a
negotiable instrument, it is known as forged instrument. A forged signature
is inoperative. The holder, including holder in due course, of a forged
instrument cannot enforce payment thereon. If he manages to obtain
payment of the amount of the instrument, inspite of forgery, the person
who has made the payment can recover the amount paid by him as payment
under a mistake.

Forged indorsement
Where the signature of indorser on a negotiable instrument is forged,
it is called forged indorsement. A forged indorsement is a nullity and
therefore does not convey any title. Thus, there can be no indorsement
under a forged indorsement. The title of the indorser whose indorsement
is forged remains unaffected. For example, a bill is payable to A or order,
A indorses it to B and C forges B's indorsement and transfers it to D, D
is not a holder in due course. The result would be same if B's indorsement
is genuine, but A's indorsement is forged. If the party liable to pay on the
indorsement, he will continue to he liable to the true owner. The position
will be different in case of bearer instrument or the one which has been
indorsed in blank.09

Section 41 provides that an acceptor of a bill of exchange already

indorsed is not relieved from liability by reason that such indorsement is
forged, if he knew or had reason to believe the indoresment to be forged
when he accepted the bill.

LEADING CASES
Firm Kalka Prasad Ram Charan v. Lala Kunwar Lal Thaper
1957 AIL LJ. 209
(Forged endorsement creates no title in favour of holder in due course.)

Q9. A bill is indorsed : "Pay John Brown or order". John Brown indorses the bill in blank
and delivers it to B. B passes it by mere delivery to C. C purges B’s indorsement and
transfers it to D. Can D recover upon the bill? Discuss referring to statutory
 3.14 Negotiation
Facts
Lala Baijnath Sayal purchased a draft of Rs. 4,000 drawn by Imperial
Bank of India, Delhi and payable to Lala Kunwar Lal Thapar at Kanpur.
The draft was duly posted and it was taken delivery of not by Kunwar
Lal Jhapar but by another person Inder Raj Sethi. Either Inder Raj Sethi
or some other person indorsed the draft as Kunwar Lal Thapar and handed
it over to firm Kalka Prasad Ram Charan. They in their turn made an
indorsement in blank in favour of Bharat Bank. This draft was entered in
a pay-in-slip and the draft along with the pay-in-slip was sent to Bharat
Bank. The Bharat Bank presented the draft for payment to Imperial Bank,
Kanpur, the drawee, and received the amount mentioned in the draft and
paid in that amount into the account of the appellant firm. Kunwar Lal
Thapar and Baijnath Sayal, after knowing the above, filed the suit against
the Imperial Bank of India, Delhi and Kanpur branches, the Bharat Bank
and the firm Kalka Prasad Ram Charan. The decree was asked for only
against the firm.

Decision of the trial court and first appellate court

The learned Munsif held that the firm Kalka Prasad Ram Charan was
not a holder in due course because the indorsement in its favour was
forged. He decreed the plaintiffs claim for Rs. 4000/-with future interest
against the firm Kalka Prasad Ram Charan.

The first appellate court also held that the forged indorsement in
favour of the firm could not give it a title.

Decision of the Allahabad High Court

GURTU, J., of the Allahabad High Court said "It is well-settled that
the indorsement on a negotiable instrument through which holder in due
course claims must be genuine and, therefore, forged endorsement creates
no title in favour of holder in due course". Therefore, such a holder who
obtained payment under the negotiable instrument, is guilty of conversion
and the true owner is entitled to waive the tort and sue for recovery of
the amount of the instrument which amount the holder must be deemed
to be holding for the use of the true owner.

In the present case the firm Kalka Prasad Ram Charan took the draft
under a forged indrosement and, in turn, indorsed it to the Bharat Bank
for collection. The firm thus undoubtedly converted the draft to its own
use. It is true that it was the Bharat Bank that actually presented the draft
4-^ 4.1------ J------------------------ -- J -1 • • ’ • » i . .i ~ »
Negotiable Instruments, Banking and Insurance 3.15
credit to the firm in the latter's account with the Bank in respect of the
amount of the draft and so ultimately the firm at least derived an advantage
to the content of the draft amount and in the opinion of His Lordship. The
firm was bound to restore that advantage to the true owner. The customer
immediately upon crediting of the amount can withdraw the same and
have the use of it. This is an advantage which has, in this case, accrued
to the firm as a consequence of the conversion by it of the draft to its own
use.

It was further held that the parties who have no title to an instrument
because of the original forged indorsement, but have dealt with it must
each be held guilty of conversion and, in the opinion of His Lordship,
would be liable to the true owner for the amount of the draft (if he chooses
to waive the tort and sue any of them for the amount of the draft) except
the drawee who is protected by S. 85 of the Negotiable Instrument Act.
Thus, the appeal was dismissed.

EXAMINATION QUESTIONS
1. Distinguish between Negotiation and Assignment,

2. A bill is payable to "A or order". It is stolen from A and the thief

forges A's indorsement and further indorses it to B who takes it in
good faith and for value. Can B recover the bill?

Hint: No. A forged indorsement is regarded as no indorsement in

the eyes of law. Therefore, indorsee of an order instrument bearing
a forged indorsement gets no title thereto, even if he is a bona fide
holder for value.

3. M as finder of lost order instrument negotiates it to N who takes

it in good faith and for value. N donates it to P. Discuss the status
of P on the instrument.

What would be your answer if the instrument is a bearer one?

Hint: In case of order instrument N is not a holder in due course

as forgery is a nullity and does not convey any title. Therefore, P
cannot get a good title. But in case of bearer instrument N would
become a holder in due course and, therefore, P would get a good
title.

4. Write short notes on (i) forged instrument and (ii) irregular

indorsement.
3.16 Negotiation
5. A is the payee holder of a bill of exchange. He indorses it in blank
and delivers it to B. B endorses it in full to C or order. C without
endorsement transfers the bill to D. State giving reasons whether
D as bearer of the bill of exchange is entitled to recover the payment
from A or B or C.

Hint: Under Section 55, if an instrument after having being indorsed

in blank is indorsed in full, the endorsee in full does not incur the
liability of an indorser, so the amount of it cannot be claimed from
him. Therefore, D as the bearer of the instrument can receive payment
or sue the drawer, acceptor, or A who endorsed the bill in blank;
but he cannot sue B or C.

But there is an exception to above rule contained in S.55. The person

to whom it has been indorsed in full, or any one who derives title
through him, can claim the amount from the indorser in full.
 «n.r,rrn
CHAPTER /I
4

CAPACITY,LIABILITYAND DISCHARGE

CAPACITY OF PARTIES

Capacity to make, etc.

The general rule as given in S. 26 is that every person capable of
contracting, according to the law to which he is subject, may bind himself
and be bound by making, drawing, acceptance, indorsement, delivery and
negotiation of a promissory note, bill of exchange or cheque. However, a
minor may draw, indorse, deliver and negotiate such instrument so as to
bind all parties except himself. An incorporated company can do any of
these things only if empowered to do so by its constitution.

Thus, the capacity of a party to make, draw, accept, indorse, deliver

and negotiate a promissory not, bill of exchange and cheque is co-extensive
with his capacity to contract. However, if a minor makes, draws or indorse
a promissory note or a bill of exchange, the holder will be entitled to
enforce the payment on it against all parties except the minor. A minor can
acquire rights against all prior parties.

Agency - S.27 provides that every person capable of binding himself

or being bound as mentioned in S. 26 above, may so bind himself or be
bound by a (i) duly authorized agent (ii) acting in his name. It further says
that a general authority to transact business and to receive or discharge
debts does not confer upon an agent the power of accepting or indorsing
bills of exchange so as to bind'the principal. And authority to draw bill
of exchange does not import an authority to indorse. S. 28 says that an
agent who signs his name to a promissory note, bill of exchange or cheque
without indicating thereon that he signs as agent, or that he does not intend
to incur personal responsibility, is liable personally on the instrument,
except to those who induced him to sign upon the belief that the principal
or>Iy would be held liable.
 4.2 Capacity, Liability and Discharge from Liability
Liability of legal representative signing - Section 29 provides that a
legal representative of a deceased person who signs his name to a promissory
note, bill of exchange or cheque is liable personally thereon unless he
expressly limits his liability to the extent of assets received by him as such.

LIABILITY OF PARTIES

Liability of drawer of bill01

As distinguished from the liability of the maker of a promissory note
which is primary, the liability of the drawer of a bill of exchange is secondary.
Section 30 provides that "the drawer of a bill of exchange or cheque is
bound, in case of dishonour by the drawee or acceptor thereof, to compensate
the holder, provided due notice of dishonour has been given to, or received
by the drawee as hereinafter provided."

Thus, the liability of the drawer arises on dishonour by non-acceptance

by the drawee or non-payment by the acceptor. On dishonour of a bill by
non-acceptance followed by a notice of dishonour, the right to sue the
drawer for the full amount of the bill immediately accrues to the holder
and there is no need to wait till maturity of the bill or to present it to the
drawer for payment. The drawer of a bill, however, can exclude or limit
his liability upon the bill. Notice of dishonour must be given to or received
by the drawer, except in case mentioned in S. 98, otherwise the drawer will
be discharged not only from his liability upon the bill, but also upon the
original debt.

The liability ofa drawer ofcheque is primary as in case ofdishonour the holder
of the cheque has no remedy against the banker. He can only sue the drawer.
In this case also the notice of dishonour must be given to, or received by
the drawer.

In Bengal Bank Ltd. v. Satyendra Nath, AIR 1952 Cal. 385, the defendant
(drawer) gave a cheque to the plaintiff in payment of the price of the goods.
The cheque was drawn on branch X of Bank A. The plaintiff sent the cheque
to Bank B for collection. Bank B sent the cheque to branch Y of Bank A
for realization. Branch Y realized the amount from Branch X but before
Branch Y made over the sum realized to Bank B, Bank A went into liquidation
and Bank B could not realize the money. It was held that the liability is
not affected if one branch pays another branch; the defendant drawer was
bound to pay his dues to the plaintiff.

QI. Write a note on Liability of the drawer of bill of exchange and drawer of cheque.
 Negotiable Instruments, Banking and Insurance 4.3

Liability of drawee of bill

When notice of dishonour is unnecessary. No notice of dishonour is
necessary in the following cases:

1. Notice of dishonour is not necessary when it is expressly waived

by the party entitled to it.

2. Notice of dishonour is not necessary, when he has countermanded

payment.

3. Notice of dishonour is not necessary when the party charged could

not suffer damage for want of notice. For example, A, having
balance of Rs. 10,000 at his bank and having no authority to
overdraw, draws a cheque for Rs. 5,00,000. A, in this case, is not
entitled to notice of dishonour.

4. Notice of dishonour is not necessary when the party entitled to

notice cannot after due search be found; or the party bound to give
notice is, for any other reason, unable without any fault of his own
to give it.
5. Notice of dishonour is not necessary to charge the drawers, when
the acceptor is also drawer.

6. Notice of dishonour is not necessary in case of a promissory note

which is not negotiable.

7. Notice of dishonour is not necessary when the party entitled to

notice, kowing the facts, promises unconditionally to pay the amount
due on the instrument._________________________ ______________

Tire drawer of a bill is under no obligation to the holder of the bill to

accept it. He incurs no liability to the holder by refusing to accept the bill.
His liability only arises when he accepts the bill and thus becomes an
acceptor of the bill.

Liability of drawee of cheque02

S. 31 provides that "the drawee of a cheque having sufficient funds
of the drawer in his hands, properly applicable to the payment of such
cheque must pay the cheque when duly required so to do, and, in default
of such payment, must compensate the drawer for any loss or damage
caused by such default.

_ £ >1. . .1------ ____ £ ~ -1----------- ri t n n th

 4.4 Capacity, Liability and Discharge from Liability
The relation between a banker and a customer who pays money into
a bank, arises out of a contract and is generally one of debtor and creditor,
with a super added obligation to honour the customers's cheques so long
as there are sufficient funds of the customer in the hands of the banker or
upto a certain amount of overdraft if agreed between the banker and the
customer. The banker's contractual duty to pay cheques is owed only to
the drawer and not to the payee or the holder and this is so even when
the cheque is marked as good for payment at the instance of the holder.

In Bank of Baroda v. Punjab National Bank, AIR 1944 PC 58, A was

indebted to B. A gave B a post-dated cheque on the Bank of Baroda for
a sum of Rs. 2,75,000 in satisfaction of his debt. The cheque was marked
by Bank of Baroda as "good for payment on 20th June, 1939". B discounted
the cheque with the Punjab National Bank and obtained Rs. 2,40,000
immediately. On 20th June, 1939, the Punjab National Bank presented the
cheque on the counter of the Bank of Baroda. But the Bank of Baroda
refused to honour it as the funds to the credit of A's account were annas
7 and pies 3 only. The Punjab National Bank sued the Bank of Baroda but
failed. It was held that the marking of cheque as good for payment did not
constitute acceptance within the meaning of Negotiable Instruments Act.

In Bank of Maharashtra v. Automotive Engineering Co., (1993) SCC

97, a cheque was drawn payable to a certain person for Rs. 95.98. The
writing on the cheque was chemically altered with regard to the date, the
name of the payee and also the amount. The amount was changed to Rs.
6500/-. The cheque was presented for payment. Drawer had sufficient
funds in the bank to cover the payment. On visual examination no infirmity
found in the cheque. But no further scrutiny was made by using modern
devices such as ultraviolet ray lamp, same being not available in the branch
though the branch was located at the outskirts of Bombay where cases of
forgery were higher. The drawer bank made the payment in good faith.
Forgery was detected later on. It was held that the bank was not liable on
ground of negligence merely because of its failure to scrutinise the cheque in
ultraviolet ray lamp.

Wilful dishonour of cheque by bank. In case of wrongful dishonour

of cheque by the drawee bank, the trader-drawer is entitled to substantial
damages without proving actual damage. The holder of cheque has no
remedy against the drawee-banker, as there is no privity of contract between
him and the banker. In Prebn v. Royal Bank of Liverpool, 1870 LR 5 Ee
92, a bank wrongfully dishonoured 11 cheques issued by the plaintiff
(drawer) for a total sum of Rs. 4,000 to 11 different payees. The plaintiff
(a fradpA waQ aiAzrardod rlamao-oc of T?c 000 A m.oi-nmni' ic
 Negotiable Instruments, Banking and Insurance 45
pot entitled to substantial damages. Similarly, in Canara Bank v. I.V.
Rajagopal, (1975) 1 Mad. LJ 420, the appellant bank wrongfully dishonoured
a cheque of Rs. 295 issued by the plaintiff (drawer). Due to dishonour of
the bill, the telephone was disconnected. There was sufficient balance in
the account. The Madras High Court awarded damages of Rs. 14,000 to
the drawer, as the employment was terminated due to the dishonour of
the cheque. He was getting a salary of Rs. 600 per month, besides free
boarding and lodging and a car for his conveyance. He was working in
reputed group Lakshmi Mills Company Limited, Coimbatore.

Cases in which the banker is justified or bound to dishonour

cheques
(1) When a cheque is post-dated.

(2) When the cheque is out-dated or stale, e.g., when it is presented

three months after its date.

(3) When the funds are insufficient.

(4) When the funds are not properly available to the payment of the
customer's cheque, e.g., in case of lien or set-off.

(5) When the maker has countermanded payment.

(6) When the cheque is mutilated.

(7) When the cheque contains an apparent material alteration not

properly authenticated by the drawer.

(8) When the cheque is drawn on another branch in which customer

has no account or in which funds are insufficient.

(9) When the amount in words and figures is different.

(10) When the customer's signatures does not tally.

(11) When the customer has died and banker has received notice thereof.

(12) When the customer becomes insolvent and the banker has notice
thereof.

(13) When the customer becomes a person of unsound mind, and the
banker has notice thereof.

(14) When a garnishee order has been issued.

To make the customer liable under S. 30 the cheque must be duly

presented within usual banking hours. In case of unjustified dishonour the
 4.6 Capacity, Liability and Discharge from Liability
banker is liable to pay compensation to his customer for any "loss or
damage" caused by such dishonour. A trade-customer is entitled to
substantial damages without pleading or proving actual damage as the
presumption is that he suffers injury owing to wrongful dishonour of
cheques.

Raising of Amount - The customer should be careful in drawing his

cheques and no unusual space be left which facilitate interpolation of
words and figures. If he is negligent in this respect, the loss falls on him.

In London Joint Stock Bank Ltd. v. Macmillan, (1918) A.C. 777, when
a partner of a firm was leaving office in haste, a clerk presented a cheque
for his signature. The cheque contained absolutely no writing except the
figure "2" in the column of amount in figures. The partner signed the
cheque and left, paying no attention to the way it was written. The clerk
then completed it for £120 and absconded with the proceeds.. It was held
that the bank could debit the customer's account with £120. The Court
approved the principle laid down in Young v. Grote, (1827) 4 Bling 253
where the amount could be raised from £350 due to negligence of the
drawer.

forgery of Signatures. If the banker pays the amount of a cheque

bearing forged signatures of the customer the banker cannot debit the
customer's amount because the banker must know the customer's
handwriting. This is so even when the customer is negligent keeping his
cheque book unlocked.

In Prabhu Dayal v. Jazvala Bank, AIR 1938 All 374, the impugned
cheque was forged and the signatures on the cheque bore no resemblance
to the admitted signatures of the plaintiff. The customer did not take
reasonable care of his cheque book as he left it in an unlocked box and
because of that some one was in a position to steal a form from the cheque
book which was utilized in drawing money from the defendant-respondent
bank. The banker was held liable for the loss. The customer was no doubt
negligent, but bis negligence was not the proximate cause of the loss.

In Bihta Co-operative Development and Cane Marketing Union Ltd.

v. Bank of Bihar, AIR 1967 SC 389, a suit was filed by the appellant Society
and its Secretary. The Society had an account with the defendant Bank. The
cheques of the Society had to be signed by two officers, namely, Joint
Secretary and the Treasurer. A cheque on which Rs. 11,000 were withdrawn,
one signature was forged. Two employees of the Bank and one of the
Society were found to be involved. The Supreme Court held that the Bank
had to'bear the loss.
 Negotiable Instruments, Banking and Insurance 4.7
In Canara Bank v. Canara Sales Corporation Ltd., AIR 1987 SC 1603
an official of the company who had the custody of the cheque-book, forged
the managing director's signature on 42 cheques during 1958 to 1961 and
withdrew and misappropriated the proceeds. During this period the
company did not raise any objection to the pass-sheets, i.e., pass book
entries in the pass-sheets. Ultimately when it came to know of the fraud
it questioned the right of them to debit rhe company's account with forged
cheques. Bank had to bear the loss.

Estoppel against forgery - In case of forgery of customer's signatures

where the banker pays the amount to the forger under this mistake of fact,
the banker can recover the amount from the forger. Therefore, to protect
the banker it is the duty of the customer, when he comes to know of the
forgery, to inform the banker so that the banker may take action against
the forger. If the customer having knowledge of the forgery does not inform the
banker and the banker consequently loses his remedy against the forger, the
customer will be stopped from relying upon the forgery of his signatures.

• Forgery in indorsement - S. 85 gives a special protection to bankers

paying cheques. It says:-

(1) Where a cheque payable to order purports to be indorsed by or

on behalf of the payee, the drawee is discharged by payment in
due course.
(2) Where a cheque is originally expressed to be payable to bearer, the
drawee is discharged by payment in due course to the bearer
thereof, notwithstanding any indorsement whether in full or in
blank appearing thereon, and notwithstanding that any such
indorsement purports to restrict or exclude negotiation.

Thus, the first clause of the section provides that if a cheque payable
to order purports to be indorsed by or on behalf of the payee, and'the
banker on whom it is drawn pays it in due course the banker is discharged,
and he can debit his customers's account with the amount so paid though
the indorsement of the payee might tuna out to be a forgery or though the
indorsement might have been placed on the cheque by the payee's agent
without his authority. This is so because a banker can hardly be called upon
to acquaint himself with handwriting of several persons who may indorse
a cheque.
To claim protection under this section the payment must be a "payment
in due course" as defined in S. 10. For example, if a banker pays the amount
of a crossed cheque across the counter it is not payment in due course as
 4.8 Capacity, Liability and Discharge from Liability

it is not according to the apparent tenor of the instrument, Madras Provincial

Co-operative Bank Ltd. v. South Indian Match Factory Ltd., I.L.R. 1945
Mad. 328. AIR (32) 1945 Mad 30.

Clause (2) provides that the cheques originally drawn payable to bearer
shall not lose the bearer character notwithstanding any indorsement thereon
whether in full or in blank and whether such indorsement purports to
restrict or exclude further negotiation or not. Thus, the expression "once a
bearer instrument always a bearer instrument" is true in case ofcheques originally
payable to bearer.

Liability of maker of a note and acceptor of bill

Section 32 provides as follows:—

"In the absence of a contract to the contrary, the maker of a promissory

note and the acceptor before maturity of a bill of exchange are bound to
pay the amount thereof at maturity according to the apparent tenor of the
note or acceptance respectively, and the acceptor of a bill of exchange at
or after maturity is bound to pay the amount thereof to the holder on
demand.

In default of such payment as aforesaid, such maker or acceptor is

bound to compensate any party to the note or bill for any loss or damage
sustained by him and caused by such default".

Thus, the liability of the maker of a promissory note and acceptor of a bill
of exchange is primary. Liability is absolute and unconditional unless there
is a contract to the contrary. The expression "contract to the contrary" is
used to cover the case of accommodation bill and notes. Further, the
liability of the acceptor is conditional by the tenor of his acceptance. In case
of qualified acceptance for part of the amount or subject to some other term
he cannot be made absolutely liable on the bill. His liability arises from
acceptance and delivery of the bill.

The maker of a note is liable "to pay according to the apparent tenor
of the note and the acceptor of a bill is liable to pay according to the
apparent tenor of his acceptance. The payment must be made to the holder
of the note or bill and at maturity. In case of default of such payment, the
maker of a note or the acceptor of a bill is bound to compensate not only |
the holder of the instrument, but any-party to the note or bill or loss or
damage sustained by him and caused by such default.

Liability of acceptor of bill on which endorsement is forged - S. 41

provides that an acceptor of a bill on which an indorsement is forged is not relieved
 Negotiable Instruments, Banking and Insurance 4.9
from liability on the bill, if he knows or had reason to believe that the indorsement
was forged when he accepted the bill.

Liability of acceptor of a bill drawn in a fictitious name - According

to S. 42 provides that where the drawer of a bill of exchange is also the
payee and is a fictitious person, the acceptor of the bill is liable to a holder
in due course, if the holder in due course can prove that the signature of
the supposed drawer and the first indorsement are by the same hand.

Liability of indorser
Section 35 provides that "In the absence of a contract to the contrary,
whoever indorses and delivers a negotiable instrument before maturity,
without, in such indorsement, expressly excluding or making conditional
his own liability, is bound thereby to every subsequent holder, in case of
dishonour by the drawee, acceptor or maker, to compensate such holder
for any loss or damage caused to him by such dishonour, provided due
notice of dishonour has been given to, or received by such indorser as
hereinafter provided. Every indorser after dishonour is liable as upon an
instrument payable on demand." Thus, the liability of an indorser is
conditional provided the conditions mentioned in S. 35 are fulfilled. The
liability of the indorser does not arise until the instrument is indorsed and
delivered to the indorsee. Further the notice of dishonour must be given
or received by the indorser.

Under S. 40 "Where the holder of a negotiable instrument, without the

consent of the indorser, destroys or impairs the indorser's remedy against
a prior party the indorser is discharged from liability to the holder to the
same extent as if the instrument had been paid at maturity." The following
illustration is appended to the section:
A is the holder of the bill of exchange made payable to the order of
B, which contains the following indorsement in blank:

First indorsement, "B".

Second indorsement, "Peter Williams."

Third indorsement, "Wright & Co."

Fourth indorsement, "John Rozario."

This bill A puts in suit against John Rozario and strikes out, without
John Razario's consent the indorsement by Peter Williams from John Rozario.
A is not entitled to recover anything from John Rozario.
 4.10 Capacity, Liability and Discharge from Liability

Liability of Intervening Parties

Sections 36 to 39 deal with the question of liability of various parties
inter se.
Section 36, as discussed earlier, provides that "Every prior party to a
negotiable instrument is liable thereon to a holder in due course until the
instrument is duly satisfied." "Prior party" means all the intervening
indorsers and the acceptor or the maker.

Section 37 says that the maker of a note and the, drawer of a cheque
are liable as principal debtors, and all other parties are liable as sureties.
In case of bill until acceptance, the drawer is liable as principal debtor and
other parties are liable as sureties, but after acceptance, the acceptor is
liable as principal debtor and all other parties as sureties.

Section 38 lays down that "As between the parties so liable as sureties,
each prior party is, in the absence of a contract to the contrary, also liable
thereon as principal debtor in respect of each subsequent party." The
section carries an illustration which says: A draws a bill payable to his own
order on B, who accepts. A afterwards indorses the bill to C, C to D, and
D to E. As between E and B, B is the principal debtor, and A, C and D
are his sureties. As between E and A, A is the principal debtor, and C and
D are his sureties. As between E and C, C is the principal debtor and D
his surety.

Section 39 provides that when the holder of an accepted bill of exchange

enters into any contract with the acceptor which, under S. 134 (to release
him from liability) or S. 135 (to give time) of the Indian Contract Act, 1872,
would discharge the-other parties, the holder may expressly reserve his
right to charge the other parties, and in such a case they are not discharged.

Liability of Transferor by Delivery

A bearer instrument does not require indorsement and is capable of
being transferred by delivery only. Thus, the name of the transferor by
delivery (without indorsement) does not appear on the instrument in any
capacity. The above rules do not apply to such a transfer, which is regarded
in the nature of a sale. The Negotiable Instruments Act does not provide about
the position or liability of such a transferor. But S. 58 of the (English) Bill of
Exchange Act provides as follows:—

"(1) Where the holder of a bill payable to bearer negotiates it by delivery

1
' without indorsing it, he is called a transferor by delivery.
X.1— -
 Negotiable Instruments, Banking and Insurance 4.11
(3) A transferor by delivery who negotiates a bill thereby warrants to
his immediate transferee being a holder for value that the bill is
what it purports to be, that he has a right to transfer it, and at the
time of transfer he is not aware of any defect which renders it
valueless."

DISCHARGE OF PARTIES FROM LIABILITY

A party is said to be discharged from his liability when his liability
on the instrument comes to an end. But an instrument is said to be discharged
only when the party who is ultimately liable thereon is discharged from
liability Thus, the discharge of one or more of the parties to an instrument
does not necessarily discharge the instrument itself.

Modes of Discharge
Sections 82 to 90 deal with discharge from liability which are discussed
below:

1. Cancellation - Section 82(a) provides that the maker, acceptor or

indorser respectively of a negotiable instrument is discharged from liability
thereon to a holder thereof who cancels such acceptor's or indorser's name
with intent to discharge him, and to all parties claiming under such holder.
Thus, where the holder of a negotiable instrument or his agent cancels the
name of any party on the instrument with intent to discharge him, such
party and all subsequent parties, who have a right of recourse against the
party whose name is cancelled are discharged from liability. The subsequent
parties are sureties and, therefore, the discharge of the principal debtor
discharges the sureties. Cancellation must be intentional and apparent on
the instrument. Thus, the cancellation of an indorser's name would discharge
him and all the subsequent indorsers; the cancellation of the drawer's name
would discharge him and all the indorsers; the cancellation of acceptor's
name would discharge him and all the parties to the instrument; and the
cancellation of maker's name would discharge him and all parties
subsequent to him.

Section 40 of the Act provides that where the holder of a negotiable

instrument, without the consent of the indorser, destroys or impairs the
indorser's remedy against a prior party, the indorser is discharged from
liability to the hodler to the same extent as if the instniment had been paid
at maturity. It may be noted that S. 39 applies only to a bill of exchange.
Whereas S. 40 applies to all negotiable instruments.
 4.12 Capacity, Liability and Discharge from Liability
2. Release - Section 82(b) provides that if a holder of a negotiable
instrument discharges the maker, acceptor or indorser otherwise than by
cancellation of names, i.e., by separate agreement of waiver, release or
remission, the party so released and all parties subsequent to him who gave
a right of action against the party so released are discharged from liability.
Thus, the effect of release is the same as that of cancelling a party's name.

3. Payment - Section 82(c) lays down that the maker, acceptor or

indorser respectively of a negotiable instrument is discharged from liability
thereof to all parties thereto, if the instrument is payable to bearer, or has
been indorsed in blank, and such maker, acceptor or indorser makes payment
in due course of the amount due thereon. S. 78 says that subject to the
provisions of S. 82(c), payment of the amount due on a promissory note,
bill of exchange or cheque must, in order to discharge the maker or acceptor,
be made to the holder of the instrument.

Thus, S. 78 says that the payment must be made to the holder and S.
82(c) says that if the instrument is bearer or indorsed in blank, payment
is a good discharge if it is payment in due course. According to S. 10
payment in due course means payment in accordance with the apparent
tenor of the instrument in good faith and without negligence to any person
in possession thereof under circumstances which do not afford a reasonable
ground for believing that he is not entitled to receive payment of the
amount therein mentioned."

Section 81 provides that when the instrument has been paid the holder
must deliver the instrument to the party paying him. However, where the
cheque is an electronic image of a truncated cheque, even after the payment
the banker who received the payment shall be entitled to retain the truncated
cheque. A certificate issued on the foot of the printout of the electronic
image of a truncated cheque by the banker who paid the instrument, shall
be prima facie proof of such payment.

4. Allowing drawee more than 48 hours to accept - Section 83 provides

that if the holder of a bill of exchange allows the drawee more than forty­
eight hours, exclusive of public holidays to consider whether he will accept
the same, all previous parties not consenting to such allowance are thereby
discharged from liability to such holder.

5. Qualified Acceptance - A qualified acceptance varies the effect of

the bill as drawn and the holder is not bound to take a qualified acceptance.
Section 86 provides that if a holder takes a qualified acceptance, he does
so at his own risk and discharges all parties prior to himself unless he
obtains their consent.
 Negotiable Instruments, Banking and Insurance 4.13
An acceptance is said to be qualified (a) where it is conditional, declaring
the payment to be dependent on the happening of an event therein
mentioned; (b) where it alters the payment of the sum ordered to be paid;
(c) where, no place of payment being specified in the order, it undertakes
the payment at a specified place and not otherwise or elsewhere; or where
a place of payment being specified in the order, it undertakes the payment
at some other place and not otherwise or elsewhere; (d) where it undertakes
the payment at a time other than at which under the order it would be
legally due; (e) where the drawees are not partners, and it is not signed
by all the drawees.
6. Delay in presenting cheque - Section 84 read with Section 72 provides
that if a cheque is not presented within a reasonable time and in consequence
of a non-presentation the drawer suffers damage the drawer is discharged
to the extent of the damage suffered. For example, if A draws a cheque
for Rs. 1,000 and when the cheque ought to be presented, has funds at the
bank to meet it The bank fails before the cheque is presented. The drawer
is discharged but the holder can prove against the bank for the amount
of the cheque [illustration (a) appended to S. 84].
Section 84(2) says that in determining what is reasonable time, regard
shall be had to the nature of the instrument, the usage of trade and of
bankers, and the facts of the particular case. For example, if A draws a
cheque at Ambala on a bank in Calcutta. The bank fails before the cheque
could be presented in ordinary course. A is not discharged, for he has not
suffered actual damage through any delay in presenting the cheque
[Illustration (b) to S. 84}.
Section 84(3) says that the holder of the cheque as to which such drawer
or person is so discharged, the holder of the cheque becomes a creditor
of the bank to the same extent of such dicharge and entitled to recover the
amount from the banker.
7. Material Alteration03 - The first paragraph of S. 87 says that "Any
material alteration of a negotiable instrument renders the same void as
against any one who is a party thereto at the time of making such alteration
and does not consent thereto, unless it was made in order to carry out the
common intention of the original parties."
The alteration must be intentional and the section does not apply to
the effects of pure accidents. Secondly, the alteration must be material. In
Loonkaran Sethiya v. Ivan E. John, AIR 1977 SC 336, the Supreme Court
defined material alteration as follows:

Q3. Write a note on material alteration of a negotiable instrument. fLL.B.. D.U.I

 4.14 Capacity, Liability and Discharge from Liability
"A material alteration is one which 'varies the rights, liabilities or legal
position of the parties as ascertained by the deed in its original state, or otherwise
varies the legal effects of the instrument as originally expressed, or which may
otherwise prejudice the party bound by the deed as originally executed."

The following are the examples of material alteration :

(i) Alteration of trie date of payment to accelerate or postpone the time

of payment is a material alteration. (A Subba Reddy v. Neelapa
Reddy Ramana Reddy, AIR 1966 AP 267).

(ii) Alteration of the time of payment is a material alteration. For

example a bill payable three months after date is altered into bill
payable three months after sight (Long v. Moore, 1790 3 Esp 155).

(iii) Alteration of the place of payment, e.g., change of bank at which

the instrument is payable is a material alteration. (Tidamarsh v.
Grover (1813) 23 LJ QB 261).

(iv) Alteration of the sum payable is a material alteration. For example, a

bill of Rs. 500 is altered into a bill of Rs. 2,500 (Scholfield v. Earl of-
Londesborough, (1896) AC 514).

(v) Alteration by adding new party to the instrument is a material

alteration [Gamer v. Walsh (1855) 5 E&B 83].

(vi) Alteration of the rate of interest is a material alteration. [Seth Tulsidas

Laichand v. Rajagopal (1967) 2 MLJ 66]. Similarly, a bill of Rs.
5,000 accepted payable without interest is altered into a bill accepted
payable with interest @ one per cent per month.

(vii) Alteration by tearing material part of the instrument is a material

alteration.

(viii) Alteration by affixing stamps without the promisor's knowledge to

a note (Thommen v. Usmia Khan, 1967 Ker LJ 80; N Gowda v, B.
Gowda 1968 1 Mys U 591).

(ix) Alteration by erasing account paying crossing is a material alteration

(J. Ladies Beauty v. State Bank of India, AIR 1984 Guj 33).

(x) Altration of an order cheque to a bearer cheque, except by or with

the consent of the drawer is a material alteration.

Thus, any alteration which changes the legal character of the instrument,
or alters the liabilities of the parties, whether change is prejudicial or
beneficial is a material alteration.
 Negotiable Instruments, Banking and Insurance 4.15
Alteration not vitiating the intrument - The following alterations do not
vitiate the instrument:

(i) Alteration made before the completion of instrument.

(ii) Alteration made with the consent of the parties liable on the
instrument,

(iii) Alteration made for the purpose of correcting a mistake or a clerical

error. For example if instead of 1823, the date entered in a bill is
1832, the drawer is entitled to correct the mistake [Brutt v. Pickard,
(1824) Rly SM 37].

(iv) Alteration made to carry out the common intention of the parties
(S. 87). For example, where the expression "or order" after the
name of the payee is inserted subsequently [Byrom v. Thomson,
(1839) II A & E 302].

(v) Conversion of bearer cheque into an order cheque.

(vi) Completion of inchoate instrument (s. 20).

(vii) Making a blank indorsement into full indorsement (S.49)

(viii) Making a qualified acceptance (S.86).

(ix) Crossing of an uncrossed cheque or conversion of general into

special crossing (S.125).

(x) An alteration which is accidental. In Hongkong & Shagia Banking

Corporation v. Lo Lee Shi, (1928) AC 181 (PC), a bank note was
accidentally multilated by washing and ironing of the garment in
which the note was kept and the number of the note was not
visible. It was held that the contract was not altered to render the
instrument void.

(xi) Erasure of an indorsement on the bank of a promissory note in

respect of a payment by the maker would not be material alteration
invalidating the note sinch such indorsement was not a part of the
instrument (Shiva Pingappa v. P.B. Puttoppa) AIR 1971 Mysore
273.

In Veera Exports v. T. Kalavathy, (2002) 1 SCC 97: AIR 2002 SC 38,

it was held that the first paragraph of Section 87 makes it clear that the
.party who consents to the alteration as well as the party who made the
alteration are disentitled to complain against such alteration. For example,
where the drawer of the cheque himself altered the date of the cheque for
 4.16 Capacity, Liability and Discharge from Liability
of it by saying that the cheque became void as there was a material alteration
thereto.

There is no provision in the Negotiable Instruments Act or any other

law which stipulates that a drawer of a negotiable instrument cannot
revalidate it. It is always open to a drawer to voluntarily revalidate a
negotiable instrument, including a cheque.

Effect of material alteration

The effect of material alterationy is as laid down in S.87 that it discharges

all parties who are liable on the instrument at the time of alteration and
who do not consent to such alteration. It does not affect the liability of
persons becoming parties subsequent to the alteration. The second paragraph
of S. 87 provides that if a material alteration is made, by an indorsee, the
indorser will be discharged from his liability even in respect of the
consideration thereof. As stated above the S. 87 is subject to provisions of
section 20, 49, 86 and 125.

Acceptor or indorser bound notwithstanding previous alteration

Section 88 provides that an acceptor or indorser of a negotiable

instrument is bound by his acceptance or indorsement notwithstanding
any previous alteration of the instrument.

Payment of instrument on which alteration is not apparent

Section 89(1) provides .-"Where a promissory note, bill of exchange or

cheque has been materially altered but does not appear to have been so
altered, or where a cheque is presented for payment which does not at the
time of presentation appear to be crossed or to have had a crossing which
has been obliterated, payment thereof by a person or banker liable to pay,
and paying the same according to the apparent tenor thereof at the time
of payment and otherwise in due course, shall discharge such person or
banker from liability thereon; and such payment shall not be questioned
by reason of the instrument having being altered, or the cheque crossed".

. Where the cheque is an electronic image of a truncated cheque, any

difference in the apparent tenor of such electronic image and the truncated
cheque shall be a material alteration and it shall be the duty of the bank
or the clearing house, as the case may be, to ensure the exactness of the
apparent tenor of electronic image of the truncated cheque while truncating
and transmitting the image (S.89(2)}.

Any, bank or a clearing house which receives a transmitted image of

a truncated cheaue. shall verifv from the oartv. who transmitted the imaee
 Negotiable Instruments, Banking and Insurance 4.17

to it, that the image so transmitted to it and received by it, is exactly the
same [S. 89 (3)].
8. Acceptor as holder - S. 90 provides that "if a bill of exchange which
has been negotiated is, at or after maturity, held by the acceptor in his own
right, all rights of action thereon are extinguished" This rule is based on
the general principle that a present right and liability united in the same
person cancel each other.

Distinction between material alteration and forgery

The following are the points of distinction between the two :

1. Meaning - Any change in a written instrument which casues it to

speak a different language in legal effect from that’, which it originally
spoke, is a material alteration. Whoever marks any false document or part
of a document, with intent to cause damage or injury, to the public or to
any person or to support any claim or title or to cause any person to part
with property, or to enter into any express or implied contract, oi with
intent to commit fraud or that fraud may be committed, commits forgery
(S. 463 IPC 1860).
2. How is it done - A material alteration may be done, inter alia, by
altering the date of the instrument, time of payment, place of payment, sum
payable and the party liable. Forgery may be effected by making signature
of another person on an instrument.

3. Effect - Where a new negotiable instrument is materially altered

without the consent of all the parties liable on it, at the time of alteration,
all such parties are discharged from their liabilities (S. 87). Forgery is a
nullity. The holder of a forged instrument cannot enforce payment thereon.
If he manages to obtain payment of the amount of the instrument, he is
liable to return the money. Even a holder in due course is not exempt from
this rule because there is complete absence of title in case of forgery.
Similarly, if the signature of an indorser is forged on a negotiable instrument,
it is no indorsement in the eyes of law. Therefore, indorsee of an order
instrument bearing a forged instrument gets no title thereto, even if he is
a bona fide holder for value.

4. Mode of discharge of liability - Material alteration is a mode of

discharge of liability but forgery is not a mode of discharge of liability.

5. Protection - There are certain instances of material alteration which,

though material will not vitiate the instrument e.g. completion of inchoate
instrument and crossing of cheon^s Fnrcrprv not nprmittpH bv law
 4.18 Capacity, Liability and Discharge from Liability

IMRleading casesM^MMB A

London Joint Stock Bank v. Macmillan and Arthur

(1918) AC 777
(If a cheque be drawn so negligently as to facilitate forgery by alteration of
the amount payable, any loss caused by such alteration zoill fall on the customer
who draws the cheque, and not on his banker.)

Facts
1 __
When a partner of a firm was leaving office in haste, a clerk presented
a cheque for his signature. The cheque contained no writing except the
figure "2" in the column for amount in figures with space before and after
2. The partner signed the cheque and left, paying no attention to the way
it was written. The clerk then completed it for £120 and absconded with
the proceeds.

Decision of the House of Lords

The relation between banker and the customer is that of debtor and
creditor, with a superadded obligation on the part of the banker to honour
the customer's cheques when the account is in credit.

The banker was held entitled to debit the customer's account with the
whole of the amount, i.e £120. Their Lordships discussed various cases
including Young v. Grote, 4 Bing 253, in which case the drawer's clerk
raised the figure from £50 to £350 as he had left enough space for writing
3 before 50 which was not noticed by the drawer's wife in whose custody
the drawer had kept certain blank forms of cheques signed by him.

The Court held that if a cheque be drawn so negligently as to facilitate

forgery by alteration of the amount payable, any loss caused by such
alteration will fall on the customer who draws the cheque, and not on his
banker. In drawing a cheque, the customer is bound to take usual and
reasonable, precautions to prevent forgery of the amount payable. If the
cheque is drawn in such a way as to facilitate or almost invite an increase
in the amount by forgery if the cheque should get into the hands of a
dishonest person, forgery is not a remote, but a very natural consequence
of neglect of this description.
 Negotiable Instruments, Banking and Insurance 4.19
Lala Prabhu Dayal v. The Jawala Bank
AIR 1938 AIL 374
(It is the duty of the banker to be acquainted with the customer's handwriting
and the banker must suffer ifpayment is made ofa cheque on which the customer's
signature is forged.)

Facts
The plaintiff-appellant was a customer of the defendant-respondent
bank. A cheque purporting to have been signed by the plaintiff in favour
of certain person. The impugned cheque was forged and the signatures on
the cheque bore no resemblance to the admitted signatures of the plaintiff.
The plaintiff had not taken sufficient care of his cheque book and because
of that some one was in a position to steal a cheque from the cheque book
which was utilized in drawing money from the defendant bank. The plaintiff
was negligent in leaving his cheque book in unlocked box in the small
"baithak" of his house where other persons had also access.

Decision of the Allahabad High Court

The banker was held liable for the loss. The Court observed that "a
document in cheque form to which the customer's name as a drawer is
forged or placed thereon without authority is not a cheque but a mere
nullity and that unless the banker can establish adoption or estoppel, he
cannot debit the customer with any amount made on such a document.
Tire customer was no doubt negligent in leaving his cheque book unlocked,
but his negligence was not the proximate cause of the loss. The Court
quoted the following passage from Beven on Negligence, Ed. 4 Vol. II
Chap. 3 p. 1471 which was relied upon on behalf of the plaintiff:

"The banker's obligation is to honour his customer's cheque. To that end he

is bound to know his customer's handwriting. If in any zoay he is deceived without
the instrumentality of his customer, he must himself abide by the loss."

Canara Bank Limited v. I. V. Rajagopal

(1975) 1 MLJ 420
(Where on account of the wrongful dishonour of the cheque for Rs. 294.40
of a liaison officer, his telephone zuas disconnected and taking that as too serious
a blozu to his reputation his employer removed him, the Madras High Court
awarded fourteen thousand rupees by way of damages. The banker's apology
carried no 7oeiaht )
 4.20 Capacity, Liability and Discharge from Liability

Facts
The plaintiff had a personal account with the Canara Bank Limited
(defendant) at its Madras Branch, on 6th April, 1964. He was the
representative of a reputed group of concerns in Coimbatore, popularly
known as M/s Lakshmi Mills Co. Limited, Coimbatore, and its sister
concerns at Madras. The group had a liaison office at Madras where a
telephone in the name of aforesaid entity was installed which was in the
sole administrative custody of the plaintiff. In the course of his official
duties, the plaintiff gave a cheque for Rs. 294.40 towards the telephone bill
for the aforesaid company. The cheque was drawn on the personal account
kept by the plaintiff with the defendant bank on 8th April, 1964 when the
cheque came for clearance, the defendant bank by mistake and oversight
did not honour the cheque, though the plaintiff had a sum of Rs. 652.83
to his credit in his account with the bank; On 24th April, 1964, the telephone
department informed the plaintiff of the dishonour of the cheque. The
plaintiff met the officials of the bank on the same day and the manager
of the Madras branch of the bank expressed regret for dishonouring the
cheque. The telephone department was requested through a letter by the
Madras office of the bank to represent the cheque but it was not interested
in such representation. As the telephone bill remained unpaid, the telephone
was disconnected on May 6, 1964. But on prompt steps taken by the
plaintiff it was restored on 7th May, 1964.

The plaintiff explained the facts to his employers but the plaintiffs
employers did not accept his explanation and on 15th June, 1964 his services
were terminated, and according to the plaintiff, on the sole ground that
the plaintiff did not pay the telephone bill in time. He contended that the
defendant bank was mainly responsible for dishonouring the cheque and
made a claim for compensation of damages against the defendant bank for
the loss of earnings for a period of five years which he estimated at Rs.
36,000 and also made a claim for a sum of Rs. 14,000 for loss of prestige
and status and for mental agony caused to him by losing his covetable job.
At the time of termination he was getting a salary of Rs. 600 p.m. besides
free boarding and lodging and a car for his conveyance. The defendant
bank contended that the plaintiff did not take immediate steps to avert the
consequences which would follow from the dishonour of the cheque and
mitigate the damage. The defendant ought to have issued a fresh cheque
on his account or utilized the other funds of his employer for paying the
telephone bill and he, not having taken such steps, cannot claim the
exaggerated amount of Rs. 50,000. The plaintiff got a part-time job ot Rs.
285 p.m. and that job was from 1st Sep. 1964 to 31st Dec, 1966 and from
 Negotiable Instruments, Banking and Insurance 4.21
Decision
The Court held that the disconnection of the telephone was due to
dishonour of the cheque and that the dishonour was due to the negligence
of the bank. It said that when the cheque was dishonoured, the bank "ought
to have issued a credit note or paid off cash to the telephone department
and advise to treat the return of the cheques as of no consequence. But,
on the other hand, a casual letter was written asking the District Manager,
Telephones to represent the cheque. Mere expression of regret is not the
answer to the situation. It is expected of the bank to honour its customer's
cheque if it has sufficient funds in his hands. If it fails to do so, it will be
liable to damages. The reason is obvious. It injuriously affects the reputation,
credit and integrity of the customer. Even S. 32 of the Act provides that the
drawee of a cheque having sufficient funds of the drawer in his hands, properly
applicable to the payment of such cheque must pay the cheque when duly required
so to do, and in default of such payment, must compensate the drawer for any
loss or damage caused by such default."

It was held that "the dismissal of the plaintiff from the service of his
employer was due to the disconnection of the telephone of the group
companies which action had a definite impact on the dishonour of the
cheque. It has not been brought out that the employer had any serious
complaint against the plaintiff prior to the dishonour of the cheque."

After applying S. 73 of the Indian Contract Act, 1872 the Court azvarded
Rs. 10,000 as special damages, and a sum ofRs. 4,000 as general damages towards
the loss of prestige, status and mental agony as azvarded by the trial Court.

It was observed that in case of dishonour of a cheque by a banker of a trader

substantial damages may be awarded against the banker without proof of actual
loss to the customer. But in case of a non-trader proof of such special damages
is necessary.

Al I amp ati Subb a Reddy v. Neelapa Reddi Ramana Reddi

AIR 1966 A.P. 267
(Alteration of the date of the instrument to accelerate or postpone the time
of payment is a material alteration.)

Facts
In this case a promissory note was alleged to have been executed on
22-7-1959. The plairitiff contended that it was executed on 29-7-1959, but
the HpfpnHant nlnaHpH that it woe ovomto/i '~>r).r7 igko
 4.22 Capacity, Liability and Discharge from Liability

bring the suit within the period of limitation the plaintiff after erasing the
figure '2' wrote the figure '9'. It was found that the figure of '9' was
rewritten after the old figure had been erased. There was no evidence on
either side explaining about the suspicious nature of the document. The
plaintiff failed to prove that the alteration was made either with the consent
of the parties or in order to effectuate the common intention of the parties.

Issue
When there is no evidence on either side explaining about this suspicious
nature of the document due to alteration of figure '9' in place of some
figure, what course should the Court take?

Decision of the Andhra Pradesh High Court

It was held that alteration of the date of the instrument, e.g., where
a holder of a bill or note alters the date of the instrument, to accelerate or
postpone the time of payment is a material alteration. The instrument
becomes void under S. 87 and cannot be enforced in Court of law.

S. 87 provides that "any material alteration of negotiable instrument

renders the same void as against anyone who is a party thereto at the time
of making such alteration and does not consent thereto, unless it was made
in order to carry out the common intention of the original parties." The
Court said:
"It is not any and every alteration that avoids the instrument. To have
that effect the alteration must be in a particular part. A material alteration
can be brought about by change of date or time of drawing or of the place
of payment or by the change in the sum payable, etc. It is thus evident that
the date of a promissory note is a material portion of it, and any alteration
of this date will naturally avoid the promissory note, unless, of course, as
stated in section such an alteration is made with the consent of the other
party, or is made to effectuate the common intention of the original parties.
It is wrong to assume that the date of the promissory note is merely a
description. It indicates the time when the promissory note was executed.
In most cases the date is very material in calculating the date of performance of
the contract and for fixing the period of limitation within which the plaintiff will
have to institute the suit on the foot of such promissory note. It is immaterial
whether the alteration is made in the date or month of year. Any such alteration
being material must necessarily result in the avoidance of the promissory note."

As regards the burden of proof the Court said: "Where an instrument

appears to be alterpd it is innimhpnt nnnn fho holder AaF ic Ao
 r
Negotiable Instruments, Banking and Insurance 4.23
to show that the alteration is not improperly made. It is not fairly settled
that in case of negotiable instruments the presumption is that the alteration
was made subsequent to the .issue of the instrument. What must follow is
that when a promissory note appears to have been altered or there are
tea
marks of erasures on it, the party seeking to enforce the promissory note
is bound to satisfy the Court that alteration does not avoid the promissory
note by explaining how the alteration has been effected. If it falls under
any one of the exceptions mentioned above, it is obvious that such an
alferation will not fall within the mischief of section 87 of Negotiable
Instruments Act, 1881."

Coming to the facts of the case the Court said: "In the absence of any
explanation on behalf of the plaintiff who seeks the enforcement of the document,
it is obvious that the plaintiff must fail, as the onus was on him to show that the
material alteration was.made either with the consent of the parties or in order to
effectuate the common intention of the parties. In the absence of any such plea
the presumption, as stated earlier, is that material alteration was made subsequent
to the execution of the document. In view of the presumption of the irresistible
conclusion is that the suit promissory note is void under S. 87 of the
Negotiable Instruments Act and it cannot, therefore, be enforced in court
of law.

Shivalingappa v. P.B. Puttoppa

AIR 1971 Mysore 273
(Erasure of an indorsement on the back of a promissory note in respect of a
payment by the maker would not be material alteration invalidating the note since
such indorsement was not a part of the instrument.)

Facts
An endorsement made in pencil on the back of a promissory note in
respect of payment of a part of the amount by the maker was alleged to
have been erased.

Decision of the Mysore High Court

The Court held that the erasure of an indorsement on the.back of a
promissory note in respect of a payment by the maker would not be
material alteration invalidating the note since such indorsement was not
a part of the instrument. The Court said:
 4.24 Capacity, Liability and Discharge from Liability
"The entire promissory note has been completed on one side of the
paper. S. 87, Negotiable Instruments Act, contemplates material alteration
of a negotiable instrument if there is a material alteration of a negotiable
instrument, the same renders the document void against anyone who is
a party thereto at the time of making such alteration and does not consent
thereto unless it was made in order to carry out the common intention of
the original parties. The indorsement which is alleged to have been made on the
back side of the promote does not form part of the negotiable instrument in
question. The alleged indorsement could as well have been made on an
independent piece of paper and not on the back side of the promissory
note. Merely because an indorsement has been made on the back side of
the promissory note, it does not form part of the pronote. As the indorsement
in question is not a part of the negotiable instrument, any alteration in the said
indorsement does not attract the penal provisions ofS. 87, Negotiable Instruments
Act."

Bihta Co-operative Development and Cane Marketing

Union Ltd. v. Bank of Bihar
AIR 1967 SC 389
(Forged signature of the customer is no mandate, bank becomes liable for
negligence.)

Facts
Tire first plaintiff, Bihta Co-operative Development and Cane Marketing
Union Ltd. was a society registered under the Bihar and Orissa Co-operative
Societies Act, 1935. The second plaintiff was Secretary of the Union at the
time when the suit was filed in 1951. Under a resolution, dated 16th April,
1947 of the Executive Committee of the Union, the defendant no. 6, Bubu
Lal Verma, Joint Secretary of the Union, the defendant no. 7, Ram J. Verma,
the Treasurer of the Union were jointly authorised to withdraw moneys
of the Union from the 1st defendant, the Bank of Bihar Ltd., with which
it had a running account.

On 26th May, 1948, defendant no. 6 and defendant no. 7 went to the
bank to encash a cheque on behalf of the Union and then they came to know
that the funds in the account of the Union wTere not sufficient to meet the
cheque. Meanwhile, on 16th April, 1948 a sum of Rs. 11,000 had been
withdrawn from the said account by means of cheque which did not come
out of the cheque book of the Union and that a loose cheque form surrendered
by an ex-constituent of the bank issued to someone on the 23rd March, 1948
 Negotiable Instruments, Banking and Insurance 4.25
had been converted into a cheque purporting to bear the signatures of
defendant no. 6 and defendant no. 7. The spurious cheque bore the signature
of defendant no. 7 but the purported signature of defendant no. 6 was
found to be a forgery at the trial of the suit. The suit was instituted by the
two plaintiffs against seven defendants.

Decision of the Sub-ordinate Judge and of Patna High Court

After examining a large number of witnesses the Sub-ordinate Judge
came to the conclusion that the cheque in question was a forged and
fabricated document and that defendants 4 and 5 who were employees of
the respondent Bank and defendant no. 7 who was Treasurer of the Union,
acting in collision and conspiracy with one another had withdrawn the sum
of Rs. 11,000 by means of the forged cheque. Decree was passed against
these defendants, manager of the branch and the respondent Bank jointly.

The High Court agreed with the finding of the Sub-ordinate Judge that
defendants 4, 5 and 7 were parties to the conspiracy, resulting in the
withdrawal of the sum of Rs. 11,000 but absolved the manager. The High
Court held that there was no negligence or lack of reasonable precaution
on the part of the Union. It further held that treasurer of the Union may
have been a party to the conspiracy which culminated in the withdrawal
of the money through the disputed cheque, but the Union could not be said
to be negligent or lacking in reasonable precaution merely because of that.
However the High Court allowed the appeal of the Bank on the ground
of jurisdiction which was, not accepted by the Supreme Court.

Contention of the defendant-respondent

It was argued on behalf of the Bank that even thougTi there was
negligence on the part of the bank and its employees, the plaintiff society
was not altogether free from blame or negligence in that but for the part
played by at least one of its employees in the matter of encashment of the
cheque for Rs. 11,000, the fraud could not have been perpetrated. It was
argued that if both the parties were negligent orblame worthy, the plaintiffs
claim ought not to succeed. In support of this argument the judgement of
the House of Lords in London Joint Stock Bank Ltd. v. Macmillan and
Arthur, 1918 AC 777 was referred.

In the above case the plaintiffs had in their employ a confidential clerk
who had been with them, for some years. They left to him the copying of
their books and filling up cheques for signatures. The usual practice in the
 4.26 Capacity, Liability and Discharge from Liability

office of the plaintiffs seems to have been for the clerk to present cheques
for signatures to get petty cash usually for £3. On a certain day, the clerk
made out a cheque for £2 and asked one of the partners to sign it which
the partner did. As the clerk did not turn up the next day, the partners
became suspicious and went to the bank. There they learned that the clerk
had presented a cheque for £120 which had been paid. The clerk absconded
with the money. The learned trial judge found that at the time when the
cheque was presented to the partner for signature the figure '2' was written
with enough space on either side for insertion or additional figures and
the clerk had taken advantage thereof and altered the figure '2' to 120. It
was held by learned Lord Chancellor that leaving blank spaces on either
side of the figure '2' in the cheque amounted to a clear breach of duty which
the customer owed to the banker. The plaintiffs were held negligent with
regard to the cheque and their action against the bank failed. According
to Lord Shaw the responsibility of what happens between the signature
and presentation of cheque, a period wholly in the customer's control, lies
entirely with him.

Decision of the Supreme Court

The Supreme Court held that the principle of London Joint Stock Bank
Ltd. v. Macmillan and Arthtir, 1918 AC 777 could not help the respondent
Bank.

In the present case, "the finding is that one of the signatures was forged
so that there never was any mandate by the customer at all to the banker
and the question of negligence of the customer in between the signature
and the presentation of the cheque never arose. Not only was there negligence
on the part of the banker'in not ascertaining zvhether the signatures on the cheque
were genuine, the circumstances attending the encashment of the cheque show
conclusively that the banker was negligent and some of its office bearers fraudulent
rightfrom the beginning.... There was no negligent on the part of the customer
according to whose resolution, the cheque had to be signed jointly by two
persons. The fraud could only be perpetrated because of the complicity of
the employees of the Bank, no doubt, with the help of one of the office
bearers of the Union. The dishonesty of the particular officer of the Union
was not the proximate cause of the loss to the Bank."

Thus, the appeal succeeded, the judgement of the Patna High Court
was set aside and that of the subordinate Judge restored.
 Negotiable Instruments, Banking and Insurance 4.27
Canara Bank v. Canara Sales Corporation Ltd.
AIR 1987 SC 1603
(If the signature on the cheque is not genuine there is no mandate on the bank
to pay. A document in cheque form on which the customer's name as drawer is
forged, is a mere nullity. The bank can succeed only when it establishes adoption
or estoppel.)

Facts
The plaintiff was a private limited company with its head office at
Mangalore. It had a current account with the appellant Bank (the first
defendant) in its Mangalore Bunder branch. The Managing Director of the
Company and the General Manager of a sister concern of the company had
been authorised to operate the said current account of the plaintiff with
the Bank. The second defendant, Y.V. Bhat, who was the Chief Accounts
Officer of the plaintiff company at that time, was incharge and custody of
the cheque books issued by the Bank to the plaintiff company. In March,
1961, the second defendant was absent from duty for some time. During
that period one A. Shenoy, who was the Assistant of the second defendant
was directed to bring the accounts upto date. During this process, he
noticed certain irregularities in the account and brought this to the notice
of the plaintiff. On verification, it \>vas found that cheques purporting to
bear the signature of the Managing Director Shri V.S. Kudva were encashed
though they did not bear his signature. In other words signature were
forged.

The special audit disclosed that the second defendant had withdrawn,
in all, a sum of Rs. 3,26,047.92 under 42 cheques with forged signature on
various dates between the year 1957 and 1961. During the said period the
appellant Bank ’used to send to the plaintiff respondent pass sheets
containing the debit and credit entries in the current account of the plaintiff
with the Bank every month and at the end of every half year ending 30th
June and 31st December, a letter used to.be sent asking the respondent to
confirm that the balance in its account with the Bank was as mentioned
in the letter. Till March 1961, the correctness of the entries in the pass sheets
and half yearly statements was not questioned by the plaintiff. The accounts
of the plaintiff company were being audited as required by the Companies
Act by chartered accountants.

The suit was filed on behalf of the company for recovery of the amount
against the Bank on the plea that the amount of nearly 31 lakhs as per the
 4.28 Capacity, Liability and Discharge from Liability
forged cheques were not utilized for the purpose of the plaintiff, that they
were not acquiescence on ratification, open or tacit, on the part of the
plaintiff, that the plaintiff was unaware of the fraud till the new accountant
discovered it.

The appellant Bank contended, that the plaintiff was not entitled to
recover the amount on account of its own negligence. It was further
contended that there was settlement of accounts between the parties from
time to time and as such the plaintiff was not entitled to reopen the same
and claim the sums paid under the cheques in question.

Decision of the Trial Court and Division Bench of the High Court
The trial Court did not accept the contentions of the Bank and passed
a decree for the sum claimed with interest at 6% from the date of the suit
till the recovery of the amount. The Division Bench of the Mysore (now
Karnataka) High Court confirmed the judgement of the trial court.

Issue before the Supreme Court

Whether acceptance by the customer without protest of a balance
struck in the pass book or statement of account constitutes a settled amount?

Decision of the Supreme Court

The Supreme Court held that the principle of law regarding forgery
of customer's signature is as follows:

"When a cheque duly signed by a customer is presented before a bank with

zvhom he has an account there is a mandate on the bank to pay the amount covered
by the cheque. However, if the signature on the cheque is not genuine there is no
mandate on the bank to pay. The bank when it makes payment of such a cheque,
cannot resist the claim of the customer zvith the defence of negligence on his part
such as leaving the. cheque book carelessly, so that third parties would easily hold
of it. This is because a document in cheque form on which the customer's name
as drawer is forged, is a mere nullity. The bank can succeed only zvhen it establishes
adoption or estoppel."

In the course of the judgement Khalid, J., referred to the following

cases:

Bihta Co-operative Development and Cane Marketing Union Ltd. v.

Bank of Bihar, (1967) 1 SCR 848: AJR 1967 SC 389;

London Joint Stock Bank Ltd. v. Macmillan, 1918 AC 777.

 Negotiable Instruments, Banking and Insurance 4.29
In Macmillan case it was held that leaving blank spaces on either side
of the figure "2" in the cheque amounted to a clear breach of duty which
the customer owed to the banker. It was further pointed but in that case
that attempts have been made to extend the principle of Young v. Grote,
4 Bing 253, beyond the case of negligence in the immediate transaction,
but they have failed.

The principle settled by the House of Lords was pressed into service
before the Supreme Court in Bihta Co-operative Development and Cane
Marketing Union v. Bank of Bihar. The principle that if the signature on
the cheque is genuine there is a mandate by the customer to the bank to
pay was reiterated. It was also held in this case that if an unauthorised
person got hold of such a cheque and encashed it, the bank might have
had a good defence but, however, if the signatures on the cheque or at least
one of the signatures are or is not genuine, there is no mandate on the bank:
to pay and the question of any negligence on the part of the customer, such
as leaving the cheque book carelessly so that a third party could easily get
hold of it would afford no defence to the bank. The Supreme Court
distinguished Macmillan case observing, that if any of the signatures was
forged the question of negligence of the customer in between the signature
and the presentation of the cheque never arose.

The Supreme Court held that there is a duty on the part of the customer
to inform the bank of the irregularities when he comes to know of it. But
by mere negligence one cannot presume that there has been a breach of
duty by the customer to the bank. The customer should not by his conduct
facilitate payment of money on forged cheques. In the absence of such
circumstances, mere negligence will not prevent a Customer suing the bank
for recovery of the amount. For negligence to constitute estoppel it is
necessary to imply the existence of some duty which the party against
whom estoppel is alleged owes to the other party. In the present case after
the irregularities were discovered, immediate action was taken. Therefore,
in the absence of any evidence of the plaintiffs involvement, the plaintiff
cannot be non-suited on the ground of negligence or inaction. Thus, a case
of acquiescence also cannot be flourished against the plaintiff.

The Supreme Court held that American Law is different from the law
that obtains in England. On the questions involved in this appeal, it is the
law that obtains in England which had been followed in India. "The
authorities in England have more or less consistently held that there is no
duty on the part of the customer to intimate the banker about any error
that may be seen in the pass book and that he will be entitled to claim any
amount paid on a forged cheque though there may be some negligence or
 4.30 Capacity, Liability and Discharge from Liability

inaction on his part in not being careful to discover the errors in the pass
book or other documents. In the instance case, there is no evidence to show
that anyone other than the second defendant knew that the forged cheques
had been encashed. After the matter was discovered, immediate action was
taken."

The Supreme Court relied upon the decision of the Privy Council in
Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., (1985) 2 All ER 947,
in which the facts were more or less identical. Their Lordships of the Privy
Council, summed up the law as follows:

"Their Lordships do not, therefore, embark on a investigation in the

relationship of banker and customer it is possible to identify to it as well
as contract as a source of the obligations owed by one to the other. Their
Lordships do not, however, accept that the parties mutual obligations in
tort can be any greater than those to be found expressly or by necessary
implication in their contract. If therefore, as their Lordships have concluded
no duty wider than that recognised in Macmillan and Greenwood can be implied
into the bank contract in the absence ofexpress terms to that effect, the respondent
banks cannot rely on the law of tort to provide them with greater protection
than that for which they have contracted."

Having rejected the plea of implied terms, indirectly constructive notice

and estoppel by negligence the Privy Council was not under breach of duty
owed by it to the banks and as such mere silence, or omission or failure
to act is not sufficient ground to establish a case in favour of the bank to
non-suit its customer.

The Supreme adopted the reasoning indicated above. The appeal was
dismissed. Khalid, J.’, said:

"Unless the Bank is able to satisfy the Court of either an express condition
in the contract ivith its customer or an unequivocal ratification it will not be
possible to save the bank from its liability. The banks do business for their
benefit. Customers also get some benefit. If banks are to insist upon extreme
care by the customers in minutely looking into pass book and the statements
sent by them, no bank perhaps can do profitable business. It is common
knowledge that the entries in the pass books and the statements of account
sent by the bank are either not readable, decipherable or legible. There is
always an element of trust between the bank and its customer. The bank's
business depends upon this trust. Whenever a cheque purporting to be by a
customer is presented before a bank it carries a mandate to the bank to pay. If
a cheque is forged there is no such mandate. The bank can escape liability only
if it can establish knowledge of the customer of the forgery in the cheques. Inaction
]\fegotiable Instruments, Banking and Insurance 4.31
for continuously long period cannot by itself afford a satisfactory ground for the
bank to escape the liability. The plaintiffin this case swung into action immediately
on the discovery of the fraud committed by its accountant as in the case before
the Privy Council."
The Supreme Court concluded at the end that there is no duty for a customer
to inform the bank offraud committed on him of which he was unaware. Nor can
inaction for a reasonably long time in not discovering fraud or irregularity be made
a defence to defeat a customer in an action for loss. Thus, the contentions put
forward by the bank were not accepted. Judgement of the High Court and that
of the Trial Judge upheld.

Jayantilal Goel v. Zubeda Khartum

AIR 1986 AP 120
(The person, who is in the custody of the document subsequent to its execution,
should there be any alteration, has to discharge the burden of establishing that
is not altered.)

Facts
The defendant appellant was a man of affluence. He was visiting
regularly the plaintiff respondent who was a tawaiff A suit was filed for
recovery of Rs. 8,000 under a promissory note which was said to be executed
on 23-4-1974. The allegation was that the amount was said to be borrowed
as a hand loan and when it was refused a legal notice was sent dated
26-11-1976 but the same was returned unserved. The suit was filed on
16-12-1976. The defendant appellant contended that there was no need or
necessity for him to borrow the amount. Secondly, whenever he visited the
house of the plaintiff-appellant he was consuming liquor and when he was
under the influence of intoxicant drinks, may be, his signature was obtained.
Therefore, even if there is any execution of such document it was not done
in consciousness. Thirdly, that the pro-note is materially altered as the date
has been later inserted.

Issues before the Trial Court

1. Whether the defendant borrowed a sum of Rs. 8,000 from the
plaintiff on 27-4-1974 and executed a pro-note?

2. Whether the suit pro-note is genuine, true and supported by

consideration?
-• 4.32 Capacity, Liability and Discharge from Liability

Decision of the Trial Court

The findings were in favour of the plaintiff on both the issues and
therefore, the suit was decreed.

Decision of the Appellate Court

In the appeal for the first time, a contention was raised stating that the
pro-note is materially altered, it is hit by section 87 of the Negotiable
Instruments Act. Therefore, the instrument is void and unenforceable. The
appellate court, however, rejected the contention.

Decision of the High Court

The Andhra Pradesh High Court held that it is well established that
the person, who is in the custody of the document subsequent to its execution,
should there be any alteration, has to discharge the burden of establishing
that it is not altered.

Section 87 of the Negotiable Instruments Act read as under:

"S. 87. Any material alteration of a negotiable instrument renders the

same void as against anyone who is a party thereto at the time of making
such alteration and does not consent thereto unless it was made in order
to carry out the common intention of the original parties; and any such
alteration, if made by an indorsee, discharges his indorser from all liability
to him in respect of the consideration thereof. The provisions of this section
are subject to those of sections 20,49, 86 and 125."

In Halsbury's Laws of England, 4th Edition, 4th Volume ,at page 460
it is stated : '

"The following alterations are specifically declared to be material: any

altcratien of (1) the date; (2)the sum payable; (3) the time of payment; (4)
the place of payment, or the addition of a place of payment where one
mentioned: by the acceptor, without the acceptor's assent."

The High Court held that "a look to pro-note itself makes it apparent
that the date, which is in different ink, that is, other than the ink that has
been used for the body of the pro-note, is a subsequent introduction into
the document. This insertion also amount to material alteration."

The High Court referred to the case of Verco Pvt Ltd. v. Newandram
Naraindas, AIR 1974 Mad 4 where it was held that even a fresh insertion
of the date or any other material particular will constitute material alteration
within the meaning of section 87 of the Negotiable Instruments Act.
Negotiable Instruments, Banking and Insurance 4.33
In the present case His Lordship had no doubt whatsoever to hold that the
date 23-4-1974 bad been inserted later on and that had not been explained by the
plaintiff. Therefore, the instrument was held to be void. In viezv of this it was
needless to consider whether consideration had passed on the defendant.

EXAMINATION QUESTIONS
1. (a} Distinguish between material alteration and forgery in a
negotiable instrument.

(b) S executed a promissory note in favour of P for Rs. 1000/-. S

claims discharge on ground of material alteration. S alleges that
he had made an indorsement of part payment of Rs. 500/- on
the back of the promissory note by pencil which has been erased
by P. Decide.

Hint: In Shivalingappa v. P. B. Puttappa, AIR 1971 Mys 273, a pronote

was partly paid and the fact of the alleged part payment was indorsed
on the back of the note and the allegation was that the holder had
subsequently erased the indorsement. It was held that this was not a
material alteration of the note. The fact of payment was a separate and
independent transaction. It could have been recorded on a separate
sheet as well. •
2. (a) "It must be remembered that it is not any and every alteration
that avoids the contract" Discuss the statement.

(b) A filed suit against B on 27-4-2001 for recovery of Rs. 1000/- on

the foot of the promissory note dated 29-4-1008. B in his written
statement contended that the promissory note in question was
executed on 22-4-1998 not on 29-4-1998. A careful examination
of suit promissory note reveals that some figure was there in the
place of 9, which was erased and the figure 9 was subsequently
written upon it, since the place where the erasure has taken place
the thinning of the paper is clear and that is why when figure
9 was written the ink has spread. Will A succeed in this suit?

Hint: A will not succeed in this suit as alteration of the date of the
instrument is a material alteration (Outhwaite v. Luntly, (1815) 4
Camp 179; A. Subba Reddy v. N. Ramana Reddy, AIR 1966 AP 267).

3. (a) What do you mean by material alteration ?

(b) "Z" in a hurry, asks his accountant to write a bearer cheque of

Rs.500. The accountant writes the amount only in figures and not
 1 4.34 Capacity, Liability and Discharge from Liability
in words. Z signs the cheque and asks his accountant to collect
money from the bank. Thereafter the accountant adds one zero
(0) after the figure of Rs. 500/- and also write in words "Five
thousand only' and collects the amount. Is bank liable to make
good the loss?

Hint: No. London Joint Stock Bank v. Macmillan (1918) AC 777

4. Write short note on Effects of Material Alteration.

i 5. Write short note on Material Alteration

I
6. Write short note on Liability of Drawee of a Cheque

7. Discuss the liability of a drawee of cheque. Under what situations is

a banker justified to dishonour cheques.

8. State the facts, issues and the principles of law as laid down in Pirbhu
Dayal v. Jwala Bank, AIR 1938 All 374

9. A drew a cheque payable to B or bearer (presented before A by his

clerk B, for his signature), filling up the space for amount in figure
as Rs. 50 but leaving blank space for showing the amount in words.
B altered the amount in figures from Rs. 50 to 50,000 and filled in the
space for the amount in words as 'Fifty thousand only'. The alterations
were made with the same pen and ink. B encashed the cheque from
the drawee bank and absconded. Discuss the rights and liabilities of
(i) A, the drawer of the cheque; and (ii) the drawee/bank. Support
your answer with the provisions of law and decided cases, if any.

Hint: See London Joint Stock Bank v. Macmillan, (1918) AC 777

10. 'The drawer of a bill of exchange or cheque is bound, in case of

dishonour by the drawee or acceptor thereof, to compensate the holder,
provided due notice of dishonour has been given to or received by,
the drawer." Explain and illustrate under what situations is a holder
justified to dishonour cheque?

11. Distinguish between material alteration as a mode of discharge of

parties to a negotiable instrument with forgery in negotiable instrument.

12. State precisely the cases in which the banker is justified or bound to
dishonour cheques.

13. A drew a bearer cheque on Toney Bank payable to B for eight thousand.
On the cheque he wrote the amount thus in words 'Eight thousand',
in figures Rs. 8000/-. B added 'y' after 'eight' so to read like 'eighty'.
He also inserted one '0' after 8000 and made it to read 80000/-. He
Negotiable Instruments, Banking and Insurance 4.35
them put a 'comma' also after 80 so that it read like this Rs. 80,000/-.
Toney Bank unsuspectingly paid Rs. 80,000 to B who later on absconded.
Does A have any cause of action against the bank?

Hint: See London Joint Stock Bank v. Macmillan, (1918) AC 777

14. What is meant by material alteration in a negotiable instrument?

Discuss with instances and relevant provisions of law.

15. Write a short note on liability of a drawee of a cheque.

 ACCEPTANCE OF BILL OF EXCHANGE

Meaning of Acceptance
In American Express Bank Ltd. v. Calcutta Steel Co., (1993) 2 SCC 199,
it was held that "acceptance" in regard to a bill of exchange is a technical
term. It does not mean "taking" or "receiving". Acceptance of a bill of
exchange is the signification by the drawee of his assent to the order of the drawer.
In commercial parlance acceptance of a bill of exchange is the drawee's signed
engagement to honour the bill of exchange as presented. The contract of the
acceptor is a new and independent one. It comes within the rules as to
consideration for a contract on a negotiable instrument, and like every
contract on a negotiable, instrument, is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto.
As between a drawer and a drawee, the latter is to be under an
obligation to accept a bill of exchange drawn by the former. Thus, it is a
well-settled rule of commercial law that no one but the person upon whom
it is drawn, or his duly authorised agent, can accept a bill except for need
or honour.
The usual mode of accepting bill of exchange is for the drawee to write,
'accepted' across the face of the bill and then sign his or its name underneath.
Acceptance on the back of the bill of exchange is also sufficient. In all cases
it is essential that the acceptance should be on the bill itself otherwise it
is a mere nullity.
Delivery of bill of exchange is essential to complete the acceptance of
the bill. For example, A draws a bill on B payable to C for Rs. 10,000. B
receives the bill for acceptance. B writes his acceptance on it. Afterwords,
he comes to know that A has become bankrupt. B cancells his acceptance
and returns the dishonoured bill to the drawer A. This is no acceptance,
as B has not delivered the bill so as to make himself liable on the bill.
C 1
F
5.2 Presentment

Presentment for Acceptance

Section 61 of the Negotiable Instruments Act, 1881 provides as follows:

A bill of exchange payable after sight must, if no time or place is

specified therein for presentment, be presented to the drawee thereof
for acceptance, if he can, after reasonable search, be found, by a person
entitled to demand acceptance, within a reasonable time after it is drawn,
and in business hours on a business day. In default of such presentment,
no party thereto is liable thereon to the person making such default.

If the drawee cannot, after reasonable search, be found, the bill is

dishonoured.

If the bill is directed to the drawee at a particular place, it must be

presented at that place; and if at the due date for presentment he cannot,
after reasonable search, be found there, the bill is dishonoured.

Where authorized by agreement or usage, a presentment through

post office by means of a registered letter is sufficient.

From the aforesaid provision it would appear that presentment for acceptance
is necessary only of a bill of exchange payable after sight. With respect to other
bills there is no express provision in the Act requiring presentment of
acceptance before presenting them for payment and there is nothing in the
Act to prevent such bills being presented for acceptance. But whether the
bill is payable after sight or at sight or on demand, acceptance by the drawee is
necessary before he can be fixed with liability on it. In Jagjivan Mavji v.
Ranchhor Das, AIR 1954 SC 554, it was held that in a bill payable after
sight there are two distinct stages, firstly when it is presented for payment
but when the bill is payable on demand both the stages synchronize and
there is only one presentment, which is both for acceptance and for payment.
In case of a bill payable at sight or on demand as there is only one
presentment if the bill is not paid, it is really dishonoured for non-acceptance.

As seen above the presentment for acceptance is absolutely necessary in the

case of bills payable after sight to fix the date of payment. Apart from this if a
bill expressly stipulates that it shall be presented for acceptance, it must be
presented for acceptance before the bill is overdue. Although acceptance of an
overdue bill is not illegal but in such a case the liability of the drawer or
indorsers will not be preserved.

The bill should be presented for acceptance by a person entitled to

receive the payment. Thus, a bill must be presented by the holder or his
authorized agent (S. 64). Similarly, the presentment for acceptance must
Hp maHp Hao rlratAzoo OT- lain z-l..!.. —J vr . i.-ti •.
 Negotiable Instruments, Banking and Insurance 5.3
drawn upon two or more persons, it must be presented to all of them,
unless one has authority to accept for all. According to S. 91, if one of the
drawees not being partners refuses to accept the bill, the bill holder may
treat the bill as dishonoured.

If a bill indicates a place of presentment it must be presented at that

place, and if no place is mentioned, the section does not say where it is
to be presented. Section 70 provides that in case of presentment for payment
it may be made either at the place of business or at the usual residence
of the drawee. The bill must be presented for acceptance in business hours
on a business day.

A bill payable after sight must be presented zvithin a reasonable time after
it is drawn. The drawee and other persons liable on the bill will be discharged
if the bill is not presented as aforesaid. If there is delay in presentment of
the bill for acceptance it will increase the time of payment and thus there
will be more risk of the drawee becoming insolvent. According to S. 105,
in determining reasonable time regard shall be had to the nature of the
instrument and the usual course of dealing with respect to similar
instruments; and in calculating such time, public holidays shall be excluded.
Reasonable time depends on facility of communication and interest of the
drawer, indorser and holder.

Paragraph 2 of S. 61 provides that if the drawee cannot after reasonable

search, be found, the bill is dishonoured. Paragraph 3 of this section says
that if the bill is directed to the drawee at a particular place, it must be
presented at that place; and if at the due date for presentment he cannot,
after reasonable search, be found there, the bill is dishonoured. Thus, in
these two cases the presentment of bill for acceptance is excused. According
to (English) Bill of Exchange Act, the presentment for acceptance is excused
when, the drawee is a fictitious person, or one incapable of contracting,
or if he cannot, after reasonable search, be found.
/

The last paragraph of S. 61 provides that where authorized by agreement

or usage, a presentment through post office by means of registered letter
is sufficient.

Presentment of promissory note for sight.—A promissory note,

payable at a certain period after sight, must be presented to the maker
thereof for sight, (if he can after reasonable search be found) by person
entitled to demand payment, within a reasonable time after it is made
and in business hours on a business day. In default of such presentment,
no party thereto is liable thereon to the person making such default.
(S. 62)
 5.4 Presentment
Section 62 provides that in order to fix the maturity of a promissory
note, payable at a certain period after sight, must be presented to the maker
thereof for sight. The presentment must be made within a reasonable time
after the note is made and in business hours on a business day. In default
of such presentment no party thereto is liable thereon to the person making
such default. As a promissory note does not require any acceptance the
"sighting of a note to a maker means only this that the note has been shown
to him.

Drawee's time for deliberations.—The holder must, if so required

by the drawee of a bill of exchange presented to him for acceptance,
allow the drawee forty-eight hours (exclusive of public holidays) to
consider whether he will accept it. (S. 63)

S. 63 provides that the holder of a bill must allow the drawee forty­
eight hours (exclusive of public holidays, to consider whether he will or
will not accept the bill. The acceptance, if given, will be effective from the
day of presentation of the bill for acceptance. Section 83 provides that if
the holder allows more time, all the previous parties not consenting to such
allowance are discharged from liability to such holder. Thus, the holder
should allow the drawee only forty-eight hours to consider whether he will
accept the bill or not.

PRESENTMENT FOR PAYMENT

Section 64 provides as follows : .

Promissory notes, bills of exchange and cheque must be presented

for payment to the maker, acceptor or drawee thereof respectively, by
or on behalf of the holder as hereinafter provided. In default of such
presentment, the other parties thereto are not liable thereon to such
holder.

Where authorized by agreement or usage, a presentment through the

post office by means of registered letter is sufficient.

Exception.—Where a promissory note is payable on demand and is

not payable at a specified place, no presentment is necessary in order
to charge the maker thereof.
Notwithstanding anything contained in section 6, where an electronic
image of a truncated cheque is presented for payment, the drawee bank
is entitled to demand any further information regarding the truncated
cheque in case of any reasonable suspicion about the genuiness of the
tonnr r»f Hip instrnmpnt. and if the suspicion is that of any
 Negotiable Instruments, Banking and Insurance 5.5
fraud, forgery, tampering or destruction of the instrument, it is entitled
to further demand the presentment of the truncated cheque itself for
varification:

Provided that the truncated cheque so demanded by the drawee

bank shall be retained by it, if the payment is made accordingly.

Section 64 provides that negotiable instruments should be presented

for payment in accordance with the rules contained in the succeeding
section. In default of such payment all parties except maker in case of a
promissory note and the acceptor in case of a bill of exchange are discharged' from
their liability to the holder. The liability of maker of a promissory note and
that of acceptor of a bill is absolute and independent of presentment. On
the other hand liability of the drawer and indorser of a bill is conditional.
The drawer of a cheque remains liable even in case of non-presentment
of cheque unless he can show that he has been prejudiced by non­
presentment.

A promissory note must be presented for payment to the maker, a bill

of exchange to the acceptor and cheque to the drawee-banker. The
presentment should be made by, on or, on behalf of, the holder. The second
paragraph of S. 64 provides that where authorized by agreement or usage,
a presentment through the post office by means of a registered letter is
sufficient.

While considering exception to S. 64 Mukherji, J., and Bennet, J., in

Ben ar as Bank Ltd v. Hormousji Pest onji, AIR 1930 All 648, observed as
follows:___________________________________________________ i_____________

"Let us now consider the exception to S. 64. It is not the case that in
the case of all promissory notes no presentment is necessary. Sections 62,
64, 67, 68 and 68 deal with promissory notes and provide for presentment
and record the consequences of non-presentment. The exception to S. 64
deals with a promissory note payable on demand; the proper place of the
exception would have been below S. 74 which deals with negotiable
instruments payable on demand. The exception to S. 64 deals with a
promissory note alone and says that where it is payable on demand but
is not made payable at a specified place, no presentment is necessary. The
fact that the exception deals with the consequences of non-presentment,
cannot be taken as enlarging the natural meaning of S. 64. The true method
of providing an exception is to take a case which but for the exception
would fall within the general rule, but it is impossible to do so in this
particular case. If S. 64 stands as it does, the exception must be taken as
PTYl'ncr tn -J4- --
 5.6 Presentment
language of S. 64. This section should be given its plain meaning and the
exception to it must be read as more or less an independent rule of law/'

Hours for presentment.—Presentment for payment must be made

during the actual hours of business, and, if at a banker's within banking
hours. (S. 65)

Section 65 provide that presentment must be made during usual hours

of business of the maker or acceptor as the case may be. Thus, a presentment
made during unusual hours of business, though valid for the purposes of
acceptance and sight, is not valid for purposes of payment. In case of
banker presentment must be made within banking hours.

Time for presentment

Presentment for payment of instruments payable after date or sight.—
A promissory note or bill of exchange made payable at a specified period
after date or sight thereof, must be presented for payment at maturity.
(S. 66)

Section 66 provides that a promissory note or bill of exchange payable

at a fixed period after date or sight must be presented for payment at
maturity. If presentment is made before maturity, and no payment is made,
it will not be sufficient to charge the other parties. Presentment before
maturity is not a valid presentment. According to (English) Bill of Exchange
Act, the rule applies to all bills payable otherwise than on demand.
Bhashyam & Adiga in their book—The Negotiable Instruments Act, 14th
Ed. page 492, observe that "it is not clear why the rule stated in this section
should be restricted to bills and notes payable at a specified period after
date or sight. It is submitted that the rule applies to all bills and notes
payable otherwise than on demand, and they must be presented at maturity."

Presentment for payment of promissory note payable by

instalments.— A promissory note payable by instalments must be
presented for payment on the third day after the date fixed for payment
of each instalment; and non-payment on such presentment has the same
effect as non-payment of a note at maturity. (S. 67)

Section 67 provides that every instalment is entitled to three days of

grace and non-payment of single instalment has the same effect as non­
payment of the note at its maturity. Thus, if a single instalment is not paid
the whole of the note can be treated as dishonoured by non-payment.
 Negotiable Instruments, Banking and Insurance 5.7

Place of presentment
Presentment for payment of instrument payable at a specified place
and notdsewhere.—A promissory note, bill of exchange or cheque made,
drawn or accepted payable at a specified place and not elsewhere must,
in order to charge any party thereto, be presented for payment at that
place.

Section 68 provides that where a promissory note, bill of exchange or

cheque is payable at a specified place and not elsewhere presentment at
that place is necessary; otherwise, all parties to the instrument are discharged.
This means that acceptor will also be discharged as this section speaks of
presentment at the specified place as a condition precedent to charge any
party to the instrument. The words "specified place" mean the precise
address of the place where the instrument is required to be presented. The
mere mention of the name of a big city like "Chennai" is not sufficient
(Sivaram v. Jayaram, AIR 1966 Mad. 297).

Instruments payable at specified place.— A promissory note or bill

of exchange made, drawn or accepted at a specified place must, in order
to charge the maker or drawer thereof, be presented for payment at that
place. (S. 69)

Section 69 provides for the necessity of presentment of a bill or note

made payable at a specified place in order to charge the drawer or the
maker. In MehrBakshi v. Harchand, (1935) Lah. 623; Dhangarmal v. Sambu,
(1955) Cal 55 and Sivram v. Jayaram, AIR 1966 Mad. 297, it was held that
place specified must be equivalent to what would be called in ordinary
language an address which will enable the maker to be found by the
exercise of reasonable diligence. It must be precise, certain and definite and
must be incorporated in the body of the instrument. In Chunilal v. Millord
(1938) Bom. 278, it was held that where a promissory note is made payable
at either of two places, its presentment at any one of such place is sufficient.

Presentment where no exclusive place specified.—A promissory note

or bill of exchange not made payable as mentioned in sections 68 and
69, must be presented for payment at the place of business (if any), or
at the usual residence, of the maker drawee or acceptor thereof, as the
case may be. (S. 70)

Section 70 provides that where no place is specified the note or bill

must be presented for payment at the place of business if any, of the maker,
drawee or acceptor as the case may be. If he has no place of business
presentment must be made at his usual residence. If the place of business
 5.8 Presentment
is closed or abandoned, and there is some other place where his business
is conducted which can be ascertained from reasonable inquiries,
presentment at the former place is not sufficient. If no place of payment
is specified, but the address of the party who has to pay is given, presentment
for payment can be made at that place. Bhashyam and Adiga (supra), page
500, say that the words "if any" would seem to suggest that the operation
of the second clause begins only where there is no place of business.

Presentment when maker etc., has no known place of business or

residence.—If the maker, drawee or acceptor of a negotiable instrument
has no known place of business or fixed residence and no place is
specified in the instrument presentment for acceptance for payment,
such presentment may be made to him in person wherever he can be
found. (S. 71)

Second 71 provides that where no place for presentment for acceptance

or payment is specified and the maker, drawee or acceptor as the case may
be also does not have any known place of business or fixed residence than
presentment may be made to him in person wherever he can be found.

Presentment of Cheques
Presentment of cheque to charge drawer.—Subject to the provision
of Section 84 a cheque must, in order to charge the drawer, be presented
at the bank upon which it is drawn before the relation between the
drawer and his banker has been altered to the prejudice of the drawer.
(S. 72)

Section 72 provides that a cheque must be presented at the branch of

the bank on which it is drawn either in person or through a collecting
banker. Presentment should be made before the relation between the drawer
and his banker has been altered to the prejudice of the drawer, i.e., before
the bank fails. Section 84 requires the cheque to be presented within
reasonable time of its issue and further says that if it is not so presented,
drawer will be discharged provided that the drawer had sufficient assets
in his account to meet the cheque when it ought to have been presented.
Thus, S. 84 allow the gap of reasonable time between the issue of a cheque
and the prejudicial alteration of relation between the drawer and his banker.

Presentment of cheque to charge any other person.—A cheque must,

in order to charge any person except the drawer, be presented within a
reasonable time after delivery thereof by such person. (S. 73)

Section 73 provides that a cheque must be presented within reasonable

time. If it is not so presented all parties except the drawer would be
 Negotiable Instruments, Banking and Insurance 5.9
discharged. Thus, under this section only the indorsers are discharged by
delay in presentment. The reasonable time, in order to fix the liability of
the indorsers of a cheque, is to be calculated from the time of delivery of
the cheque to such indorser, and not from the time when the holder
receives the cheque from any subsequent indorses.

Presentment of demand instruments

Presentment of instruments payable on demand.—Subject to the
provisions of S. 31, a negotiable instrument must be presented for
payment within a reasonable time after it is received by the holder. (S.
74)

Demand instruments are payable immediately on presentment.

Therefore, S. 74 says that these must be presented within a reasonable time
after they are received by the holder. This section is primarily applicable
to bills and notes payable on demand as cheques have been specially
provided for by sections 72 and 73. The effect of the failure to present
within reasonable lime has not been stated in the section.

Presentment by or to agent, etc.

Presentment by or to agent, representative of deceased or assignee

of insolvent.—Presentment for acceptance or payment may be made to
the duly authorized agent of the drawee, maker or acceptor, as the case
may be, or where the drawee, maker or acceptor has died, to his legal
representative, or, where he has been declared an insolvent, to his
assignee. (S. 75)

Section 75 says that presentment for acceptance or payment may be

made to the drawee, maker or acceptor as the case may be, or to an agent
duly authorized. In case of death of drawee, maker or acceptor the
presentment may be made to his legal representative and in case of
insolvency to his assignee. The text of the section speaks only of the party
to whom presentment may be made. But the marginal note of the section
is wider and speaks also of the party by whom presentment may be made.
It follows, therefore, that presentment may be made by an agent of the
holder and in case of his death or insolvency by his legal representative
or assignee respectively.

Delay when excused

Excuse for delay in presentment for acceptance or payment.— Delay

in presentation for acceptance for payment is excused if the delay is
caused by circumstances beyond the control of the holder, and not
 5.10 Presentment
imputable to his default, misconduct or negligence. When the cause of
delay ceases to-operate, presentation must be made within a reasonable
time. (S. 75A)

Section 75A was inserted by an amendment in 1920. The section was

added so as to make provision of excusing delay in making presentment
for payment when the delay is caused by circumstances beyond the control
of the holder. In 1962 the scope of the section was extended so as to excuse
delay in presentment for acceptance also. The delay owing to war or
political disturbances is excused, as the delay is beyond the control of the
holder. If there is delay due to the fault of the post office the delay is
excused. In Udho Ram v. Hemraj, AIR 1924 Lah. 198, the instrument was
lost and the drawer refused to issue a duplicate the delay in presentment
was excused. The section further provides that when the cause of delay
ceases to operate, presentment must be made within a reasonable time.

When presentment excused®

When presentment unnecessary.—No presentment for payment is

necessary, and the instrument is dishonoured, at the due date for
presentment, in any of the following case:

(a) if the maker, drawer or acceptor intentionally prevents the

presentment of the instrument, or

if the instrument being payable at his place of business he closes

such place on business day during the usual business hours, or

if the instrument being payable at some other specified place,

neither he nor any person authorized to pay it attends at such
place during the usual business hours, or

if the instrument not being payable at any specified place, he

cannot after due search be found;

(b) as against any party sought to be charged therewith if he has

engaged to! pay notwithstanding non-presentment;

<c) as against any party if after maturity, with knowledge that the
instrument has not been presented—

he makes part-payment on account of the amount due on the

instrument,

Q. State the cases when presentment for payment is unnecessary. [LL.B., D.UJ
 Negotiable Instruments, Banking and Insurance 5.11
or promise to pay the amount due therein in whole or in part,
or otherwise waives the right to take advantage of any default
in the presentment for payment;
(d> as against the drawer, if the drawer could not suffer damage
from the want of such presentment. (S. 76)

Section 76 provides that presentment for payment is not necessary in

the following cases:

(1) When presented is intentionally prevented - If the maker, drawee or

acceptor intentionally prevents the presentment, holder is excused
from making presentment. For example, where he puts any obstacle
in the way of the holder making presentment or deprives the holder
of the instrument and keeps it till after maturity or refuses to issue
a duplicate instrument in case of loss of original.
(2) When business place is closed - If the instrument is payable at the place
of the maker, drawee or acceptor, he closes such place on a business
day during usual business hours, presentment for payment is not
necessary. In such a case it is presumed that he does not want to
make payment.

(3) When no person is found at the place of payment - If the instrument is

payable at some other specified place, neither he nor any person
authorized to pay it attends at such place during the usual business
hours, presentment for payment is not necessary. In Sands v. Clcn ke,
(1849) 19 L.J.C.P. 84, it was held that it is not sufficient to prove
that the maker's or acceptor's house was closed, but that the holder
must go further and show that he had inquired about the maker
or acceptor or attempted to find him.
(4) When the party liable for payment cannot be found - If the instrument
is not payable at any specified place it is the duty of the holder to
make inquiries and use his due diligence to find out the maker,
drawee or acceptor as the case may be. If after due search, he cannot
be found, presentment for payment is not necessary.

(5) Waiver - Presentment of a note or bill is not necessary to the maker,

drawee or acceptor as the case may be if he promises to pay it
notwithstanding non-presentment. A waiver of presentment may
be express or implied. It may be embodied in the instrument itself
by such words as "presentment waived" or "presentment not
necessary" or other words to that effect. Waiver may be before
 5.12 Presentment
in clause (c) may be inferred when after maturity of the instrument
any party makes a part payment on account of amount due thereon
or when any party promises to pay the amount due thereon in
whole or in part or when any party waives his right to take advantage
; of any default in presentment for payment.
i .
(6) When drawer could not suffer damages - If the drawer could not suffer
damages from the want of presentment of the instrument, then non-
presentment is excused. For example when the drawer has no funds
belonging to himself in the hands of the drawee and the drawer
has no reason to expect that the bill would be paid, if presented,
the presentment is not necessary as the drawer could not suffer
damage from want of presentment. It may be noted that if the
drawer has reason to believe that on presentment the bill will be
honoured, the holder must present the bill in order to charge the
drawer, even when the drawer has not provided the drawee with
sufficient funds to meet the bill. This clause does not apply to
promissory notes.

Liability of banker for negligently dealing with bill presented for payment -
When a bill of exchange, accepted payable at a specified bank, has been
duly presented payable at a specified bank, has been duly presented
there for payment and dishonoured, if the banker so negligently or
improperly keeps, deals with or delivers back such bill as to cause loss
to the holder, he must compensate the holder for such loss. (S. 77)

If a banker receives a bill of exchange for payment and dishonours it,

he is bound to take due care of the instrument and return it to the holder
in the same state as it was when he left with him. If he keeps the bill and
refuses improperly to deliver it, or negligently delivers to a wrong person
or he cancels the acceptance or any other portion of the instrument and
returns it defaced or negligently deals with it so as to cause loss to the
holder he must compensate the holder for such loss (S.77).

EXAMINATION QUESTIONS
1. Write short notes on the following;

(a} Presentment for Acceptance

(b) Presentment for Payment

2. Explain the cases when presentment is excused.

 DISHONOUR BY NON-ACCEPTANCE
Section 91 provides as follows :

Dishonour by non-acceptance.— A bill of exchange is said to be

dishonoured by non-acceptance when the drawee, or one of several
drawees not being partners, makes default in acceptance upon being
duly required to accept the bill, or where presentment is excused and
the bill is not accepted.

Where the drawee is incompetent to contract, or the acceptance is

qualified, the bill may be treated as dishonoured.

Section 91 provides that a bill of exchange is said to be dishonoured

in the following cases:—

(1) When a bill is properly presented for acceptance, and the drawee
makes default in accepting it. If there are several drawees not being
partners the bill is said to be dishonoured by non-acceptance if any
one of them refuses to accept the bill.

(2) When the presentment for acceptance is excused and the bill is not
accepted. (Also see section 61)

(3) Where the drawee is incompetent to contract, the bill may be

treated as dishonoured.

(4) When the drawee gives a qualified acceptance, the bill may be
treated dishonoured. (Also see section 86)

The effect of dishonour by non-acceptance is that the holder can

immediately start an action against the drawer and the indorsers The
holder is not bound to wait for maturity of the bill or to present it for
payment at maturity.
 6.2 Dishonour of an Instrument

DISHONOUR BY NON-PAYMENT
Dishonour by non-payment.— A promissory note, bill of exchange
or cheque is said to be dishonoured by non-payment when the maker
of the note, acceptor of the bill or drawee of the cheque makes default
in payment upon being duly required to pay the same. (S. 91)

Section 92 provides that a promissory note, bill of exchange or cheque

is dishonoured by non-payment when it is duly presented for payment to
the maker of the note, acceptor of the bill or drawee of the cheque but the;
payment is refused or cannot be obtained. When the presentment is not
necessary as provided in S. 76 and the instrument has remained unpaid
when due. In K. Venkatasubbayya v. P.R. Rao Tobacco Co., AIR 1972 A.P.
72, a promissory note was sent by registered post and the party liable
refused to receive the post, the bill was held to be dishonoured.

NOTICE OF DISHONOUR0
Section 93 provides as follows :

By and to whom notice should be given.— When a promissory note,

bill of exchange or cheque is dishonoured by non-acceptance or non­
payment, the holder thereof, or some party thereto who remains liable
thereon, must give notice that the instrument has been so dishonoured
to all other parties whom the holder seeks to make severally liable
thereon, and to some of several parties whom he seeks to make jointly
liable thereon.

Nothing in this section renders it necessary to give notice to maker

of the dishonoured promissory notes or the drawee or acceptor of the
dishonoured bill of exchange or cheque.

Section 93 lays down that immediate notice of dishonour is necessary

to charge the parties liable thereto. The object of giving notice of dishonour
is to warn the party to whom the notice is given of liability and in the case
of drawer to enable him to protect himself as against the drawee or acceptor
who has dishonoured his bill. If the holder does not give a notice of
dishonour he cannot sue the party to whom notice has not been given or
who has not received notice from any other party. In Kuttayan v.
Palaniappa, ILR 27 Mad. 540, it was held that the drawer or indorser who
has not received notice of dishonour is discharged on the bill as well as
on original consideration.
 Negotiable Instruments, Banking and Insurance 63
Notice of dishonour must be given by the holder, or by a person liable
on the instrument. But the notice must emanate from the holder. Notice
of dishonour given by a stranger is of no effect. Even a notice given by
a party to the instrument is not valid, if at the time of giving such notice
he is not liable thereon.

Notice of dishonour is not necessary who dishonours the instrument

by non-acceptance or non-payment because he already knows the fact of
dishonour. The notice of dishonour is not required to be given to the maker
of a promissory note, or acceptor of a bill of exchange or a drawee of a
cheque as the maker and acceptor are the parties primarily liable upon the
instrument. If the drawer of a cheque himself stops the payment of cheque
there is no need of notice of dishonour to him. Thus, notice of dishonour
must be given to all parties other than the maker of a promissory note,
acceptor of a bill of exchange or drawee of a cheque whom the holder seeks
to make liable.

Notice of dishonour is a condition precedent to the liability of the

drawer under S. 30 and of the indorser under S. 35. As said earlier if notice
of dishonour is not duly given to all parties who are entitled to such notice
are discharged from their liability not merely on the instrument but also
on the consideration.

Mode of giving notice of dishonour. Section 94 deals with the mode

of giving notice. The section is reproduced below:

"Notice of dishonour may be given to a duly authorized agent of the

person to whom it is required to be given, or, where he has died, to his
legal representative, or where he has been declared an insolvent, his assignee;
may be oral or written; may, if written, be sent by post; and may be in any
form; but it must inform the party to whom it is given either in express
terms or by reasonable intendment, that the instrument has been
dishonoured, in what way, and that he will be held liable thereon; and it
must be given within a reasonable time after dishonour, at the place of
business or (in case such party has no place of business) at the residence
of the party for whom it is intended.

If the notice is duly directed and sent by post and miscarried, such
miscarriage does not render the notice invalid."

Duty of the person receiving notice of dishonour. Section 95 provides

that a person receiving notice must transmit it to prior parties whom he
wishes to make liable to himself because the holder may'have omitted to
give notice to some of the nrior nartips Thp cpctinn cave- " a™?
 6.4 Dishonour of an Instrument
receiving notice of the dishonour must, in order to render any prior party
liable to himself, give notice of dishonour to such party within a reasonable
time, unless such party otherwise receives notice as provided by Section
93."

Agent for persentment. S. 96 deals with agent for presentment. It says:

"When the instrument is deposited with an agent for presentment the agent
is entitled to the same time to give notice to his principal as if he were the
holder giving notice of dishonour, and the principal is entitled to a further
like period to give notice of dishonour." In Clode v. Bayley, (1843} 12 M
& W 51, it was held that where a hill is indorsed by different branches of
the same bank, each branch is, for the purposes of giving and receiving
notice of dishonour, treated as a distinct holder.

Section 97 provides that "when the party to whom notice of dishonour

is despatched, is dead, out the party despatching the notice is ignorant of
his death, the notice is sufficient."

When notice of dishonour is dispensed with

When notice of dishonour is unnecessary.— No notice of dishonour

is necessary—

(a> when it is dispensed with by the party entitled thereto;

(b) in order to charge the drawer, when he has countermanded

payment;
(c) when the party charged could not suffer damage for want of
notice;

(d) when the party entitled to notice cannot after search be found;
or the party bound to give notice is, for any other reason, unable
without any fault of his own to give it;

(e> to charge the drawers, when the acceptor is also a drawer;

(f) when the party entitled to notice, knowing the facts promises
unconditionally to pay the amount due on the instrument.

Section 98 lists the circumstances in which notice of dishonour is not

necessary. These circumstances are as follows:

(a) Waiver - The party who is entitled to a notice of dishonour of an

instrument, expressly or impliedly waives his right to receive it,
notice is not necessary for charging him with liability. A waiver
of notice may be made at the t'me of drawing or indorsing the
Negotiable Instruments, Banking and Insurance 6.5
the omission to give due notice. A waiver by a party to receive
notice ensures for the benefit of all the parties coming after him.

(b) Countermanding payment - When the drawer has countermanded

payment he is not entitled to notice of dishonour. The rule is based
on the ground that the drawer having put an impediment in the
way of the holder obtaining payment, is not entitled to notice.

(p) No damage - When the party charged could not suffer damage for
want of notice, no notice of dishonour is necessary. In Chunilal v.
Amerendra, AIR 1953 Assam 94, it was held that no notice of
dishonour is necessary under this clause when a cheque is
dishonoured on account of the fact that the drawer has no account
or had closed his account because no question of damage by reason
of absence of notice of dishonour arises.

(d) Party not found - No notice of dishonour is necessary when a party

entitled to notice cannot after due search "be found. However, if
the address of the .place of business or residence is found, notice
must be given within reasonable time, such time being calculated
not from the date of dishonour but from the date of discovery of
the address. This clause further says that notice of dishonour is not
necessary when the party bound to give notice is, for any reason,
unable without any fault of his own to give it. For example, due
to the happening of an event beyond the control of the holder such
as an inevitable accident, or overwhelming calamity, or sudden
illness or death, the holder is prevented from giving notice. In
Lindo v. Unsworth, (1811) 2 Camp. 602, one day delay in giving
notice was excused to the holder, a Jew, as sending the notice
within the required time would have involved the desecration of
a sacred holiday.

(e) Drawer and acceptor same person - No notice of dishonour is necessary

when the acceptor is also one of the drawers as the dishonour of
the bill must necessarily have been known to that drawer who is
also the acceptor and the knowledge of one is knowledge of all.
In Jambu Ramaswami v. Sundararaja Chetti, (1903) ILR 26 Mad.
239, it was held that the mere fact that the drawer and drawee
happen to be partners cannot lead to any presumption that they
are partners in respect of the drawing of the bill or that the bill
was drawn by one of them on behalf of both.

(f) Not negotiable promissory note - No notice of dishonour is necessary

 6.6 Dishonour of an Instrument
indorsee of such a notice is in the position of a mere assignee of
a chose in action.

(g) Promise to pay - No notice of dishonour is necessary when the party

entitled to notice, knowing the facts, promises unconditionally to
pay the amount due on the instrument. The promise may be express
or implied.

Reasonable Time
Section 106 deals with the time of giving notice of dishonour and S. 107
deals with the time for transmitting such notice. Both these sections are
reproduced below:

Reasonable time of giving notice of dishonour.— If the holder and

the party to whom notice of dishonour is given carry on business or live
(as the case may be) in different places, such notice is given within a
reasonable time if it is despatched by the next post or on the day next after
the day of dishonour (S.106).

Reasonable time for transmitting such notice.— A party receiving

notice of dishonour, who seeks to enforce his right against a prior party,
transmits the notice within a reasonable time if he transmits it within the
same time after its receipt as he would have had to give notice if he had
been the holder (S.107)

NOTING
Section 99 provides as follows :

When a promissory note or bill of exchange has been dishonoured

by non-acceptance or non-payment, the holder may cause such dishonour
to be noted by a notary public upon the instrument, or upon a paper,
attached thereto, or partly upon each.

Such note must be made within a reasonable time after dishonour,

and must specify the date of dishonour the reason, if any, assigned for
such dishonour, or if the instrument has not been expressly dishonoured,
the reason why the holder treats it as dishonoured, and the notary's
charges.

Section 99 provides a method of authenticating the fact of the dishonoui

which may be adopted by the holder. Under this method, the notary or
his agent makes a formal demand upon the drawee or acceptor for
acceptance or payment as the case may be, and on refusal to accept or to
 Negotiable Instruments, Banking and Insurance 6.7

pay it is noted on the instrument. By "noting" is meant the minute recorded

by a notary public on a dishonoured bill at the time of dishonour. Noting must
be made within reasonable time after dishonour. Noting is not compulsory
except for foreign bills. The note of dishonour contains the following
particulars:

1. The fact dishonour.

2. The date of dishonour.

3. The reason, if any, assigned for dishonour.

4. If the instrument has not been expressly dishonoured, the reason

why the holder treats it as dishonoured.

5. The notary's charges.

PROTEST AND PROTEST FOR BETTER SECURITY

Section 100 provides as follows :

Protest.—When a promissory note or bill of exchange has been

dishonoured by non-acceptance or non-payment, the holder may, within
a reasonable time, cause such dishonour to be noted and certified by a
notary public. Such certificate is called a protest.

Protest for better Security.— When the acceptor of a bill of exchange

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

Section 100 provides that where the fact of dishonour has been noted,
the holder may also have the fact of dishonour and noting certified by the
notary public. The certificate which the holder will get from the notary
public certifying the fact of dishonour is called a protest. The special
advantage of a protest is that the fact of dishonour can be easily proved
and under S. 119 the court shall on proof of protest presume the fact of
dishonour. Like noting, protest is also not compul-sory in case of inland
bills.

It is further provided that in case of insolvency of the acceptance or the

public impeachment of his credit before the maturity of the bill, the holder
may have the bill protested for better security. This can be done by the
holder by approaching a notary public within a reasonable time and asking
 6.8 Dishonour of an Instrument
him to demand from the acceptor a better security. If the acceptor refuses
to give better security a protest may be made within a reasonable time.
Such a protest is called a protest for better security. This enables the bill
to be accepted for honour.

Contents of the protest

Section 101 provides that a "protest" under S. 100 must contain—

"(a) either the instrument itself, or a literal transcript of the instrument

and of everything written or printed thereupon;

(b) the name of the person for whom and against whom the instrument
has been protested;

(c) a statement that payment or acceptance, or better security, as the

case may be, has been demanded of such person by the notary
public; the terms of his answer, if any, or a statement that he gave
no answer, or that the could not be found;

(d) when the note or bill has been dishonoured, the place and time of
dishonour, and, when better security has been refused, the place
and time of refusal;

(e) the subscription of the notary public making the protest;

(f) in the event of an acceptance for honour or of a payment for

honour, the name of the person by whom, or the person for whom,
and the manner in which, such acceptance or payment was offered
and effected".

A notary public may make the demand mentioned in clause (c) of this
section either in person or by his clerk or, where authorized by agreement
or usage, by registered letter.

Notice of protest

Section 102 provides that "Where a promissory note or bill of exchange

is required by law to be protested, notice of such protest must be given
instead of notice of dishonour, in the same manner and subject to the same
conditions; but the notice may be given by the notary public who makes
the protest."

Protest/or non-payment after dishonour by non-acceptance

Section 103 provides that "all bills of exchange drawn payable at some
other place than the place mentioned as the residence of the drawee, and
which are dishonoured bv non-acceptance, may, without further
 Negotiable Instruments, Banking and Insurance 6.9

presentment to the drawee, be protested for non-payment in the place

specified for payment, unless paid before or at maturity."
Protest offoreign bills

Section 104 provides that "foreign bills of exchange must be protested

for dishonour when such protest is required by the law of the place where
they are drawn/ This means that foreign bills must be protested as the law
of most countries has made protest compulsory in case of dishonour of a
bill. Section 12 provides that an instrument not drawn or made or made
payable as provided by S. 11, shall be a foreign instrument. Section 11
defines an inland instrument as a note, bill or cheque drawn or made in
India and made payable in or drawn upon any person resident in India.
In A.G. Kidston & Co. Ltd. v. Seth Brothers, AIR 1930 Cal. 692, it was held
that a bill drawn from a foreign country upon a person in India is an inland
bill and not a foreign bill for the purposes of S. 104.
When noting equivalent to protest

Section 104-A provides that "For the purposes of this Act, where a bill
or note is required to be protested within a specified time or before some
further proceedings is taken, it is sufficient that the bill has been noted for
protest before the expiration of the specified time on the taking of the
proceeding and the formal protest may be extended at any time thereafter
as of the date of noting."

EXAMINATION QUESTIONS
1. "Notice of dishonour to the drawer of a negotiable instrument is
absolutely necessary, and unless and until it is given, the holder has
no cause of action against him." Explain and Illustrate.

2. Write short note on : Notice of Dishonour.

 3K<' CHAPTER 7

CROSSING OF CHEQUES

Open cheque can be presented to the banker on whom it is drawn and

is paid by the banker across the counter. It need not be presented through
a banker, e.g., it need not be put through a bank account. There is always
a great danger of such a cheque being stolen or lost, crossing has been
introduced to avoid, as far as possible, the losses incurred by open cheques
getting into wrong hands. Even if some wrongful person secures payment
that can be traced, because he has to operate through a banker. He has first
to open an account with some banker, then deposit the cheque into his
account to enable the.banker to receive its payment on his behalf and credit
it into his account. Thus, it is easy to trace the recipient of the money if
it subsequently comes to know that he was not entitled to the cheque.

A cheque is said to be crossed when it bears across its face two parallel
transverse lines. The lines are usually drawn on the left hand top corner
of the cheque. A crossing is a direction to the paying banker to pay the
money generally to a bank or to a particular bank as the case may be. Thus,
crossing affects the mode of payment of cheque. But it does not affect the
transferability. Although crossing is a material alteration but it is permitted
under S. 125 of the Act. A specimen of crossing is as follows:
 72 Crossing of Cheques
Kinds of Crossing01
Crossing is mainly of two kinds, namely—

(1) General Crossing, and

(2) Special Crossing

Both general crossing and special crossing may be of various types.

General Crossing.—S. 123 says, "Where a cheque bears across its face
an addition of the words "and company" or any abbreviation thereof,
between two parallel transverse lines, or of two parallel transverse lines
simply, either with or without the words "not negotiable", that addition
shall be deemed to be a crossing', and the cheque shall be deemed to be
crossed generally."

Specimen of General Crossing

Special Crossing.—S. 124 provides that "Where a cheque bears across

its face an addition of the name of a banker, either with or without the
words "not negotiable", that the addition shall be deemed a crossing, and
the cheque shall be deemed to be crossed specially, and to be crossed to
that banker." Thus, two parallel transverse lines required for a general
crossing are not necessary for a special crossing. In case of special crossing
payment of the amount of the cheque can be obtained only through the
particular banker to whom the cheque is crossed specially.

Specimen of Special Crossing

QI. Explain in brief 'General', 'Special' and 'Account Payee' crossing of cheques.
ni n nH1
 Negotiable Instruments, Banking and Insurance 7.3

Not Negotiable Crossing02

Where the words "not negotiable" are added to the general crossing
(see example 4 of general crossing) or to the special crossing (see example
2 of special crossing) the crossing is called not negotiable crossing.

Effect of not negotiable crossing.—The mere crossing of a cheque does

affect its negotiability. But where the words "not negotiable" are added
to the crossing, the cheque is not negotiable, though transferable. Such a
crossing only subjects it to the consequences or restriction mentioned in
S. 130 (Messers Tailors Priya v. Messers Gulabchand, AIR 1963 Cal. 36).
Section 130 states that "a person taking a cheque crossed generally or
specially, bearing in either case the words "not negotiable", shall not be
capable of giving, a better title to the cheque then that which the person
from whom he took it had." A transferee (including a holder in due couser)
shall get only the rights of the transferor, but not better rights. The transferee
can not become a holder in due course." Thus, "not negotiable" crossing
makes the cheque a non-negotiable instrument.

It must be remembered that a cheque crossed "not negotiable" can still

be transferred by indorsement and delivery. So long as there is no defect
of title, the cheque may pass from one person to another and every successive
holder acquires full rights and title thereon. It is only when the title of the
transferor is defective, the transferee will remain in the position of the
transferee of an ordinary chose-in-action.

Thus, "A person who takes a cheque marked "not negotiable" takes it
at his own risk, and his title to the money got by its means is as defective,
as his title to the cheque itself." [Great Eastern Railway Co. v. London and
Country Banking Company (1901) A.C. 414]
Case.—In Great Western Railway Co. v. Landon and Country Banking
Co., (1901) A.C. 414, A obtained by fraud from B a cheque crossed "not
negotiable". A indorsed the cheque and got it encashed at a bank other than
tire drawee bank. B sued the indorsee bank for conversion. It was held that
as A had obtained the cheque by fraud, he had no title to it, and could not
give the bank valid title to the cheque or money. Thus, the bank was held
liable for the amount of the cheque.
Example.—A cheque payable to bearer is crossed generally and marked
"not negotiable". The cheque is stolen by A who negotiates it to B who takes
 7.4 Crossing of Cheques
it good faith and for value. B deposits the cheque in his own bank and his
banker collects the amount of the cheque from the paying banker. The
paying banker and the collecting banker are both exonerated from liability
under section 128 and section 131 respectively. However, B is liable to pay
the money to the true owner and he does not obtain any better title than
that of the immediate transferor who had stolen the cheque.

Account Payee or Restrictive CrossingO2A

To further protect the drawer against theft or loss a practice though not
recognised by the Act, has sprung up of adding the words "account payee"
or "account payee only" to a crossing. The cheque remains negotiable. But
the transferee will find it difficult to get the cheque collected for him as
the "account payee" crossing has come to be regarded as a direction to the
collecting banker to apply the proceeds to the payee's account. If the
collecting banker receives payment on behalf of any person other than the
payee the banker will be guilty of negligence and thus will not be entitled
to protection under S. 131. Thus, "account payee" crossing hinders the
negotiability of the cheque in practice.

In M/s Tailors Priya v. M/s Gulabchand Danraj, AIR 1963 Cal. 36, it
was held that a cheque payable to order or bearer and crossed "A/c Payee"
or "A/c Payee only", but without the indorsement "not negotiable", is a
negotiable instrument and maybe negotiated, but the collecting banker has
a duty to put the money, when collected, to the account of the payee
indicated, and into no other account.

The collecting banker would not collect the "Account payee" cheque
for none other than the payee. In case, the collecting banker collects it for
someone else it would be deprived of the statutory protection afforded to
it by section 131 of the Act. Since the collecting banker would not like to
be charged for negligence he would certainly collects the cheque for the
payee only. In such a case, indorsement of such a cheque by the payee,
would be superfluous. Therefore, Sinha, J., of the Calcutta High Court in
the aforesaid case observed that this curious position in law should be
corrected by legislation.

Who may cross a cheque

A cheque may be crossed by (i) drawer (ii) holder and (iii) banker. A
cheque may be crossed generally or specially by the drawer.

m a
 Negotiable Instruments, Banking and Insurance 7.5
Section 125 provides that where a cheque is uncrossed, the holder may
cross it generally or specially; Where a cheque is crossed generally, the
holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add
the words "not negotiable". Section 125 further provides that where a
cheque is crossed specially, the banker to whom it is crossed, may again
cross it specially to another banker, his agent, for collection.

Payment of crossed cheques

S. 126 provides that "where a cheque is crossed generally, the banker
on whom it is drawn shall not pay otherwise than to a banker." It further
says that "where a cheque is crossed specially, the banker on whom it is
drawn, shall not pay it otherwise than to the banker to whom it is crossed,
or his agent for collection."
In Madras Provincial Co-operative Bank Ltd. v. South Indian Match
Factory Limited, AIR (32) 1945 Mad. 30, a purchaser of certain property
from a company in liquidation issued a crossed cheque in favour of the
official liquidator of the company. Under the Companies Act, the official
liquidator was required to open an account with a bank to pay therein
moneys received by him in the course of liquidation. The cheque was paid
by the drawee bank to the official liquidator across the counter and he
misappropriated the money. In a suit by the new liquidator against the
drawee bank for money of the amount of the cheque, it was held that bank
was liable. The Bank had committed a breach of statutory duty and was
negligent in paying to the liquidator direct over the counter. The bank must
be deemed to have known that the liquidator ought to have a bank account -
and that he could not collect a cheque except through account. The negligent
payment by the bank facilitated his misappropriation. The payment was
not, therefore, made in due course under S. 10 and the bank was not
entitled to claim protection under S. 85.
S. 89(1) provides that where a cheque does not at the time of presentment
appear to be crossed or where the crossing is obliterated, the banker,
paying the cheque according to the apparent tenor thereof and otherwise
in due course shall be discharged from liability thereon. Such payment
shall not be questioned on the ground of crossed cheque. For more details
see chapter on "Capacity, Liability and Discharge from liability".
S. 127 provides : "Where a cheque is crossed specially to more than one
banker, except one crossed to an agent for the purpose of collection, the
banker on whom it is drawn shall refuse payment thereof." Thus, this
raef-c a HiiKz r>i-> navino- Vianlzor
 7.6 Crossing of Cheques
S. 128 provides protection to a paying banker. The banker on whom
a crossed cheque is drawn must pay it in due course, e.g., in accordance
with the provisions of S. 10 and S. 126. It means that in case of a cheque
crossed generally the payment must be made to a banker and if crossed
specially then to the banker to whom it is crossed or his agent for collection
being a banker, if a banker pays a crossed cheque in due course and in accordance
with provision of S. 126 he can debit his customer, the drazuer, zvith the amount
so paid, even though the amount of the cheque does not reach the hands of the
true owner.

S. 129 states the consequences of contravening S. 126. If a banker pays

a cheque out of due course, or in contravention of S. 126, and the amount
of the cheque is not received by the true owner, the paying banker cannot
debit the customer with the amount subject to the provisions of S. 89.

PROTECTION OF COLLECTING BANKER03 04’05

Section 131 gives protection to a banker who collects a crossed cheque
on behalf of a customer (payee of the cheque). The section is reproduced
below:

A banker who has in good faith and without negligence received

payment for a customer of a cheque crossed generally or specially to
himself shall not, in case the title to the cheque proves defective, incur
any liability to the true owner of the cheque by reasons only of having
received such payment.

Explanation I.— A banker receives payment of a crossed cheque

within the meaning of this section notwithstanding that he credits his
customer's account with the amount of the cheque before receiving
payment thereof.

03. "Section 131 of the Negotiable Instruments Act, 1881 confers protection to a
collecting banker receiving payment of a cross cheque in case the title of the
customer to it is proved defective." State the essential requirements for claiming
such protection. Discuss with the help of decided cases the standard of care
expected of a collecting banker to enable it to claim this protection. [LL.B.,
D.UJ
04. With the help of decided cases, describe the standard of care expected of a
collecting banker to enable it to. claim the protection of section 131 of the Nego­
tiable Instrument Act, 1881. What are the other requirements of that section?
[LL.B., D.UJ
05. Discuss the protection available to a collecting banker under Section 131 of the
Negotiable Instruments Act, 1881 with the helps of decided cases.
it i n nni
 Negotiable Instruments, Banking and Insurance 7.7
Explanation II.— It shall be the duty of the banker who receives
payment based on an electronic image of a truncated cheque held with
him, to verify the prima facie genuiness of the cheque to be truncated
and any fraud, forgery or tampering apparent on the face of the instrument
that can be verified with due diligence and ordinary care.

According to S.131A the same protection is available to a bank while

collecting bank draft as in case of a cheque.

The protection is very significant and it is available etfen where the

cheque is crossed "not-negotiable". It is doubtful if the protection is available
where the cheque is materially altered. The following conditions must be
satisfied to avail the protection:

1. For a customer.—The payment must be received on behalf of and for

a "customer". Customer means a person who has some sort of account,
either a deposit or current account or a savings account or some similar
relation. Duration of account is immaterial. But the account must be an
existing one at the time when the cheque is received for collection. A person
whojjhas no sort of account with bank but is merely in the habit of cashing
cheques across the counter is not a customer.

2. Crossed cheque.—The cheque must be already crossed when it is

given to the banker, for collection. The banker cannot claim the protection
by subsequently himself crossing the cheque if the customer's title is
defective. However, S. 131-A provides that provisions of S. 85 and Ss. 123
to 130 apply to any draft as defined in S.85-A as if draft were a cheque.

3. Banker acts as an agent for collection.—The banker must act as an

agent for collection for the customer and not as a holder of the cheque. If
the banker advances money to the customer against the cheque or allows the
customer to draw against the cheque even before it is realized the banker will be
a holder for value and lose the protection afforded by the section. But a mere
crediting of the cheque to a customer's account would not make him the
holder if there are no outstanding dues.

4. Good faith and without negligence.—Lastly, in collecting a cheque

the banker must act in "good faith and without negligence". An act is done
in good faith when it is done honestly. The expression "without negligence"
means with reasonable care in reference to the interest of true owner of
the cheque, that is, the principal whose authority the banker purports to
have. Negligence is essentially a question of fact and it must depend upon
the circumstances of each case whether negligence has been proved or not.
The test of negligence as laid down by the Privy Council in Commissioners
 7.8 Crossing of Cheques

of Taxation v. English, Scottish & Australian Bank Ltd., 1990 AC 683: 89

U PC. 181 and applied in Bapu Lal Prem Chand v. Nath Bank Ltd., AIR
1946 Bom. 482 is as follows:—

"Whether the transaction of paying in any given cheque coupled with the
circumstances antecedent and present was so out of ordinary course that it ought
to have aroused doubt in the banker's mind and caused him to make inquiries?"

To claim protection under this section the burden is on the banker

to prove that he collected the cheque in good faith and without negligence,
Indian Overseas Bank v. Industrial Chain Concern, (1990)1 SCC 484.

Negligence need not necessarily be at the time of collection of the

cheque; negligence at the time of opening of the account of the customer
may be relevant if the opening of the account and deposit of the cheque
were really part of one scheme as where the account itself was opened
with the cheque in question or where it was put into the account so shortly
after the opening of the accounts as to lead to the inference that it was part
of it. In such a case negligence in the matter of opening the account must
be treated as negligence in the matter of collection of the cheque.

In Indian Overseas Bank v. Industrial Chain Concern, (1990)1 SCC 484

the Supreme Court laid down the following test of negligence:

"The test of negligence for the purpose of S. 131 of the Act is zvhether the
transaction ofpaying in any given cheque coupled with the circumstances antecedent
and present is so out of the ordinary course that it ought to arouse doubts in the
banker's mind and cause him to make inquiries ivhen there is anything to arouse
suspicion that the cheque is being zvrongfully dealt with in being paid into the
customer's account. However, the banker is not called upon to be abnormally
suspicious. As a general rule a banker before accepting a customer, must take
reasonable care to satisfy himself that the person in question is ofgood reputation;
and if he fails to do so he zvill run the risk offorfeiting the protection given by
S. 131 of the Act but 'reasonable care' will depend on the facts and circumstances
of the case. The courts have tended to accept the practice and procedures zvhich
bankers lay dozvn for themselves, but that can by no means be decisive."

The following are the cases where a collecting banker may be held liable
for negligence:

(1) When he collects a cheque payable to order without verifying the

% indorsement thereon [Central Bank of India v Gopinathan 1972
KLT 518}.
 Negotiable Instruments, Banking and Insurance 7.9
(2) When he collects a cheque for a very large sum for an account
whose balance is generally in low water [Brahma Shum Sher Jung
Bahadur v. Chartered Bank, All 1956 Cal 399].

(3) When he collects cheque payable to an official for his private account.

(4) When he collects a cheque for an agent or employee which is drawn

by him on his principal's or employer's account respectively.

(5) When he collects a cheque on behalf of a partner which is payable

to the partnership firm.

(6) When he collect a cheque payable to a company for the private

account of the director or official of the company [United Commercial
Bank Ltd. v. Reliable Hire Purchase Co. (P) Ltd., (1976) comp cas
403}

(7) When he collects a cheque crossed "account payee" for the account
of a person other than the payee [Anupama Stationery v. Vishnu
Vardhana Enterprises., (1987)62 Comp. Cas.271 Karn].

In Syndicate Bank v. Jayshree Industries, AIR 1994 Karnatak 315, a

draft in the name of 'Ms. Rama'was collected and credited to the account
of 'Mr. Rama'. It was held that the bank was negligent and thus not entitled
to protection given under S. 131. It is no defence that bank acted in good
faith.

In United Bank of India v. Bank of Baroda, AIR 1997. Mad 23, the
collecting bank (defendant - appellant) sent for realization and payment
to the paying banker (plaintiff - respondent) a demand draft purported to
be drawn on Bank of Baroda for Rs..11,260 and payable to Mr. A. N.
Rangarajan. The demand draft was forged but the plaintiff bank made the
payment to the collecting bank in good faith and even without waiting for
the advise from the purported issuing branch of the plaintiff bank. Thus,
the defendant bank received payment of the forged instrument. It was
proved that the defendant bank was negligent in opening the account of
a person on whose account the demand draft was collected. The paying
banker sued the collecting banker to recover back Rs. 11,260 with interest.
It was held that the collecting banker was negligent and thus could not
claim protection under Section 131, 131A of the Act. The opening of the
account and deposit of the draft was held to be part of one scheme.
 7.10 Crossing of Cheques

LEADING CASES
Bapu Lal Prem Chand v. Nath Bank Ltd.
AIR 1946 Bom. 482
(Negligence is essentially a question of fact and it must depend upon the
circumstances of each case whether negligence has been proved or not. The test
of negligence is whether the transaction of paying in any given cheque coupled
with the circumstances antecedent and present was so out of ordinary course that
it ought to have aroused doubts in the banker's mind and caused him to make
inquiries.)

Facts
On 5th February, 1945 a firm of merchants issued a generally crossed
cheque upon Laxmi Bank Ltd. (paying banker) for the sum of Rs. 4000/
- payable to the plaintiff appellant or bearer. On the same day the plaintiff
dispatched the cheque to his commission agent but was stolen during
transit. On 26th Jan., 1945 one Nemchand Amichand Gandhi opened an
account by paying to the credit of that account Rs. 300/- in cash. Although
the name of the depositor was Gandhi he signed his application form as
N.A. Gandhi. The manager of the defendant bank accepted the reference
of Modi, the cashier of the branch, and also made certain inquiries of Modi
as to the position and status of Gandhi at the time of opening the account
of Gandhi. On 30th Jan., 1945 Gandhi withdrew from his account by a
cheque a sum of Rs. 225. On 7th Feb., 1945 Gandhi withdrew a further sum
of Rs. 50 by drawing another cheque and on the same day paid into his
account the cheque for Rs. 4,000/- which had been drawn in favour of the
plaintiff and of which the plaintiff claimed to be the true owner. On Sth
Feb., 1945 Gandhi drew a cheque for Rs. 3,800/- on his account and
withdrew the amount. The plaintiff as the true owner of the cheque for
Rs. 4000/- filed the suit against the defendant bank which pleaded protection
afforded by S. 131. The plaintiff contended that the defendant bank acted
with negligence although in good faith.

Issue
Whether on the facts established the defendant bank has discharged his
burden of proving that he acted without negligence?

Decision of the Bombay High Court

In order to escape liability which the general law imposes upon a
person, or party who converts the goods belonging to the true owner
thereof the banker must discharge the burden of establishing that he received
 Negotiable Instruments, Banking and Insurance 7.11
payment on behalf of a customer of a crossed cheque not belonging to the
customer but to some one else, in good faith and without negligence. The
expression "without negligence" means without reasonable care in reference to the
interests of the true owner of the cheque, the principal zuhose authority the
customer purports to have. Negligence is essentially a question offact and it must
depend upon the circumstances of each case whether negligence has been proved
or not. The test of negligence is ivhether the transaction of paying in any given
cheque coupled with the circumstances antecedent and present zoas so out of
ordinary course that it ought to have aroused doubts in the banker's mind and
caused him to make inquiries.

Primarily inquiry as to negligence must be directed in order to find out

whether there is negligence in collecting the cheque and not in opening
the account, but if there is any antecedent or present circumstance which
aroused the suspicion of the bank then it would be his duty before he
collects the cheque to make the necessary inquiry and undoubtedly one
of the antecedent circumstances would be the opening of the account. In
certain case failure to make inquiries as to the integrity of the proposed
customer would constitute negligence. But it would depend upon the facts
and circumstances attendant upon the opening of an account by the new
customer whether an inquiry about him was necessary and called for or
not. There is no absolute and unqualified obligation on the banker to make
inquiries about the respectability of the proposed customer.

It is true that modern banking practice requires that a customer should be

properly introduced and it would be zuiser and more prudent for a banker not to
accept a customer without some reference. But it cannot be suggested that after
a banker has been given a proper reference zoith regard to the proposed customer
and although there are no suspicious circumstances attendant upon the opening
of the account it is still encumbent upon the banker to make further inquiries zuith
regard to the customer and the banker cannot be held to be guilty of negligence
in having failed to make any such further inquiries so as to disentitle it to the
protection given by S. 131.

In this case the manager of the defendant bank accepted the reference
of Modi, the cashier of the branch, and also in fact made certain inquiries
of Modi as to the position and status of Gandhi. The Court said it zoas not
obligatory upon the defendant bank to make further inquiries about the customer,
and having failed to make inquiries they are not guilty of negligence.

Under all the circumstances of the case, the defendant bank has
established that there was no negligence on his part in collecting the cheque
of Gandhi and crediting it to his account and therefore, the defendant bank
 7.12 Crossing of Cheques
is protected by S. 131 of the Negotiable Instruments Act, 1881, and is not
liable to the plaintiff for conversion.
Indian Bank v. Catholic Syrian Bank Lid.
AIR 1981 Mad. 129
(An introduction by an employee of the bank who knows nothing about new
customer cannot always be regarded as trust worthy. The bank has to shoiv absence
of negligence not merely in the act of receiving payment of the cheque but at all
stages of the transaction culminating in the cashing of the cheque.)

Facts
An account was opened on 7-6-1969 with the Salem branch of the
appellant bank with a small sum of Rs. 300. The account was opened on
the recommendation of a customer who could not be said to be respectable
and without testing the credentials of the person desirous of opening the
account. The very next day a sum of Rs. 200 had been withdrawn and thus
only a sum of Rs. 100 was left as a balance in the account. On 13-6-1969
a demand draft of Rs. 20 from the respondent bank whose amount had
been altered by means of clever forgery for Rs. 29,000, a considerable large
amount, was presented for collection to the appellant bank. The appellant
bank sent the draft on the very same day to the respondent bank for
clearance. The said bank unsuspectingly paid the draft amount of Rs.
29,000 to the appellant bank by means of a cheque in due course. However,
on 14.6.1969, the Salem branch office of the respondent bank came to know
from its Singallar branch that the Singallar branch had issued a draft of
Rs. 20 only and payable by the branch office at Cochin and no drafts of
Rs. 29,000 had been issued. At once, the respondent bank at Salem got in
touch with the Agent of Salem branch of the appellant bank and informed
him of the fraud that had been committed. But, unfortunately, by then the
appellant bank had already paid a large part of the draft amount to its
customer under the self-cheque. The respondent then filed a suit against
the appellant for recovery of Rs. 29,000 on the ground that the appellant
had been negligent while opening a current account in the name of its
impugned customer by reason of its negligence and want of good faith and
forged cheque had come to be wrongly converted. The appellant bank
pleaded the protection of S. 131 and S. 131A of the Negotiable Instruments
Act, 1881.

Decision
The court held that the appellant bank was not entitled to benefit of Sections
131 and 131A as it acted negligently. It said that opening of the account had been
done negligently and "the draft had been put into the account so shortly after the
 Negotiable Instruments, Banking and Insurance 7.13
opening of the account as to lead to the inference that it forms part of the opening
ffie account and consequently the negligence in opening the account has to be
treated as negligence in the matter of realisation of the cheques as well.
The Court further said that in such a case the bank which honoured
the draft could not be said to be guilty of contributory negligence merely
because it failed to make enquiries from its branch which issued the draft
before the same was cleared and the amount thereon was credited to the
account of the new customer and he withdrew it.
Great Western Railway Co. (plaintiff-appellant)
v.
London and County Banking Company (defendant-respondent)
1901 AC 414
(Payment should be received on behalf of and for a "customer". A banker who
allows the facility of collection to a stranger does so at his own risk.)

Facts
Higgins by false pretences obtained in Nov., 1898 from Great Western
Railway (appellants) a cheque drawn by them on the London and County
Banking Company (respondents) payable to Higgins or order, crossed "&
Co/' and "not negotiable". This cheque Higgins took to the respondents'
branch, indorsed it and handed to the bank clerk. At Higgins's request a
part of the amount ($ 250) was placed to the credit of a particular account
with the bank and the balance ($ 1171.10) respondents crossed the cheque
to themselves and sent it to their head office in London, where it was
passed through the clearing house and paid. After it was paid, Higgins'
fraud was discovered and the appellants sued the respondents for the
amount (S 1421.10) of the cheque. At the trial Court it was found that for
twenty years the respondent's branch had paid cheques, some crossed,
some not crossed, to Higgins at the counter in a similar manner. None of
them were marked "not negotiable". Higgins never had any account with
the bank. It was found that defendants received the payments in good faith
and without negligence. It was also found that they received it for Higgins
and not for themselves and that Higgins "customer" within S. 82 of the
English Bill of Exchange Act, This decision was affirmed by the Court of
Appeal. Sections 81 and 82 of the (English) Bill of Exchange Act, 1882
provided as follows:-
"S. 81. Effect of not negotiable" crossing on holder.—Where a person
takes a crossed cheque which bears on it the words "not negotiable", he
shall not have and shall not be capable of giving a better title to the cheque
 7.14 Crossing of Cheques
S. 82. Protection to collecting banker.—Where a banker in good faith
and without negligence receives payment for a customer of a cheque
crossed generally or specially to himself, and the customer has no title or
a defective title thereto, the banker shall not incur any liability to the true
owner of the cheque by reason only of having received such payment.
A banker receives payment of a crossed cheque for a customer within
the meaning of S. 82 notwithstanding that he credits his customer's account
with the cheque before receiving payment thereof."
Note.— It may be noted that S. 82 cited above has been repealed and
substituted as follows:
"S. 82, Protection to collecting banker.—(1) Where a banker, in good
faith and without negligence—
(a) receives payment for a customer of an instrument to which this
section applies; or
(b) having credited a customer's account with the amount of such an
instrument receives payment thereof for himself, and the customer
has,no title or a defective title, to the instrument, the banker does
not incur any liability to the true owner of the instrument by reason
only of having received payment thereof.
(2)..............
(3) ........... "
Decision
It was held that the cheque having been obtained by fraud of the
appellant holder who had no title to the cheque, and could not give to the
bank title to the cheque dr the money, and that the bank was liable for the
amount for the cheque.
In the course of his judgment Lord Brampton said: "The object of section
81 is obvious. It is to afford to the drawer or the holder of a cheque who
is desirous of transmitting it to another person as much protection as can
be reasonably afforded to it against dishonesty or accidental miscarriage
in the course of its transit, if he will only take the precaution to cross it,
with the addition of the words "not negotiable" so as to make it difficult
to get such cheque so cashed until it reaches the destination." While applying
that section to the present case His Lordship stated that having obtained the cheque
by false pretence Higgins could not give a better title to anybody else. The
protection of a collecting banker could not be availed because the money had
already been given to Higgins in exchange for the cheque and the money paid to
the respondents has been received on their own account to reimburse a'nd not on
1

Negotiable Instruments, Banking and Insurance 7.15

account of Higgins at all. Moreover, as per His Lordship, he was not a customer
of the bank.
In the course of his judgment Lord Lindley stated that the bank obtained
; the payment of the cheque for themselves and not for Higgins. The bank
were under no obligation to remit the money to Higgins. Therefore, the
bank could not be regarded as collecting the money for Higgins. As per
His Lordship he was not a customer of the bank; no doubt he was known
at the bank as a person accustoined to come to get cheques cashed. But
he had no account of any sort with the bank. Nothing was put to his debit
or credit in any book or paper kept by the bank.
As per Lord Davey the bank ivas not entitled to the protection of S. 82. His
Lordship stated that there must be some sort of an account, either a deposit or
current account or some similar relation, to make a person a customer of a bank.
Thus, Higgins was not a customer and in this case the banker did not undertake
to collect the cheque on his behalf.
In the course of his judgment Earl Halsbury, L.C., said
"It is very important that every one shoujd know that people who take
a cheque which is upon its face "not negotiable" and treat it as a negotiable
security, must recognize the fact that if they do so they take the risk of the
person for whom they negotiate it having no title to it. In this case, it cannot
be pretended that Higgins had any title to it at all."
M/s Tailors Priya v. M/s Gulab Chand Dhanraj
AIR 1963 Cal 36
(A cheque payable to order or bearer and crossed "a/c payee " but zvithout the
indorsement "not negotiable ", is a negotiable instrument and may be negotiated,
but the collecting banker has a duty to put the money, zuhen collected into the
account of the payee indicated, and into no other account.)

Facts
The plaintiff instituted a suit in City Civil Court, Calcutta under Rule
2, Order XXXVII of the Code of Civil Procedure claiming a decree on
dishonoured cheque drawn by the defendant and payable to the plaintiff
or order. The cheque was crossed generally and is marked with the words
"a/c payee only". Those words were written within the transverse lines
of the crossing. On behalf of the defendant it was contended that cheque
was not a negotiable instrument within the meaning of S. 13 of the Negotiable
Instruments Act, 1881 and that a suit on it under Rule 2 Order XXXVII Code
of Civil Procedure was not maintainable at all. Rule 2 Order XXXVII C.P.C.
bears the heading "Summary Procedure on Negotiable Instruments". The
 7.16 Crossing of Cheques

enacting words of the aforesaid Rule enable a person to institute a suit

under the summary procedure upon "bills of exchange, hundies or
promissory notes".

Decision of the Calcutta (now Kolkata) High Court

The Calcutta (now Kolkata) High Court held that the heading cannot
control the clean and express enacting words of the rule and limit its
operation to negotiable instrument as defined in S. 13 of the Negotiable
Instrument Act, 1881. In support of the decision the Court referred to
Hammersmith and City Railway Co. v. Brand, (1869)4 HL 171 and Fletcher
v. Birkenhead Corporation, 1907 1 KB 205. Even Act XXVI of 1881 though
called the Negotiable Instruments Act, 1881 deals with instruments both
negotiable and non-negotiable; for example Sections 4 and 5 of the Act.

Bachawat, J. of the High Court held that a cheque marked "a/c payee
only" is a bill of exchange and consequently the plaintiff was entitled to
institute a suit on it under Order XXXVII C.P.C. Therefore, Bachawat, J.
din not decide the question whether such a cheque is a negotiable instrument
within the meaning of S. 13 of the Negotiable Instrument Act, 1881. However,
he noticed that according to English decision, the marking "a/cpayee “ on a
crossed cheque payable to order or bearer is no part of the crossing: " the words
do not restrict transferability, nor it seems the negotiability of the cheque, the
words refer to the banker and not to the transferee and constitute a direction to
the banker and not to the transferee and constitute a direction to the banker that
the proceeds of the cheque collected by him are to be placed to the credit of the
payee specified in the cheque... In practice the collecting banker usually declines
to collect a cheque so marked for an account other than that of the payee and
marking therefore indirectly restrains the negotiability of the cheque. The position
of the paying banker honouring the cheque with the knowledge that the
proceeds of the cheque are going otherwise than to the specified payee is
not quite clear, see Chalmer's Bill of Exchange 12th Edition, pages 253-4."

Sinha, J. of the High Court, in a separate judgment, also held that the
City Civil Court had jurisdiction to pass a decree in the suit filed under
the provisions of Order XXXVII of the C.P.C. in this case as the heading
of the order cannot control the substantive provisions of Rule 2.

Sinha, J. also dealt with the other point, namely, the nature of a cheque
indorsed and/or crossed with the words "a/c payee only".

Sinha, J. quoted certain text book writers, namely Sheldon Chalmers,

Byles, Halsbury and Davar. According to "Halsbury's Laws of England"
3rd Edition page 153: "The marking to a particular account as "account
 Negotiable Instruments, Banking and Insurance 7.17

payee" or "account of AB" has no warrant or recognition in the Bill of

Exchange Act, 1882. It does not affect the transferability of the cheque: See
1891-1913 435. Nor it is submitted, does it affect its negotiability. See 1924-
1 KB 775. This particular crossing has been in use too long for it to be
disregarded, and it must be taken to convey an intimation to the collecting
banker that the proceeds of the cheque are only to be placed to the specified
account (1904-2 KB 465 and (1914)3 KB 356 CA). It is, therefore, the custom
of most banks to decline to take the cheque for any other account, and a
disregard of the intimation would probably be deemed negligence [(1906)23
TLR 65)]". His Lordship then referred to two cases namely, (1891)1 QB 435
and (1924)1 KB 775. Honourable Justice then referred to various provisions
of the Negotiable Instruments Act, 1881. The provisions referred were
Sections 5, 6, 7,13,14, 123,124,129,130, 50 and 54 of the Act. His Lordship
came to the following conclusion-:

"It is thus found that a cheque is a negotiable instrument and may be

transferred or negotiated by indorsement and delivery, making the indorsee
the holder in due course. But unlike other negotiable instruments, there
are specific provisions with regard to crossed cheques. Those provisions
have been mentioned above. If the words "not negotiable " are used with special
crossing, then it is still transferable but not negotiable. The Negotiable
Instruments Act does not provide specifically for a crossing, "a/c payee" or "a/
cpayee only". At one time it used to be thought in England that such indorsement
had no legal effect and it was even thought that such indorsement invalidated a
cheque. However, the practice of making such indorsement is so widespread and
has been going on for such a length of time, that it can no longer be said that
such a crossing would invalidate a cheque. But there has really been no satisfactory
decision with regard to the legal consequences of such crossing. The two cases
mentioned above, which are always cited, do not specifically deal with
such indorsements, except a passing observation of Lord Scrutton L.J. in
(1924) 1 KB 775. However, it seems that an indorsement or crossing containing
the words "a/c payee" or "a/c payee only" does not restrict the negotiability of
the cheque. It is only a direction on the collecting bank, to put the money into
the account of the person shown as payee, on the face of cheque."

Sinha, J. concluded his judgment with the following observation:

"It is generally believed that by crossing a cheque with the words

"a/c payee only", it is made non-negotiable. Indeed such indorsements are
made in order to render it non-negotiable, and as a measure of safety. In
my opinion the law on the point should be reconsidered and there is no
reason why we should follow the English Law on the point. However, the
DfVJlWfATn QOOm Q have taoor'i az”\ oz^ror^l-nrl Xxy 4-o\z4- u/rifore
 7.18 Crossing of Cheques

both in England and India that I am enable to depart from that view on
the strength of my own feeling about it. The matter should however, be
corrected by legislation. /, therefore, hold that according to the law as it stands
at present, a cheque pavable to order or bearer and crossed "a/c payee" or "a/c
payee only" but without the indorsement, "not negotiable", is a negotiable
instrument and may be negotiated, but the collecting banker has a duty to put
the money, when collected into the account of the payee indicated, and into no
other account."
Sinha, J. agreed with the order made by Bachawat, J.
Indian Overseas Bank v. Industrial Chain Concern
(1990) 1 MLJ (SC) 40: (1990) 1 SCC 484:
(1990) 67 Comp. Cas. 255
(The test of negligence for the purpose of Section 131 of the Act is whether
the transaction of paying in any given cheque is so out of the ordinary course that
it ought to arouse doubts in the banker's mind and cause him to make inquiries.
The banker is bound to make inquiries when there is anything to rouse suspicion
that the cheque is being -wrongfully dealt with in being paid into the customer's
account. However, the banker is not called upon to be abnormally suspicious. As
a general rule a banker before accepting a customer, must take reasonable care to
satisfy himself that the person in question is of good reputation; and forfeiting
the protection given by Section 131 of the Act but 'reasonable case' will depend
on the facts and circumstances of the case. The Courts have tended to accept the
practices and procedures -which bankers lay down for themselves, but that can be
no means be decisive.)

Facts
One Sethuraman (henceforth S), was manager of the respondent firm
'Industrial Chain Concern'. He, representing himself as the sole proprietor
of the firm, approached the manager of a branch of the appellant bank for
opening of a current deposit account there with overdraft facility in the
name of the firm. The manager of the bank deposed that he had refused
the request for overdraft facility. But S then requested for opening of a
current deposit only so that his request for overdraft facility might be
considered after about one year when his business will improve. Though
the address of the firm mentioned by S was far off from the branch
(Nungambakkam Branch) of the bank but on the inquiry of the manager,
S had maintained that he had preferred that branch due to his acuqintance
with the manager. The manager also glaced through some business
correspondence and supply orders in the name of Industrial Chain Concern
shown by S though he did not check up the address given in the
 Negotiable Instruments, Banking and Insurance 7.19
correspondence by the companies. As the manager of the bank knew S,
being his erswhile classmate, he gave the introduction and on that basis
an ordinary current deposit account was opened by account opening form
under the title Industrial Chain Concern on the cash deposit of Rs. 100 on
October 3, 1974. The respondent, Industrial Chain Concern, averred that
S as its manager had received drafts and cheques amounting to Rs. 26,383.49
sent by the parties to whom the firm had supplied goods and that he after
opening a "fictitious account' in the aforesaid branch of the bank, paid in
the stolen drafts and cheques and the bank collected them and allowed S
to withdraw the same defrauding the respondent. The respondent filed a
suit for recovery of the amount with interest alleging the bank as being
guilty of negligence and conversion. The trial court decreed the suit and
the High Court dismissed the bank's appeal.

Issue
Whether the bank is guilty of negligence and conversion?

Decision of the Supreme Court

To enable a bank to avail the immunity under Section 131 as a collecting
banker he has to bring himself within the conditions formulated by the
section. Otherwise, he is left to his common law liability for conversion or
for money had and received in case of the person from whom he took the
cheques having no title or defective title. The conditions are (a) the banker
should act in good faith and without negligence in receiving a payment,
that is, in the process of collection, (b) that the banker should receive
payment for a customer on behalf of him and thus acting as a mere agent
in collection of the cheque and not as an account holder, (c) that person
for whom the banker acts must be his customer, and (d) that the cheque
should be one crossed generally or especially to himself. The receipt of
payment contemplated by the section is one firm the drawee bank. It is
settled law that the onus of bringing himself within the section rest on the
banker.
If bank collects in good faith and without negligence he may plead
statutory protection under Section 131 of the Act.
There must be sufficient connection established between the opening
of the account and the collection of the cheque before a defence under
Section 131 could be held to be barred. The question would then be one
of facts as to how far the two stages can be regarded as so intimately
associated as to be considered as one transaction. The banker is not to be
treated for purposes of protective section as having being negligent bv
 7.20 Crossing of Cheques
in, endorsement of cheque or other instrument to which the section applies.
This has to be so because the drawer of the cheque is not a customer of
the bank while the payee is where the protection attaches, it covers the
receipt of the cheque and every step taken in the ordinary course of
business and intended to lead up to the receipt of payment. Even if there
was negligence in opening of the account that act ipso facto would not result
in loss to the true owner of the cheque collected.
While collecting the cheque for.a customer tine bank is under obligation
to present it promptly so as to avoid any loss due to change of position.
When it receives the money collected then also there is no direct loss to
the true owner. It is only when the amount is paid or withdrawn by the
customer that the loss results. During this period whai is important to note
is that at every step in collection of the money and making payment the
banker is bound by the banker-customer relationship and rights and
obligations flowing therefrom. Even so, if there was anything to rouse
suspicion regarding the cheque and ownership of the customer the banker
may find itself beyond the protection of Section 131. The scope or ambit
of possible suspicion will depend on various situations that may have
prevailed between the drawer of the cheque and the customer. Carelessness
on the part of the bank is most likely to occur at the time of collection of
cheques especially in failure to pay due attention to the actual terms of the
mandate. It is not here a case of playing the defective but of careful
examination of everything which appears on the front and back of the
instrument. Each set of circumstances produces its own requirements. The
instruments, crossing, type of crossing, per pro, pay cash or order etc. are
important. The banker may be negligent in acting contrary to such mandates
under appropriate circumstances. In the instant case, however, no details
regarding such mandates on the alleged cheques are available.
The test of negligence for the purpose of Section 131 of the Act is
whether the. transaction of paying in any given cheque coupled with the
circumstances antecedent and present is so out of the ordinary course that
it ought to rouse doubts in the banker's mind and cause him to make
inquiries. Tire banker is bound to make inquiries when there is anything
to rouse suspicion that the cheque is being wrongfully dated with in being
paid into the customer's account.
As a general rule a banker before accepting a customer, must take
reasonable care to satisfy himself that the person in question is of good
reputation; and if he fails to do so he will run the risk of forfeiting the
protection given by Section 131 of the Act but 'reasonable care' will depend
on the facts and circumstances of the case. The courts have tended to accept
 Negotiable Instruments, Banking and Insurance 7.21
the practices and procedures which bankers lay down for themselves, but
that can be no means by decisive.
While dealing with a customer for collecting a cheque, there is no
contractual relation between the collecting banker and the true owner. The
duty is implied by law. A conduct beneficial to the customer at the expense
of the true owner when the bank acts in good faith and without negligence
is no breach of that duty. It is from this position of the true owner that
the question of negligence under Section 131 of the Act has to be viewed.
What facts ought to be known to the bank, what inquiries he should
have made and what facts were sufficient to cause the bank reasonably to
suspect that the customer was not the true owner in the facts and
circumstances of the case would depend on the current banking practice.
What was banking practice long time back when the use of the banking
facilities by the general public was much less widespread may not be a
proper guide. The duty of care owed by the bank to the plaintiff as owner
of the cheque did not arise until the cheque was delivered to the bank by
the customer. It was then only duty to make inquiries about the cheque
arose. Those inquiries would depend upon the apparent tenor of the cheque
and knowledge of the facts that earlier inquiries ascertained. What courts
has to do is to look at all the circumstances at the time of paying in the
cheque by the customer and to see whether those circumstances were such
as would cause a reasonable banker possessed of the information gathered
about S to suspect that he was not the true owner of the cheque. There is
very little evidence relating to the deposit and particulars of the cheques
deposited and hence it is difficult to hold that the bank deposited and hence
it is difficult to hold that the bank ignored obvious indications and was
negligent at that time. It is difficult to accept so speculative a proposition
as what would have happened if inquiries had been made which were not /
made. It does not constitute any lack of reasonable care to refrain from
making such inquiries which it was improbable to have led to detection
of the customer's fraud.
The Supreme Court said:
"In the instant case S having being known to the manger of the bank
who gave the introduction, there was no violation of any instruction or
rules. On the facts and circumstances of the case the bank cannot be said
to be negligent in opening the account accepting the deposit of cash by
a person known to the manger of the bank.
Though the fact that a cheque of Rs. 2800 was paid on the same date
of opening of the account it is likely to arouse suspicion but there'ls^
nothing tO Show that it formed r>art rtf the camo
 7J22 Crossing of Cheques
account is opened the relationship of banker and customer begins.
Duration is not of the essence. The detailed particulars of the cheques
paid into the account are not in evidence. It is, therefore, difficult to
know whether each individual cheque or draft should have aroused
suspicion in the mind of the banker before accepting the same for
collection from its customer. Thus, the bank was not negligent in opening
the account considered alone.
The standard of care to be taken by a bank in opening an account
is given in PRACTICE AND LAW OF BANKING by H.P. Sheldon, 11th
Edn. p. 84:
'Before opening an account for a customer who is not already known
to him, a banker should make proper preliminary inquiries. In particular,
he should obtain references from responsible persons with regard to the
identity, integrity and reliability of the proposed customer.
If a banker does not act prudently and in accordance with current
banking practice when obtaining references concerning a proposed
customer he may later have cause for regret.'"

EXAMINATION QUESTIONS
1. Distinguish between an open cheque and a crossed cheque.
2. Distinguish between account payee and not negotiable crossing.
3. Discuss the law relating to crossed cheques with special reference
to the liability of the collecting banker in respect thereof.
4. Write a short note on non-liability of a banker receiving payment
of cheque.
Hint: Explain protection of collecting banker.
5. State the facts, issues and the principles of law as laid down in
Indian Bank v. Catholic Syrian Bank Lid.
6. What are the requirements to be fulfilled to claim protection by
collecting banker of a crossed cheque under Section 131 of Negotiable
Instrument Act, 1881?
7. (a) What do you mean by 'Not-negotiable crossing'?
(b) X drew a cheque payable to B or order, crossed it 'Account
Payee only'. Can B indorse it in favour of C? Decide with the
help of decided cases.
Hint: A cheque payable to order or bearer and crossed 'Account
Payee only' is a negotiable instrument and may be negotiated but
Negotiable Instruments, Banking and Insurance 7.23

the collecting banker has a duty to put the money, when collected,
into the account of the payee indicated, and into no other account
(Tailors Priya v. Gulabchand, AIR 1963 Cal. 36).
8. A drew a cheque in favour of B and crossed 'Not negotiable'. Can
B indorse this cheqtie to C? If you think that B can indorse, what
kind of title will C have?
Hint: A person who takes a cheque crossed 'not negotiable' has no
better title to it than his immediate transferor, and the true owner
can always reclaim it or the amount due on it, no matter what has
been done to it, although the bank which pays the cheque and the
bank which collects it are both protected, provided that the payment
and the collection have been made in good faith and without
negligence (sections 128 and 131). The crossing of cheque 'not
negotiable' does not render the instruments non-transferable; it
only deprives the instrument of the incident of negotiability (Tailors
Priya v. Gulabchand, AIR 1963 Cal 36). If the holder has a good
title, he can still transfer it with a good title; but if his title is
defective, his transferee will not have a better title and he (transferee)
cannot claim the rights of a holder in due course even if he purchased
the instrument in good faith and for consideration. Therefore, in the
present problem B can indorse the cheque to C but C's title will not
be better than that of B.
9. A cheque payable to bearer is crossed generally and is marked "not
negotiable."
The cheque is lost or stolen, and comes into the possession of B who
takes it in good faith and gives value for it. B pays the cheque into
his own bank, and his banker presents it, and obtain payment for
his customer from the banker upon which the cheque is drawn. Is
B liable to refund the money to the true banker? Also state the
liability of paying and collecting banks.
Hint: B is liable to refund the money to the true owner as the cheque
was crossed "not negotiable". B does not get better title than that
of his immediate transferor, who was either finder or thief of the
cheque. As regards the true owner, B is in the same position as his
immediate transferor who was either finder or thief of the cheque.
Both the paying and the collecting bakers are protected in this case
under Sec. 128 and Sec. 131, respectively.
10. A draws a cheque payable to bearer and hands it over to B, who
crosses it and endorses it in favour of,C and delivers it to him. D
7.24 Crossing of Cheques

steals the cheque from C and presents it for payment before the
bank which makes the payment over the counter. C sues the bank.
Decide.
Hint: A crossed cheque has to be presented through a banker i.e.
cannot be paid across the counter. Therefore, C can sue the banker
for paying the cheque across the counter.
11. A is the payee of a crossed cheque marked "payee account only".
A endorses the cheque in favour of B and delivers it to B.
(i) Is this negotiation valid?
(ii) Can B realize the amount of the cheque?
Hint: See hint to Q. No. 7 (b).
12. A, by means of false pretences, obtains from B a crossed cheque
"not negotiable" He (A) took the cheque to a bank (D) who paid
it. B brings an action against the. bank (D) for conversion of the
amount of the cheque. Will he succeed. Discuss citing statutory
provisions and judicial pronouncements on the subject.
Hint: See Hint to Q. No. 8.
13. Write short notes on the following:
(i) Payment in due course;
(ii) Effect of material alteration;
(iii) Effect of "not negotiable" crossing;
(iv) Collecting banker's liability.
14. Mohan, by means of false pretence, obtained a cheque of Rs. 4000
from Sohan. The cheque was crossed "not negotiable". Mohan got
the cheque encashed at the counter of Bank "B". Mohan used to get
such cheques encashed from this bank for the last 20 years without
opening an account with the bank. The bank had no problems
during this period. After sometime Sohan came to know that Mohan
got the cheque by fraudulent means and sued bank "B" for
conversion. Can Sohan succeed against the Bank?
Hint: In Great Western Railway Co. v. London & County Banking
Co., (1901) AC 414, it was held that a person who has no sort of
account with a bank, but is merely in the habit of encashing cheques
across the counter is not a customer. The facts of this case were
similar to the facts of this problem. In the aforesaid case it was held
that as the drawer had obtained the cheque by fraud, he had no
title to it, and could not give to the bank any title to the cheque or
Negotiable Instruments, Banking and Insurance 7.25
the money and that the bank was liable for the amount of the
cheque. Therefore, in the present problem, Sohan is entitled to sue
the Bank "B" as it had made the payment out of due course, that
is, making payment of the crossed cheque across the counter and
to a person who is not its customer. The bank is, therefore, negligent.
15. "Section 131 of the Negoitable Instrument Act, 1881 confers
protection to a collecting banker receiving payment of a crossed
cheque in case the title of the customer to it is proved defective."
State the essential requirements for claiming such protection. Discuss
with the help of decided cases the standard of care expected of a
collecting banker to enable it to claim this protection.
 ■■■■■k chapter 8 .a—
PENALTIES IN CASE OF DISHONOUR
d OF CERTAIN CHEQUES FOR
INSUFFICIENCY OF FUNDS

Sections 138 to 142 were inserted by the Banking, Public Financial

Institutions and the Negotiable Instruments Laws (Amendment) Act, 1988.
These sections were introduced "to enhance the acceptability of cheques in
settlement of liabilities by making the drawer liable for penalties in case of
bouncing of cheques due to insufficiency of funds in the accounts or for
reason that it exceeds the arrangements made by the drawer, with adequate
safeguards to prevent harassment of honest drawers." Sections 143 to 147
were added vide Amendment Act, 2002.
Section 138 requires that the dishonour of the cheque should be due to
insufficiency of funds etc. in the drawer's account. The section is reproduced
below:
Q1"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 two years (Substituted for 'one year' vide Act 55 of
2002), 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 three
months from the date on which it is drawn or within the period of
its validity, whichever is earlier ;
QI. What do you undersand by the term “dishonour of cheque”? What are its legal
conseques? [LLJB., D.U]
8.1
 82 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
(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
thirty (Substituted for "Fifteen' vide Act 55 of 2002) 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.
Explanation. — For the purposes of this section, "debt or other liability"
means a legally enforceable debt or other liability."
In Dalmia Cement (Bharat) Ltd. v. Glaxy Traders and Agencies Ltd.,
AIR 2001 SC 676, the court held that section 138 of the Act makes a civil
transaction to be an offence by fiction of law. 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 is returned by the bank unpaid either
because of the amount standing to the credit of that person being insufficient
to honour the cheque or that it exceeds the amount arranged to be paid from
that account, such person, subject to other conditions, shall be deemed to have
committed an offence under the section.
Q1AChapter XVII of the Negotiable Instrument Act has been incorporated
to enhance the acceptability of cheques in settlement of liability by making
the drawer liable for penalties in case of bouncing of cheques for insufficiency
of funds in the account of the drawer a for the reason that it exceeds the
amount arranged to be paid from that account of the drawer. Section 138
provides safeguards to protect the honest drawers of cheques.
The following are the conditions to be fulfilled to constitute an offence
under section 138 of the Act:

debtor liability.
(ii) The cheque must have been presented to the drawee bank, either
personally or through a collecting banker.
(iii) The cheque must have been returned unpaid by the drawee-bank
either because of the amount of money standing to the credit of that

Q1A. "The object of bringing section 138 of the Negotiable Instrument Act, 1881 is to
inculcate with faith in the efficacy of banking operations and credibility in
transacting business on negotiable instruments’. Discuss the above statement,
referring to case law on the subject.
 Negotiable Instruments, Banking and Insurance 8.3
account is insufficient to honour the cheque or that if exceeds the
amount arranged to be paid from that account by an agreement made
with the bank.
(iv) The payee or holder of the cheque must have made a demand, in
writing, for payment, within 30 days of the receipt of the information
by him of dishonour of cheque from the paying or collecting banker.
(v) The drawer must have failed to make the payment within 15 days of
receipt of the notice.
(vi) Section 142 provides that a written complaint should have been
made to a court, not inferior to that of a metropolitan Magistrate or
Judicial Magistrate of the first class, normally within one month of
the date on which the cause of action arose.
In Dashrath Rupsingh Rathor v. State of Maharashtra, (2014) 9 SCC129,
it was held that offence is complete upon dishonour, prosecution for such
offence is deferred till the time the cause of action for such prosecution
accrues to the complainant. The proviso to section 138 simply postpones the
actual prosecution of • the offender till such time he fails to pay the amount
within the statutory beriod prescribed for such payment. The scheme of
section 138 thus not c>hly saves the honest drawer of cheque but also gives a
chance to even the dishonest one to make amends and escape prosecution.

CONDITIONS TO BE FULFILLED FOR PROSECUTION OF A DRAWER0203

The following conditions must be fulfilled before a drawer can be
fastened with criminal liability:
(1) Cheque in discharge of a debt or liability.
The cheque must have been drawn for payment of money to another
person for the full or partial discharge of any legally enforceable debt or

Q2. “Section 138 of the Negotiable Instrument Act, 1881 was enacted to punish
unscrupulous drawers of cheques who, though purport to discharge their liability
by issuing cheques, have no intention of really doing so. Apart from civil liability,
criminal liability is sought to be imposed by the said provision on such unscrupu­
lous drawer of cheques. However, with a view to unnecessary prosecution of an
honest drawer of the cheque, the prosecution under section 138 of the Act has been
made subject to certain conditions.” Enumerate and analyse the conditions for the
successful applicability of section 138 of the Act, referring to case law on the subject.
[LL.B., D.U.]
Q3. (a) When is dishonour of a cheque is an offence? [LL.B., D.U.J
(b) A issued a cheque for 5,000 in favour of B towards the payment of monthly
rent. The cheque was presented for encashment by B through his banker.
However,the same was referred unpaid by the banker of A due to reason
"payment stopped by drawer”. B approaches you for advice. What action B can
take? Will B succeed in case a complaint under section 138 of the Negotiable
Instrument Act is filed? [LLJB., D.U.]
 8.4 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
other liability. Under Section 139 there is a legal presumption that the holder
of a cheque which falls within Section 138 received it for the discharge of a
debt or liability. The drawer may rebut the presumption by proving to the
contrary.
A cheque given as a gift, or donation, or in discharge of a moral
obligation, or for the unlawful or illegal consideration is not covered by
Section 138.
In Shivaji v. Lognathan, (1996) 85 Comp. Cas. (Mad.), it was Jield that the
payment of capitation fee and refund thereof were not for an unlawful
purpose within the meaning of Section 23 of the Indian Contract Act, 1872.
The refund of fees was held to be in discharge of legally enforceable debt or
liability.
In Uplanche Mallikarjun v. Ratkanti Vimala, 1998 IS J (Banking) 175
(AP), it was held that if the payment by way of cheque is made as a gift or
charity, it is not a payment for a legally enforceable debt or liability.
In C.V. Alexander v. Joseph Chacko, (1995) 82 Camp Cas. 368, it was held
that a cheque given in discharge of the drawer's liability as a surety would
fall under section 138. Thus, the debt or liability in respect of which the
cheque was issued need not necessarily be that of the drawer. It may that of
third party to the payee.
In M.S. Narayana Menon v. State ofKerala, (2006) 6 SCC 39, it was held
that the court shall presume a negotiable instrument to be for consideration
unless and until after considering the matter before it, it either believes that
the consideration does not exist or considers the non-existence of the
consideration so probable that a prudent man ought, under the circumstances
of the particular case, to act upon the supposition that consideration does not
exists. Thus, initial burden of proof is on accused to rebut the presumptions
under sections 118 and 139 by raising a probable defence. If he discharges the
said burden, the onus thereafter shifts on to the complainant to prove his
case. Whether the initial burden has been discharged by accused is a
question of fact. Burden of proof on the accused is not heavy. He need not
disprove the prosecution case in its eiyirety He can discharge its burden on
the basis of preponderance of probabilities through direct or circumstantial
evidence.
In Sudhir Kuntar Bhalla v. Jagdish, (2008) 7 SCC 137, it was held that
offence under Section 138 was made out only if cheques were in discharge
of debt or other liability but not when they were issued as a security.
In Rangappav. Srimohan, AIR 2010 SC 1898, it was held that what courts
have to consider is whether ingredients of offence enumerated in section 138
 Negotiable Instruments, Banking and Insurance 8.5
have been met, the court has to consider whether accused was able to rebut
statutory presumption contemplated under section 139. (Section 139 provides.
"It shall be presumed, unless the contrary is proved, that the holder of a
cheque received the cheque of the nature referred to in section 138, for the
discharge, in whole or in part, of any debt or other liability.") The Supreme
Court also stated the standard of proof for rebutting the presumption. The
accused can rely on the prosecution materials to prove defence.
The Court said : "Section 139 is an example of a reverse onus clause that
has been included in furtherance of legislative objective of improving the
credibility of negotiable instrument. While section 138 of the Act specifies a
strong criminal remedy in relation to the dishonour of cheques, the rebutable
presumption under section 139 is a device to prevent undue delay in the
course of litigation. However, it must be remembered that the offence made
punishable by section 128 can be better described as a regulatory offence since
the bouncing of a cheque is largely in the nature of a civil wrong whose impact
is usually confined to the private parties involved in commercial transactions.
In such a scenario, the test of proportionality should guide the construction
and interpretation of reverse onus clauses and the defendant accused cannot
be expected to discharge an unduly high standard of proof."
The Court further said : "The reverse onus clauses usually impose
evidentiary burden and not a persuasive burden. Keeping this in view, it is
a settled position that when an accused has to rebut the presumption under
section 139, the standard of proof for doing so is that of "preponderance of
probabilities." Therefore, if the accused is able to raise a probably defense
which creator doubts about the existence of a legally enforceable debt or
liability, the prosecution can fail. The accused can rely on the materials
submitted by the complaint in order to raise such a defense and it is
conceivable that in some cases the accused may not need to adduce evidence
of his/her own."
In Indus Airways (P.) Ltd. v. Magnum Aviation (P.) Ltd., (2014) 12 SCC
539, it was held that if at the time of entering in to a contract, it is one of the
conditions of the contract that appellant purchaser had to pay the amount in
advance and there is breach of such condition then the appellant purchaser
may have to make good a loss that might have occasioned to the seller but that
does not create a criminal liability under section 138 of Negotiable Instrument
Act, 1881. The payment by cheque in the nature of advance payment
indicates that at the time of drawing of cheque, there was no existing liability.
The Court said "If a cheque is issued as an advance payment for purchase of
the goods and for any reason purchase order in nqt carried to its logical
conclusion either because of its cancellation or otherwise, and materials or
 8.6 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds

goods for which purchase order was placed is not supplied, the cheque
cannot be held to have been drawn for an existing debt or liability."
r
(2) Presentment of the cheque to the drawee-bank
The cheque must have been presented to the drawee-bank, either personally
or through a collecting banker, within six months from the date in which it
was drawn, or within the period of its validity, whichever is earlier. However,
unless the drawer establishes the actual date of drawing, the cheque would
be presumed to be drawn on the date it bears.
In Anil Kumar Saxvhney v. Gulshan Rai, (1994) 79 Camp Cas. 150, the
Supreme Court held that a postdated cheque is only a bill of exchange when
it is written or drawn and it becomes a cheque under the Act with effect from
the date it bears and attracts the provisions of Section 138. Earlier Kerala
High Court held in Manoj K. Seth v. K. J. Fernandez, (1991) 73 Comp. Cas.
441, that for the purposes of Section 138, a post dated cheque has to be
considered to have been drawn on the date it bears, and the condition
prescribed in the section is satisfied if the cheque is presented for payment
within six months (now this period is three months) from the date the cheque
bears.
In Goaplast (P) Lid. v. Shri Chico Vrsula D 'Souza, (2003) 3 SCC 232, it was
held that Section 138 of the Act is attracted if a post-dated cheque issued by
a person to settle his debt or other liability is stopped for payment by the
drawer even before the date of the cheque.
In MSR Leathers v. S. Palaniappa, (2013) 10 SCC 568, it was held that
neither section 138 nor section 142 or any other provision contained in the
Negotiable Instrument Act forbids the holder or payee for encashment on any
number of occasions within a period of six (now three months as per RBI
Guidelines) or within a period of its validity, whichever is earlier. Therefore,
prosecution of the accused on the basis of fresh cause of action arising out
of subsequent presentation of cheque even when original cause of action
was time barred was held permissible as long as conditions mentioned
under section 138 are satisfied. This was reiterated by the Supreme Court in
Kamlesh Kumar v. State of Bihar, (2014) 2 SCC424. In this case, on dishonour
of the cheque on 25-10-2008, although a legal notice dated 27-10-2008 was
issued to the appellant (drawer of the cheque ) by making a demand for
payment of the amount of the said cheque, but no complaint was filed under
section 138 of the Act on the basis of the said notice. Thereafter, the said
cheque was again presented before the bank on 10-11-2008 for encashment,
but it was again dishonoured. Consequently, another legal notice dated 17-
12-2008 was issued to the appellant on the basis of the said dishonour of the
cheque on 10-11-2008. On no response to the said notice dated 17-12-2008, the
complaint was filed against the appellant.
 Negotiable Instruments, Banking and Insurance 8.7
In Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375, it was held
that dishonour of cheque for reasons such as "account closed", "payment
stopped", "refer to the drawer", "signature do not match" are only species
of the first of the two contingencies mentioned in section 138. The first
contingency is "either because of the amount of money standing to the
credit of that account is insufficient to honour the cheque held, is a genus.
If there is a dishonour of cheque due to mismatch between signatures on
cheque drawn and specimen available with the bank, such dishonour to
qualify for prosecution under section 138 shall have to be preceded by
statutory notice where drawer is called upon and has opportunity to arrange
payment of the amount covered by the cheque . It is only when the drawer
| despite receipt of such notice and opportunity to make the payment within
the time stipulated under the statute does not pay the amount that it would
be considered an offence, hence punishable. Even in such a case, there should
be lawfully recoverable debt or liability.
(3) Reasons for dishonour
The cheque must have been returned unpaid by the drawee-bank either
because of insufficiency of funds in the drawer's account on which it is
drawn, or because the cheque exceeds the amount arranged to be paid from
the account by an agreement made with the bank. The section is not
applicable to cheques returned unpaid for technical reasons such as
irregularity of an endorsement or a discrepancy between the amount in
words or figures.
In Modi Cements Ltd. v. Kuchil Kumar Nandi, AIR 1998 SC 1057: (1988)
3 SCC249, the Supreme Court, while elaborating the elements of insufficiency
of funds on the date ofissue ofcheque observed that "If a person drawsacheque
with no sufficient funds available to his credit on the date of issue, but makes
the arrangement or deposits the amount thereafter before the cheque is put
in the bank by the drawer and the cheque is honoured, in such a situation
drawing a presumption of dishonesty on the part of the drawer under
section 138 would not be justified. Section 138 of the Act gets attracted only
when the cheque is dishonoured."
In Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249, it was
further held that even though the cheque was dishonoured by reason of
"stop-payment" instruction, an offence under section 138 could still be
made out. It was held that presumption under section 139 is attracted in such
a case and therefore, the court has to presume that the cheque was received
by the holder for the discharge, in whole or in part, of any debt or other
liability. Of course, this a rebuttable presumption.
 8.8 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
In Voltas Ltd. v.HiralalAganvalla, (1971) 71 Comp. Cas. 273, it washeld
that the drawee-bank's endorsement "refer to drawer" while returning the
cheque in question necessarily meant, as per banking custom, that the
cheque had been returned for insufficiency of funds on the drawer's account.
However, in M. Y. Maharishi v. Tagore Financiers, (1995) 83 Comp. Cas. 444,
it was held that where a cheque is returned "refer to drawer," it was a matter
of evidence during the trial whether the real reason for dishonour was
insufficiency of funds.
(4) Dishonour/demand notice to drawer.
The payee or holder in due course of the cheque, as the case may be, must
have made a demand for payment by giving notice, in writing, within 30
days of receipt of information by him from the bank (paying or collecting
banker) as unpaid. In Satyanaryana Gowda v. B. Rangarappa, (1997) 88
Comp. Cas. 433, it was held that the notice is required to be issued by the
holder and is not required to be served on the accused, within 30 days of
receipt of the information of the dishonour of the cheque. It was further held
in this case that unsigned notice issued by the holder's advocate was
sufficient. In K. Madhu v. Omega Pipes Ltd., (1996) 85 Comp. Cas. 267, it was
held that if the payee has dispatched the notice to the drawer's correct
address reasonably ahead of the expiry of 15 (now 30 as per Amendment Act,
2002) days, it can be regarded that he had made the demand by giving the
notice within the statutory period.
In Tomy Jacob Kattikkaran v. Thomas Manjaly, AIR 1998 SC 366, the
Supreme Court held that if it was established that the payee or holder in due
course as the case may be, did not serve the notice on the drawer within the
period prescribed under section 138 of the Act, the acquittal of the drawer
was justified.
In K. Bhaskaran v. Sankaran Vidyan Balan, (1999) 7SCC 510, it was held
that the payee has to make a demand by 'giving a notice' in writing. The
failure on the part of the drawer to pay should be within 15 days 'of the receipt' of
such notice^ Thus, 'giving notice' in this context is not the same as 'receipt of
notice'. Giving is the process of which receipt is the accomplishment. It is for
the payee to perform the former by sending the notice to the drawer at the
correct address and for the drawer to comply with clause (c) of the proviso
to Section 138 of the Act. The words in clause (b) of the proviso to Section 138
shows that payee has the statutory obligation to 'make a demand' by giving
notice. The thrust in the clause is on the need to 'make a demand'. It is only
the mode for making such demand which the legislature has prescribed. A
payee can send the notice for doing his part for giving the notice. Once it is
despatched his part is over and the next depends on which the sender does.
 Negotiable Instruments, Banking and Insurance 8.9
The principle of Section 27 of the General Clauses Act, 1897 apply to a notice
sent by post with the correct address written on it and it is deemed to have
been served on the sendee unless he proves that it was not really served and
that he was not responsible for such non-service.
In Dahnia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd.
(2001) 6 SCC 463: AIR 2001 SC 676, it was held that to constitute an offence
under section 138 of the Act, the complainant is obliged to prove its
ingredients which include the receipt of notice by the accused under clause
(b). It is not the "giving" of the notice which makes the offence but is the
receipt of the notice by the drawer which gives cause of action to the
complainant within the statutory period. In this case the accused replied to
the first notice stating that he had received only empty envelop and the
complainant sent a second notice which was duly acknowledged, the
complaint filed on the basis of the second notice was held maintainable.
InD. Vinod Shivappa v. Nanda Belliappa, (2006) 6 SCC 456, the Supreme
Court highlighted and reiterated all the aspects. Elaborately dealing with the
situation where notice could not be served on the addressee for one or the
other reason, such as his non availability at the time of delivery, or premises
remaining locked on account of his having gone elsewhere etc., it was
observed that if in each such case, the case is understood to mean that there
has been no service of notice, it would completely defeat the very purpose
of the Act. It would then be very easy for an unscrupulous and dishonest
drawer of a cheque to make himself scarce for sometime after issuing the
cheque so that requisite statutory notice can never be served upon him and
consequently he can never be prosecuted. It was further observed that once
the payee of the cheque issues notice to the drawer of the cheque, the cause
of action to file a complaint arises on the expiry of the period prescribed for
payment.
Similarly in C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555,
it was held that where the payee dispatches the notice by registered post with
correct address of the drawer of the cheque, the principle incorporated in
Section 27 of the General Clauses Act would be attracted; the requirement of
clause (b) of proviso to 138 of the Act stands complied with and cause of
action to file a complaint arises on the expiry of the period prescribed in
clause (c) of the said proviso for payment by the drawer of the cheque.
Nevertheless, it would be without prejudice to the right of the drawer to
show that he had no knowledge that the notice was brought to his address.
The Supreme Court stated that the Court has already held that when a
notice is sent by registered post and is returned with a postal endorsement
'refused7 or 'not available in the house7 or 'house locked7 or 'shop closed' or
 8.10 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
"addressee not in station', due service has to be presumed [vide Jagdish
Singh v. Nathu Singh; State ofM.P. v.Hiralal, Raja Kumari v. P Subharamana
Naidu]
In Smt. Shamshad Begum v. B. Mohammad, (2008) 13 SCC 77, it was held
that once notice has been sent by registered post with acknowledgement due
to a correct address, it must be presumed that the service of notice has been
made effective. It was further held that it is not necessary that the five acts
constituting an offence under Section 138, NI Act, 1881 "should have been
perpetrated at the same locality. It is possible that each of those five acts
could be done at five different localities.
(5) Drawer's failure to pay.
The drawer of the cheque must have failed to pay the amount of money
to the payee or, as the case may be, to the holder in due course of the cheque,
within 15 days of the receipt of the demand notice. It implies that the drawer
gets 15 days time from the date of receipt of the notice, to pay the amount of
the cheque which has been dishonoured. Thus, the payee or the holder in due
course, as the case may be, has to wait for 15 days anticipating payment of
the amount of the cheque by the drawer. If the drawer does not pay till the
expiry of the 15 days time, the cause of action arises on the 16th day.
(6) Filing a written complaint.
Section 142 provides that a written complaint should have been made to
the court of a metropolitan or a first-class judicial magistrate or a superior
court by the payee or as the case may be, the holder in due course of the
cheque within one month from the date on which the cause of action arose
under clause (c) of the proviso to Section 138. The Amendment Act, 2002 has
given discretion to the court to waive the period of one month if the
complainant satisfies the court that he had sufficient cause for not making a
complaint within one month of the date on which the cause of action arose.
In Poomasree Agencies v. Universal Enterprises, (1995) 83 Comp. Cas.
66, the drawer received the notice on 9th June, 1993. It was held that the 15
days period expired on 24th June, 1993 and the complaint should have been
filed on or before 24th July, 1993. "Fifteen" days period has been substituted
by "thirty" days vide Act 55 of 2002.
In SKD Lakshmanan Fire Works v. K. V Sivaramkrishnan, (1995) 84
Comp. Cas. 446, the Full bench of the Kerala High Court held that successive
cause of action may arise on the basis of one cheque when the cheque is
repeatedly presented and dishonoured within the period prescribed in
Section 138. However, in view of Section 300 of Criminal Procedure Code,
1973 only pne conviction is possible. A similar view has been expressed by
 Negotiable Instruments, Banking and Insurance 8.11
some other High Courts. Earlier the Division Bench of Kerala High Court
held in N.C. Kumar & Son v. Annepura, (1992) 74 Comp. Cas. 848, has held
that once cause of action has arisen, limitation will begin to run, and it cannot
be stopped by presenting the cheque again so as to create a fresh cause of
action and a fresh period of limitation. Some other High Courts expressed
the same opinion.
In Veera Exports v. T. Katavathy, it was held that "it is always open to a
drawer to voluntarily revalidate a negotiable instrument, including a cheque."
The validity period of a cheque is only 6 months.
In Prem Chand Vijay Kumar v. Yashpal Singh, (2005) 4 SCC 417, it was
held that cause of action within the meaning of Section 142 (b) arises and can
arise only once. Another cause of action would not arise on repeated
dishonour on presentation of same cheque again subsequent to non-payment
after the first notice. If dishonour of a cheque has once snowballed into a
cause of action it is not permissible for a payee to create another cause of
action with the same cheque. The period of one month for filing the complaint
will be reckoned from the day immediately following the day on which the
period of fifteen days from the date of thezreceipt of the notice by the drawer
expires.
In Shankar Finance and Investments v. State ofA.P., (2008) 8 SCC 536, it
was held that it was permissible to lodge a complaint in the name of payee
proprietory concern itself.
In Indra Kumar Patodia v. Reliance Industries Ltd., AIR 2013 SC 426,
it was held that a complaint in writing without signature is maintainable
when such complaint is subsequently verified by the complainant and
process is issued by the Magistrate after due verification. If legislative
intended complaint was also required to be signed by the complainant, it
would have used different language. In the present case, complaint was filed
within time and on the direction of the Magistrate, verification was recorded
by solemn affirmation by authorized representation of the complainant and
after according and securing his signature, Magistrate passed an order
issuing summons against the accused under section 138/142 of the Negotiable
Instrument Act.
In MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177, it was held that by
amendment, section 142(b) proviso now permits payee to institute prosecution
proceedings against a defaulting drawer even after expiry of one month.
Therefore, if failure of payee to file a complaint within prescribed period was
to result in "absolution" under section 142(b), proviso would not have been
added to negate that consequence.
 8.12 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
Defence which may not be allowed in any prosecution under section 138
Section 140 provides :
"It shall not be a defence in a prosecution of an offence under section 138
that the drawer had no reason to believe when he issued the cheque that the
cheque may be dishonoured on presentment for the reasons stated in the
section."
Thus, section 140 has categorically ousted the role of mens rea in the cases
of dishonour of cheque. It means that irrespective of whether the accused had
any intention to issue a cheque Which is likely to be dishonoured, the mere fact
of dishonour is sufficient to make him liable for the criminal liability if other
ingredients of the offence are satisfied.
Cognizance of offences
Section 142(1) provides:
(1) Not withstanding anything contained in the Code of Criminal
Procedure, 1973 (2 of 1974), —
(a) no court shall take cognizance of any offence punishable under
section 138 except upon a complaint, in writing, mode by the
payee or, as the case may be, the holder in due course of the
cheque;
(b) such complaint is made within one month of the date on which
the course of action arises under clause (c) of the proviso to
section 138 :
Provided that the cognizance of a complaint may be taken by
the court after the prescribed period, if the complaint satisfies
the court that he had sufficient cause for not making the
complaint with such period;
(c) no court inferior to that of a Metropolitan Magistrate or a
Judicial Magistrate of the first class shall try any offence
punishable under section 138.
Section 142(1) has already been discussed :
In K. Bhaskaran v. Sankaran Vidyan Balan, (1999) 7SCC 510, it was held
by a twojudge, Bench of the Supreme Court thatfive acts [namely, (i) drawing
of cheque, (ii) presenting of cheque to the bank, (iii) dishonour of cheque by
the drawee bank, (iv) giving of notice in writing to the drawer of the cheque
demanding payment of the cheque amount and (v) failure of the drawer to
making the payment within the statutory period of receipt of notice) were
done in five different localities any one of the courts exercising jurisdiction in
any one of the five local areas can become the place of trial for the accused
under section 138 of the Negotiable Instrument Act, 1881.
 Negotiable Instruments, Banking and Insurance 8.13
However, in Dashrath Rupsingh Rathore v. State of Maharashtra,
(2014) 9 SCC 129, three Judge Bench of the Supreme Court overruled the
earlier twojudge Bench decisions given in Bhaskaran and other cases of the
Supreme Court and held that a complaint of dishonour of cheque can be filed
only to the Court within whose local jurisdiction where the cheque is
dishonoured by the bank on which it is drawn. To nullify this decision an
amendment was made in the Negotiable Instrument Act, 1881 in 2015 and
section 142(2) was inserted which reads as follows :
//

a court within whose local jurisdiction-

fa) if the cheque is delivered for collection through an account, the
branch of the bank where the payee or holder in due course, as the
case may be, maintains the account, is situated; or
(b) if the cheque is presented for payment by the payee or the holder in
due course otherwise through his account, the branch of the drawee
bank where the drawee maintains the account, is situated.
Explanation.-For the purposes of the clause (a), where the cheque is
delivered for collection at any branch of the bank of the payee or holder in due
course, then, the cheque shall be deemed to have been delivered to the branch
of the bank in which the payee or holder in due course, as the case may be,
maintains the account."
Example: A has an account with Cannaught Place, New Delhi Branch of
ABC bank. He issues cheque payable at par in favour of B. B has an account
with M.G. Road, Gurgaon Branch of XYZ Bank. B deposits the said cheque at
South Extension, New Delhi Branch of XYZ Bank. The cheque is dishonourd.
In this case, complaint will have to filed before the court haying local
jurisdiction where M.G. Road, Gurgaon Branch of XYZ Bank is situated.
Section 142A was also inserted by the Negotiable Instruments
(Amendment) Act, 2015. This section, provides as follows:
1. All cases arising out of section 138 pending before any court before
15th June, 2015, shall be transferred to the court jurisdiction as per
section 142(2).
2. Where the payee or holder in due course, as the case may be, has filed
a complaint against the drawer of a cheque in the court having
jurisdiction as per section 142(2), all subsequent complaints arising
out of section 138 against the same drawer shall be filed before the
same court, irrespective of whether those cheques were presented for
payment within the territorial jurisdiction of that court.
3. If, on 15th June, 2015, more than one presecution filed by the same
person against the same drawer of cheques is pending before different
 8.14 Penalties in Case of Dishonour of Cheques for Insufficiency of Fm^s

courts, all the cases shall be transferred to the court having jurisdiction
under section 142(2) before which the first case was filed.

OFFENCES BY COMPANIES
Section 141 of the Act provides that if the person committing an offence
under Section 138 is a company, the company itself as well as every person
who was incharge of, and was responsible to, the company for the conduct
of the business of the company, shall be deemed to be guilty of offence and
shall not be liable in a case where he establishes that the offence was
committed without his knowledge, or that he had exercised all the due
diligence to prevent the commission of such offence.
Where a person is nominated as a Director of a Company by virtue of his
holding any office or employment in the Central Government or State
Government or a financial corporation owned or controlled by the central
government or the state government, as the case may be, he shall not be liable
for prosecution under this chapter [Chapter XVII sections 138 to 147 of the
Negotiable Instruments Act 1881].
Explanation to the section provides that for the purposes of this section
(Section 141), —
(a) "company" means any body corporate and includes a firm or other
association of individuals, and
(b) "director", in relation' to a firm, means a partner in the firm.
Section 141 does not make all partners of a firm liable. Liability is fastened
only on those who, at the time of the commission of the offence, were
incharge of and were responsible to the firm for the conduct of its business.
Primary responsibility is on complainant to make necessary averments in
complaint and establish the fact that when the offence was committed by
accused were in charge of and responsible to the firm for conduct of its
business. Obligation of accused to prove to the contrary arises thereafter
only. There is no presumption that every partner knows about the transaction.
[Monaben Ketanbhai Shah v. State of Gujarat, (2004) 7 SCC 15]
It is not necessary to reproduce language of Section 141 verbatim in the
complaint. If the substance of the allegations made in the complaint fulfil
requirements of the said section, complaint has to proceed and is required to
be tried. [Ketanbhai Shah v. State of Gujarat, (2004) 7 SCC 15]
Under the scheme of the Act, if the person committing an offence under
section 138 of the Act is a company, by application of Section 141 it is deemed
that every person who is in charge of and responsible to the company for
conduct of the business of the company as well as the company are guilty of
the offence. A person who proves that the offence was committed without
 Negotiable Instruments, Banking and Insurance 8.15
his knowledge or that he had exercised all due diligence is exempted from
becoming liable by operation of the proviso to Section 141 (1). [S. V. Muzumdar
v. Gujarat State Fertilizer Co. Ltd., (2005) 4 SCC 173}
The liability arises from being in charge of and responsible for the
conduct of business of the company at the relevant time when the offence
was committed and not on the basis of merely holding a designation or office
in a company. Conversely, a person not holding any office or designation in
a company may be liable if he satisfies the main requirement of being in
charge of and responsible for the conduct of business of a company at the
relevant time. Liability depends on the role one plays in the affairs of a
company and not on designation or status. Thus, merely being a director of
a company is not sufficient to make the person liable under section 141. A
director or officer (except managing director or joint managing director) in
a company cannot be deemed to be in charge of and responsible for the
conduct of the business of the company at the relevant time. [S.M.S.
Pharmaceutical Ltd v. Neeta Bhatia, (2005) 8 SCC 89].
In Aneeta Hada v. Godfather Travels and Tours (P) Ltd., (2008) 13 SCC
703, it was held that there was a complaint against Director (authorised
signatory) who signed the cheque. Company was not joined as an accused.
A three-judge Bench of the Supreme Court unanimously quashed the
criminal proceedings against the appellant (director).

Civil action against the drawer

Criminal proceedings initiated under section 138 are no bar to the
continuation of a suit for recovery of the amount of the dishonoured cheque.

Sections 143 to 147

Sections 143 to 147introduced vide amendment Act, 2000 are reproduced
below:
"143. Power of Court to try cases summarily. — (1) Notwithstanding z
anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), all
offence under this Chapter shall be tried by a Judicial Magistrate of the first
class or by a Metropolitan Magistrate and the provisions of sections 262 to
265 (both inclusive) of the said Code shall, as far as may be, apply to such
trials:
Provided that in the case of any conviction in a summary trial under this
section, it shall be lawful for the Magistrate to pass a sentence of imprisonment
for a term not exceeding one year and an amount of fine not exceeding five
thousand rupees:
Provided further that when at the commencement of, or in the course of,
a summary trial under this section, it appears to the Magistrate that the
 8.16 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
nature of the case is such that a sentence of imprisonment for a term
exceeding one year may have to be passed or that it is, for any other reason,
undesirable to try the case summarily, the Magistrate shall after hearing the
parties, record an order to that effect and thereafter recall any witness who
may have been examined and proceed to hear or rehear the case in the
manner provided by the said Code.
(2) The trial of a case under this section shall, so far as practicable,
consistently with the interest of justice, be continued from day to day until
its conclusion, unless the Court finds the adjournment of the trial beyond the
following day to be necessary for reasons to be recorded in writing.
(3) Every trial under this section shall be conducted as expeditiously as
possible and an endeavour shall be made to conclude the trial within six
months from the date of filing of the complaint.
143A. Power to direct interim compensation. —The Negotiable Instru­
ments (Amendment) Act, 2018 introduced new section 143A which come into
force on 1-9-2018. The section is reproduced below :
"143A. Power to direct interim compensation. — (1) Notwithstanding any­
thing contained in the Code of Criminal Procedure, 1973, the Court trying an
offence under section 138 may order the drawer of the cheque to pay interim
compensation to the complainant —
(a) in a summary trial or a summons case, where he pleads not guilty to the
accusation made in the complaint; and
(b) in any other case, upon framing of charge.
(2) The interim compensation under sub-section (1) shall not exceed
twenty per cent of the amount of the cheque._____________________
(3) .The interim compensation shall be paid within sixty days from the date
of the order under sub-section (1), or within such further period not exceeding
thirty days as may be directed by the Court on sufficient cause being shown
by the drawer of the cheque.
(4) If the drawer of the cheque is acquitted, the Court shall direct the
complainant to repay to the drawer the amount of interim compensation,
with interest at the bank rate as published by the Reserve Bank of India,
prevalent at the beginning of the relevant financial year, within sixty days
from the date of the order, or within such further period not exceeding thirty
days as may be directed by the Court on sufficient cause being shown by the
complainant.
(5) The interim compensation payable under this section may be recov­
ered as if it were a fine under section 421 of the Code of Criminal Procedure,
1973 (2 of 1974).
I Negotiable Instruments, Banking and Insurance 8.17
(6) The amount of fine imposed under section 138 or the amount of
compensationawarded under section357of the Code of Criminal Procedure,
1973 (2 of1974), shall be reduced by the amount paid or recovered as interim
i compensation under this section."
144. Mode of service of summons. —(1) Notwithstanding anything
contained in the Code of Criminal Procedure, 1973 (2 of 1974), and for the
purposes of this Chapter, a Magistrate issuing a summons to an accused or
a witness may direct a coy of summons to be served at the place wTiere such
accused or witness ordinarily resides or tarries on business or personally
works; for gain, by speed post or by such courier services as are approved by
a Court of Session.
(2) Where an acknowledgement purporting to be signed by the accused
or the witness or an endorsement purported to be made by any person
authorized by the postal department or the courier services that the accused
or the witness refused to take delivery of summons has been received, the
Court issuing the summons may declare that the summons has been duly
served.
145. Evidence on affidavit. — (1) Notwithstanding anything contained in
the Code of Criminal Procedure, 1973 (2 of 1974) the evidence of the
complainant may be given by him on affidavit and may, subject to all just
exceptions be read in evidence in any enquiry, trial or other proceeding
under the said Code.
(2) The Court may, if it thinks fir, and shall, on the application of the
prosecution or the accused, summon and examine any person giving evidence
on affidavit as to the facts contained therein.
146. Bank's slip primafacie evidence of certain facts.—The Court shall,
in respect of every proceeding under this Chapter, on production of bank's
slip or memo having thereon the official mark denoting that the cheque has
been dishonoured, presume the fact of dishonour of such cheque, unless and
until such fact is disproved.
147. Offences to be compoundable: Notwithstanding anything contained
in the Code of Criminal Procedure, 1973 (2 of1974), every offence punishable
under this Act shall be compoundable."
Where the dispute is settled between the parties, conviction and sentence
of the defaulter can be set aside in view of the fact that Section 147 of the Act
allows compounding the offence. [Anil Kumar Haritwal v. Alka Gupta, (2004)
4 SCC 366}
148. Power of Appellate Court to order payment pending appeal against
conviction.—The Negotiable Instruments (Amendment) Act, 2018 introduced
 8.18 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
new section 148 which come into force on 1-9-2018. The section is reproduced
below:
'148. Power of Appellate Court to order payment pending appeal against
conviction. — (1) Notwithstanding anything contained in the Code of Criminal
Procedure, 1973, in an appeal by the drawer against conviction under section
138, the Appellate Court may order the appellant to deposit such sum which
shall be a minimum of twenty per cent of the fine or compensation awarded
by the trial Court:
Provided that the amount payable under this sub-section shall be in
addition to any interim compensation paid by the appellant under section
143A.
(2) The amount referred to in sub-section (1) shall be deposited within
sixty days from the date of the order, or within such further period not
exceeding thirty days as may be directed by the Court on sufficient cause
being shown by the appellant
(3) The Appellate Court may direct the release of the amount deposited by
the appellant to the complainant at any time during the pendency of the
appeal:
Provided that if the appellant is acquitted, the Court shall direct the
complainant to repay to the appellant the amount so released, with interest
at the bank rate as published by the Reserve Bank of India, prevalent at the
beginning of the relevant financial year, within sixty days from the date of the
order, or within such further period not exceeding thirty days as may be
directed by the Court on sufficient cause being shown by the complainant.".

LEADING CASES
Modi Cements Ltd. v. Kuchil Kumar Nandi
(1998) 3 SCC 249: AIR 1998 SC 1057
(Drawer entitled to make deposits or make arrangementsfor sufficiency offunds
in his account before presentation. Section 138 is attracted only when the cheque is
dishonoured. Even ifa cheque is dishonoured because of'stop payment' instruction
to the bank, Section 138 would get attracted.)
Facts
The respondent/accused carries on business as a sole proprietor of
certain business concerns including construction of concerns. He purchased
from the appellant large quantities of cement on credit. He incurred on 23-
3-1994 a liability/ debt of Rs. l,10,53,520.30payable to the appellant towards
the purchased price of the cement supplied by them to the respondent. In
 Negotiable Instruments, Banking and Insurance 8.19

partial discharge of the said liability/debt the respondent drew three

cheques in favour of the appellant on 23-2-1994,26-2-1994 and 28-2-1994 for
a sum of Rs. 2,00,000 each. The appellant presented these three cheques on
9-8-1994 for encashment through their bankers.
The banker of the respondent returned these cheques as impaid with an
endorsement "payment stopped by drawer". Later on it transpired that vide
his letter dated 8-8-1994 the respondent had given such instruction. The
appellant on 13-9-1994 sent a legal notice in terms of section 138 of the Act
to the respondent demanding payment of the aforesaid amounts under the
cheques. The said notice was duly served on the respondent on 17-9-1994.
Since the respondent failed and neglected to make the payment of the
amount of the aforesaid three cheques within 15 days which expired on 2-10-
1994, the appellant filed three criminal complaints against the respondent
under Section 138 of the Act.
Issue
Whether the respondent is guilty of the criminal offence under section
138 of the Act?

Decision of the Supreme Court

The Supreme Court held that insufficiency of funds at the time of
drawing of the cheque will not justify drawing of presumption of dishonesty
on the part of the drawer under section 138. The drawer is entitled to make
deposits or make arrangement for sufficiency of funds in his account before
presentation. Section 138 is attracted only when the cheque is dishonoured.
In Electronics Trade & Technology Development Corporation Ltd. v.
Indian Technologists & Engineers (Electronics) (P) Ltd., (1996) 2 SCC 739,
the Supreme Court while interpreting section 138 of the Act, firstly observed
as follows:
"It would thus be clear that when a cheque is drawn by a person on an
account maintained by him with the banker for payment of any amount of
money to another person out of the account for the discharge of the debt, in
whole or in part, or other liability is returned by the bank with the endorsement
like (1) in this case, 'refer to the drawer' (2) 'instructions for stoppage of
payment' and stamped (3) 'exceeds arrangement', it amounts to dishonour
within the meaning of section 138 of the Act. On issuance of the notice by the
payee or the holder in due course after dishonour, to the drawer demanding
payment within 15 days from the date of the receipt of such a notice, if he
does not pay the same, the statutory presumption of dishonest intention,
subject to any other liability, stands satisfied".
 8.20 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
The Supreme Court further observed in the above case as follows;
'It is seen that once the cheque has been drawn and issued to the payee
and the payee has presented the cheque and thereafter, if any instructions
are issued to the bank for non-payment and the cheque is returned to the
payee with such an endorsement, it amounts to dishonour of cheque and it
comes within the meaning of section 138".
Another two-judge Bench while dealing with the same question in K.K.
Sidharthan v. T.P. Praveena Chandran (1996) 6 SCC 369 said:
"This shows that section 138 gets attracted in terms if cheque is
dishonoured because of insufficient funds or where the amount exceeds, the
arrangement made with the bank. It has, however, been held by a Bench of
this court in Electronics Trade&Technology Development Corporation Ltd.
v. Indian Technologists & Engineers (Electronics) (P) Ltd., that even if a
cheque is dishonoured because of 'stop payment' instruction to the bank,
section 138 would get attracted".
The Supreme Court in the present case (Modi Cement Ltd. case) agreed
with the above legal proposition. However, in present case cheques were
presented after the appellant had directed its bank, to 'stop payment'.
The Supreme Court in the aforesaid Electronics Trade & Technology
Development Corporation Ltd. Case further observed as follows:
"Suppose after the cheque is issued to the payee or to the holder in due
course and before it is presented for encashment, notice is issued to him not
to present the same for encashment and yet the payee or holder in due course
presents the cheque to the bank for payment and when it is returned on
instruction, section 138 does not get attracted".
This view has been referred to in K.K. Sidharthan case, wherein it was
held that section 138 was not attracted in that case, where the dishonoured
cheque had been presented to the drawee bank although the payee was
aware that the drawer had stopped its payment.
The Supreme Court in the present case {Modi Cements Ltd. case) did not
agree with the aforesaid view and, respectfully observed that the aforesaid
proposition in both these respected judgments are contrary to the spirit and
object of sections 138 and 139 of the Act. If this proposition is accepted it will
make section 138 a dead letter, for, by giving instruction to the bank to stop
payment immediately after issuing a cheque against a debt or liability the
drawer can easily get rid of the penal consequences notwithstanding the fact
that a deemed offence was committed. Thus, the Supreme Court held that
section 138 of the Act is applicable in the present case. Note: Electronics
Trade case given above was overruled in Goaplast case.
 Negotiable Instruments, Banking and Insurance 8.21
Kusum Ingots & Alloys Ltd. v. Pennor Peterson Securities Ltd.
(2000) 2 SCC 745: AIR 2000 SC 954
(Where a cheque drawn by a company is dishonoured but before offence under
Section 138 ofNI Act is complete, the drawer company is declared sick by BIFR
under SICA, then, if the ingredients of Section 138 are satisfied thereafter, Section
22 or Section 25 ofSICA will not bar criminal proceedings against the company and
its directors on complaint made by the payee under NI Act.)
Facts
Post-dated cheques were issued on behalf of the Company in favour of
the complainant in course of business of the company. When the complainant
presented the cheques in the bank they were returned without payment.
Then the complainant issued notice to the company and/ or its Directors
stating the facts of dishonour of the cheques and demanding payment. Since
no payment was made within the period of 15 days stipulated under the NI
Act the payee filed complaint against the company and/ or its Directors
alleging, inter alia, that they had committed an offence under section 138 of
the NI act. Before the cheques were presented in the bank or after the bank
declined to honour the cheques the drawer company was declared sick
under the provisions of SICA by the Board of Industrial and Financial
Reconstruction ("the BIFR"). On receipt of the summons from the court in the
criminal case registered on the basis of the complaint the accused company
and/ or its Directors filed petitions under section 482 of the Code of Criminal
Procedure or under Article 227 of the Constitution seeking quashing of the
complaint/ proceedings in the criminal case, mainly on the ground that in
view of the provisions in section 22 of SICA the criminal case instituted
against them for commission of the alleged offence under section 138 NI act
is misconceived and compelling the accused to face trial in the case will
amount to abuse of the process of court.
Issue
Whether a company and its directors can be proceeded against for having
committed an offence under section 138 of the Negotiable Instrument Act,
1881 after the company has been declared sick under the provisions of the
Sick Industrial Companies (Special Provisions) Acts, 1985 (SICA) before the
expiry of the period for payment of the cheque amount.
Decision of the Supreme Court
The Supreme Court held that the ingredients which are to be satisfied for
making out a case under section 138 of the NI Act are:
(i) a person must have drawn a cheque on an account maintained by
him in a bank for payment of a certain amount of money to another
person from out of that for the discharge of any debt or other liability;
 8.22 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
(ii) that 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;
(iii) that cheque is returned by the bank unpaid, either because the
amount of money standing to the credit of the amount is insufficient
to honour the cheque or that it exceeds the amount arranged to be
paid from that account by an arrangement made with the bank;
(iv) the payee or the hoi der in due course of the cheques 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 15 days of the receipt of
information by him from the bank regarding the return of the cheque
as unpaid;
(v) the drawer of such cheques fails to make payment of the said amount
of money to the payee or the holder in due course of the cheque
within 15 days of the receipt of the said notice.
If the aforementioned ingredients are satisfied then the person who has
drawn the cheque shall be deemed to have committed an offence. In the
explanation to the section clarification is made that the phrase "debt or other
liability" means a legally enforceable debt or other liability.
The ingredients of section 138 are prima facie established in the present
case. Therefore, no exception can be taken against the order of the Magistrate
taking cognizance of the offence under section 138 of the NI Act against the
appellants.
Section 22 of SICA makes provision for the 'suspension of legal
proceedings' and provides that no 'suit' for recovery of money or enforcement
of any security shall be without the permission of the Board for Industrial
and Financial Reconstruction. Section 22 does not refer to any criminal
proceedings. Therefore, section 22 does not create any legal impediment for
instituting and proceeding with a criminal case on the allegation of an
offence under section 138 of the NI Act against a company or its directors.
However, where the company is declared sick and directors under section
22 A of the SICA are issued to the company or its directors restraining them
from disposing off the assets, except with the permission of the court before
the cheque is presented for payment or before the expiry of the statutory
period of 15 days of notice, then the offence under section 138 is not
completed. The Supreme Court referred the case to the concerned Magistrate
to examine the matter in respect of section 22 A of SICA.
 Negotiable Instruments, Banking and Insurance 8.23
Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd.
(2001) 6 SCC 463: AIR 2001 SC 676
(Once the offence under Section 138 is committed any payment made subsequent
thereto will not absolve the accused of the liability of criminal offence, it may have
some effect on the court trying the offence. But by no stretch of imagination, a
criminal proceeding could be quashed on account of deposit in the Court.)
Facts
In its complaint, the appellant company had stated that Accused 2 to 9
who are partners of the respondent firm purchased cement from it and
issued cheque for Rs. 9,13,353.84 on 26-5-1998 which was drawn on Karur
Vysa Bank Ltd., Emakulam Branch. When presented for collection, the
cheque was dishonoured on account of insufficiency of funds in the account
of the accused. The information regarding non-payment of the cheque
amount was communicated by the bank to the complainant on 2-6-1998. The
complainant on 13-6-1998, through its advocate, issued a statutory notice in
terms of section 138 of the Act intimating Respondents 1 and 2 regarding the
dishonour of the cheque and calling upon the respondents to pay the said
amount within a period of 15 days from the receipt of the said notice. The
postal acknowledgement receipt of the notice, served upon the respondents,
was received by the complainant on 15-6-1998. However, Respondents 1 and
2, vide their letter dated 20-6-1998, which was received empty envelops
without any contents and requested the appellant to mail the contents. It is
worth noticing that by the time the complainant received the intimation of
the respondents, the statutory period of filing the complaint was about to
expire. Believing the averments of the respondents to be true, though not
admitting but as an abundant caution the appellant presented the cheque
again on 1 -7-1998 to the drawee bank through their bankers.
The cheque was again dishonoured by the drawee bank on 2-7-1998. A
registered statutory notice was issued to the accused intimating the dishonour
of the cheque and the payment was demanded. The accused received the
said notice on 27-7-1998 but did not make the payment. According to the
complainant, the accused on 6-7-1998 (sic 6-8-1998) sent a registered cover to
its Ernakulam office which contained some waste newspaper bits. As
despite dishonour of the cheque and receipt of notice, the cheque amount
was not paid, the appellant filed the complaint on 9-9-1998, admittedly,
within the statutory period from the second notice. The Additional Chief
Judicial Magistrate, Emakulam took cognizance and issued process to the
respondents. Instead of appearing before the Magistrate, the respondents
filed a petition under section 482 of the Code of Criminal Procedure in the
High Court praying for quashing the complaint on the ground that the same
 8.24 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds

was barred by limitation. The High Court quashed the complaint holding
that the same was barred by the time as the complaint had allegedly failed
to file it within the statutory period from the date of accruing of the cause of
action.
Issue
Whether, on the facts and circumstances, the High Court was right in
quashing the complaint filed by the appellant?
Decision of the Supreme Court
The Supreme Court held that to constitute an offence under section 138
of the Act, the complainant is obliged to prove its ingredients which include
the receipt of notice by the accused under clause (b). It is to be kept in mind
that it is not the "giving" of the notice which makes the offence but it is the
"receipt" of the notice by the drawer which gives the cause of action to the
complainant to file the complaint within the statutory period.
The Court relied on K. Bhaskaran v. Sankaran Vaidhyan Balan, (1999) 7
SCC 510 in that case the Court considered the difference between "giving"
of a notice and "receipt" of the notice and held:
"1. On the part of the payee he has to make a demand by 'giving a notice'
in writing. If that was the only requirement to complete the offence on the
failure of the drawer to pay the cheque amount within 15 days from the date
of such 'giving', the travails of the prosecution would have been very much
lessened. But the legislature says that failure on the part of the drawer to pay
the amount should be within 15 days of the receipt' of the said notice. It is,
therefore, clear that 'giving notice' in the context is not the same as receipt of
notice. Giving is a process of which receipt is the accomplishment. It is for the
payee to perform the former process by sending the notice to the drawer at
the correct address.
2. In Black's Law Dictionary 'giving of notice' is distinguished from
'receiving of the notice': ' A person notifies or gives notice to another by
taking such steps as may be reasonably required to inform the other in the
ordinary course, whether or not such other actually comes to know of it'. A
person 'receives' a notice when it is duly delivered to him or at the place of
his business.
3. If a strict interpretation is given that the drawer should have actually
received the notice for the period of 15 days to start running no matter that
the payee sent the notice on the correct address, a trickster cheque drawer
would get the premium to avoid receiving the notice by different strategies
and he could escape from the legal consequences of section 138 of the Act It
must be borne in mind that the court should not adopt an interpretation
 Negotiable Instruments, Banking and Insurance 8.25
which helps a dishonest evader and clips an honest payee as that would
defeat the very legislative measure.
4. In Maxwell's Interpretation of Statutes the learned author has
emphasized that 'provisions relating to giving of notice receive liberal
interpretation'. The context envisaged in section 138 of the Act invites a
liberal interpretation for the person who has the statutory obligation to give
notice because he is presumed to be the loser in the transaction and it is for
his interest the very provision is made by the legislature. The words in clause
(b) of the proviso to section 138 of the Act show that the payee has the
statutory obligation to 'make a demand' by giving notice. The thrust in the
clause is on the need to 'make a demand'. It is only the mode for making such
demand which the legislature has prescribed. A payee can send the notice for
doing his part for giving the notice. Once it is dispatched his part is over and
the next depends on what the sendee does.
5. It is well settled that a notice refused to be accepted by the addressee
can be presumed to have been served on him.
6. Here the notice is returned as unclaimed and not as refused. Will there
be any significant difference between the two so far as the presumption of
service is concerned? In this connection a reference to section 27 of the
General Clauses Act will be useful. The section reads thus:
7. Meaning ofservice by post: Where any Central Act or Regulation made
after the commencement of this Act authorizes or requires any document to
be served by post, whether the expression 'serve' or either of the expression
'give' or 'send' or any other expression is used, then, unless a different
intention appears, the service shall be deemed to be effected by properly
addressing, pre-paying and posting by registered post, a letter containing
the document, and unless the contrary is proved, to have been effected at the
I time at which the letter would be delivered in the ordinary course of posts'."
The Supreme Court stated that Section 27 of the General Clauses Act
deals with the presumption of service of a letter sent by post. The despatcher

a presumption. But as the presumption is a rebuttable one, he has two

options before him. One is to concede to the stand of the sendee that as a
matter of fact he did not receive the notice, and the other is to contest the
sendee's stand and take the risk for proving that he, in fact, received the
notice. It is open to the despatcher to adopt either of the options. If he opts
for the former, he can afford to take appropriate steps for the effective service
of notice upon the addressee. Such a course appears to have been adopted
by the appellant company in this case and the complaint filed, admittedly.
 8.26 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
within limitation from the date of the notice of service conceded to have been
served upon the respondents.
In Sadanandan Bhadran v. Madhvan Sunil Kumar, (1998) 6 SCC 514, the
Supreme Court held that clause (a} of the proviso to section 138 did not put
any embargo upon the payee to successively present a dishounoured cheque
during the period of its validity. On each presentation of the cheque and its
dishonour a fresh right and not cause of action accrues. The payee or holder
of the cheque may, therefore, without takingpri-amatory action in exercise
of his right under clause (b) of section 138 of the Act, go on presenting the
cheque so as to enable him to exercise such right at any point of time
during the validity of the cheque. But once a notice under clause (b) of
section 138 of the Act is "received" by the drawer of the cheque, the payee
or the holder of the cheque forfeits his right to again present the cheque
as cause of action has accrued when there was failure to pay the amount
within the prescribed period and the period of limitation starts run which
cannot be stopped on any account. This Court emphasized that "needless
to say the period of one month from filing the complaint will be reckoned
from the date immediately falling the day on which the period of 15 days
from the date of the receipt of the notice by the drawer expires".
In the present case the appellant issued a such notice after again
presenting the cheque. The respondents have not denied the issuance of
their letter dated 20-6-1998 in which they accepted the receipt of empty
envelops and requested the appellant to send the content, if any. This
intimation was received by the appellant on 30-6-1998, the day on which
the period of limitation on the basis of earlier notice was to expire. They
had exercised the option to accept the averments made by the respondents
in their letter dated 20-6-1998 and issued a fresh notice after again
presenting the cheque.’The respondents have not denied the issuance of
their letter dated 20-6-1998. Despite admitting its contents, they opted to
approach the High Court for quashing the proceedings merely upon
assumption, presumption and conjectures. They tried to blow hot and cold
in the same breath, stating on the one hand that the notice of dishonour had
not been received by them and on the other praying for dismissal of the
complaint on the plea that the complaint was barred by time in view of the
notice served by the appellant, which they had not received. The plea of the
respondents was not only contradictory, and an afterthought, but apparently
carved out to resist the claim of the complainant and thereby frustrate the
provisions of law.
The Supreme Court held that the High Court fell in error by not referring
to the letter of the respondents dated 20-6-1998 and quashing the proceedings.
 Negotiable Instruments, Banking and Insurance 8.27
The appellant in para 7 of their complaint had specifically stated that:
"Even though the complainant is not admitting the said allegation, on
abundant caution the complainant presented the cheque again on 1-7-1998
to the drawee bank through complainant's bankers, Punjab National Bank.
The cheque was again dishonoured by the drawee bank on 2-7-1998; a
registered lawyer notice was issued to the accused Firm as well as to the 2nd
accused intimating the dishonour of the cheque and demanding payment.
The accused have received the notice on 27-7-1998. The accused did not
make any payment so far".
The receipt of the second notice has not been denied by the respondents.
Therefore, the Supreme Court allowed the appeal and quashed the order
of the High Court.

Suganthi Suresh Kumar v. Jagdeeshan

AIR 2002 SC 681: (2002) 2 SCC 420
(Where the amount concerned by the cheque remained unpaid during the
pendency of the case before the court it should be the look out of the trial magistrates
that the sentence for the offence under Section 138 should be of such a nature as to
give a proper effect to the object of the legislature.)
Facts
Two cheques drawn by the respondents Jagdeeshan in favour of the
appellant Sugnathi Suresh Kumar were dishonoured by drawee bank. The
total amount covered by the cheque was Rs. 4,50,000. The trial Magistrate
convicted the respondent under section 138 of the Negotiable Instruments
Act but sentenced him only to undergo imprisonment till the rising of the
court and pay a fine of Rs. 5,000 in both the cases.
The appellant preferred revision before the High Court on the premise
that the sentence was grossly inadequate and contended that trial Magistrate
should at least have invoked section 357 (3) of the criminal procedure code.
The Single Judge of the Kerala High Court did not interfere with the sentence
passed on the respondent and therefore he dismissed both the revisions.
Nonetheless, he directed the trial Magistrate to keep in mind the object of
providing stringent punishment and guidelines given by the Apex Court in
PankajBhaiNagjibhai Patel v. State ofGufrat, (2001) 2 SCC 595. However,
the High Court did not invoke section357 (3) Cr.P.C. The respondent had not
paid the amount involved in the two cases either during the pendency of the
cases before the trial court or revision before the High Court or the Supreme
Court.
Issue
What should be the limit of proper sentence?
 8.28 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
Decision of the Supreme Court
The Supreme Court held that there was no case for the respondent that
the amount involved in the two cases had been paid either during the
pendency of the cases before the trial court or revision before the High Court
or the Supreme Court. If the amounts had been paid to the complainant there
perhaps would have been justification for the imposing a flee-bite sentence
as had been chosen by the trial court. But in a case where the amount covered
by the cheque remained unpaid it should be the lookout of the trial Magistrate
that the sentence for the offence under section 138 should be of such a nature
as to give proper effect to the object of the legislation. No drawer of the
cheque should be allowed to take dishonour of the cheque issued by him
light-heartedly. The very object of the enactment if provision like section 138
of the Act would stand defeated if the sentence is of the nature passed by the
trial Magistrate.
That the complainant has subsequently filed civil suit and attach all
property of the respondent is not a ground for lessening the gravity of the
offence or to impose a minor sentence chosen by the trial court.
The Supreme Court in K. Bhaskaranv. Sankaran Vaidhyan Balan, (1999)
7 SCC 510, had reminded all concerned that it is well to remember the
emphasis laid on the need for making a liberal use of section 357 (3) of the
Criminal Procedure Code. This was observed by reference to a decision of
the Supreme
Court in Hari Singh v. Sukhbir Singh, (1988) 4 SCC 551. In Hari Singh case
the Supreme Court held as follows:
'The quantum of compensation may be determined by taking into
account the nature of crime. The justness of the claim by the victim and the
ability of accused to pay. If there are more than one accused they may be
asked to pay in equal terms unless their capacity to pay varies considerably.
The payment may also vary depending upon the acts of each accused.
Reasonable period for payment of compensation, if necessary by installments,
may also be given. The court may enforce the order by imposing sentence in
default".
Therefore, the Supreme Court remitted the present case to the trial court
for passing proper sentence after hearing the parties.
M.M.T.C. Ltd. v. Medchl Chemicals and Pharma (P) Ltd.
(2002) 1 SCC 234 : AIR 2002 SC 82
(Onus toprove the non-existence ofadebtor liability lay on the drawer andhad
to be discharged at the trial)
 Negotiable Instruments, Banking and Insurance 8.29
Facts
Pursuant to a memorandum of understanding, the respondent Company
issued two cheques, one dated 31-10-1994 and another dated 10-11-1994, in
favour of the appellant company. Both the cheques when presented for
payment were returned with the endorsement "payment stopped by drawer".
After issuing notices, the appellant lodged two complaints under section 138
of the Negotiable Instruments Act through one Shri Lakshman Goel, the
manager of the regional office. The respondent filed two petitions for
quashing of the said complaints. Allowing the petitions the High Court held
that the complaints were not maintainable. The High Court further held that
the manager (who had lodged the complaints) and the Deputy General
Manager Shri Sampath Kumar (who was substituted) were merely paid
employees of the appellant Company and had not been authorised by the
Board of Directors to sign and file the complaint on behalf of the company
or to prosecute the same it further held that the authorization in favour of the
Deputy General Manager could not cure the defect. Since in the complaint
there was no specific allegation of existence of any debt or liability, the High
Court further held that the cheques were issued as security and not for any
debt or liability existing on the date of issuance. Opposing the appeals, the
respondent contended inter alia, that the cheques having bounced on account
of stoppage of payment by the drawer and not on account of insufficiency of
funds, section 138 was not allowed.
Issue
Whether the complaint, under the facts and circumstances of the case,
maintainable under section 138 of the Negotiable Instruments Act?
Decision of the Supreme Court
The Supreme Court held that the only eligibility criterion prescribed by
section 142 for maintaining a complaint under section 138 is that the
complaint must be filed by the payee or the holder in due course. This
criterion is satisfied in the present case 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 sent a person who is
competent to represent the company. The complaints could thus not have
been quashed on that ground.
Relying on Modi CementsLtd. v. Kuchil Kumar Nandi, (1998)3 SCC 249, and
following Maruti Udyog Ltd. v. Narender, (1999) 1 SCC 113, the Supreme
Court held that even when the cheque is dishonoured by reason of stop­
payment instructions, by virtue of section 139 the court has to presume that
 8.30 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds

the cheque was received by the holder for the discharge, in whole or in part,
of any debt or liability. Of course this is a rebuttable presumption. If the
accused shows that in his account there were sufficient funds to clear the
amount at the time of presentation of the cheque for encashment at the
drawer bank and that the stop-payment notice had been issued because of
other valid causes including that there was no existing debt or liability at the
time of presentation of cheque for encashment, then offence under section
138 would not be made out. The important thing is that the burden of so
proving would be on the accused. Thus; the High Court cannot quash a
complaint on this ground.
Therefore, the Supreme Court set aside the judgment of the High Court
and directed to Metropolitan Magistrate, G.T. Chennai to proceed with the
complaints against the respondents in accordance with the law. The Supreme
Court allowed the respondents to take, at the trial, pleas available to them
including those taken herein.
Goaplast (P) Ltd. v. Chico Ursula D'SouzaQ4
(2003) 3 SCC 232: AIR 2003 SC 2035
(Where a drawer issues a cheque to a person a post dated cheque and instructs
the bank not to make payment and consequently the cheque is dishonoured then,
notwithstanding that payment was stopped prior to the due date of the cheque,
Section 138 becomes applicable)
Facts
On 20-7-1992, the respondent sent to the appellant a number of post
dated cheques, two of which were dated 10-12-1994 and 10-4-1995, in
discharge of a certain liability. On 12-2-1993, the respondent wrote to the
appellant denying his liability to pay the amounts under the said cheques on
the ground that the cheques were issued under a mistaken belief of liability
and asked the appellant to treat the said cheques as invalid. Simultaneously,
the respondent instructed the drawee bank to stop payment of the said
cheques. The cheques when presented for payment, after the due date,
bounced. After issuing the statutory notice, the appellant filed a complaint
against the appellant under s. 138 of the Negotiable Instruments Act.
Misreading Anil Kumar Sawhney v. GulshanRai, (1993) 4 SCC 424, both the
trial court and the High Court held that before the due date the instruments

Q4. A issued post dated cheques totalling Rs. 5 lakh in favour of “X & Company (Pvt.)
Ltd.’ for purchasing a dream bike. The first cheque was dated 1st July, 2013. A
instructed its banker to stop payment any cheque on 25th June, 2013. When "X &
Company (Pvt.) Ltd.
* presented the cheque on 1 st July, 2013, it was returned unpaid
by the banker of 'A'. X & Company (Pvt.) Ltd. approaches you for advice.
 Negotiable Instruments, Banking and Insurance 8.31
were merely bills of exchange and not cheques and that, therefore,
countermanding of the cheques at that stage did not attract section 138.
Issue
Whether stop payment of post-dated cheque prior to the date of cheque
by the drawer and presentation of the cheque by the payee after the due date
of the cheque can amount to a penal offence under section 138 of the
Negotiable Instrument Act? z

Decision of the Supreme Court

Chapter XVII containing sections 138 to 142 was introduced in the Act by
Banking, Public Financial Institutions and Negotiable Instruments Laws
(Amendment) Act, 1988 with the object of inculcating faith in the efficacy of
banking operations and giving credibility to negotiable instruments in
business. The said provisions were intended to discourage people from not
honouring their commitments by way of payment through cheques. The
court should lean in favour of an interpretation which serves the object of the Act.
A post dated cheque will lose its credibility and acceptability if its payment can be
stopped routinely. The purpose of the post-dated cheque is to provide some
accommodation to the drawer of the cheque. Therefore, it is all the more
necessary that the drawer of the cheque should not be allowed to abuse the
accommodation given to him by a creditor by way of acceptance of post­
dated cheque.
The present case was decided by the trial court and the High Court
mainly on the basis of the judgment of the Supreme Court in Sawhney Case.
In that case, the point for consideration was the date from which the period
of six months (now three months) provided in proviso (a) to section 138
should be counted. The Court clearly held that a post-dated cheque becomes
a cheque only on the date it bears when it becomes payable on demand, and
therefore, limitation period will start from that date. In the present case the
issue is very different. The issue is regarding payment of a post-dated cheque
being countermanded before the date mentioned on the face of the cheque.
In view of section 139, it has to be presumed that a cheque is issued in
discharge of any debt or other liability. The presumption can be rebutted by
adducing evidence and the burden of proof is on the person who wants to
rebut the presumption. This presumption coupled with the object of Chapter
XVII of the Act leads to the conclusion that by countermanding payment of
post-dated cheque, a party should not be allowed to get away from the penal
provision of section 138 a dead letter and will provide a handle to person
trying to avoid payment under legal obligations undertaken by them through
 8.32 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
their own acts which in other words can be said to be taking advantage of
one's own wrong.
NEPC Micon Ltd. v. Magma Leasing Ltd., (1999) 4 SCC 253, was a case
in which the drawer of the cheque closed the account in the bank before
presentation of the cheque and the cheque when presented was returned by
the bank with the remark "account closed". The question arose whether in
this situation section 138 of the Act would be attracted. It was contended on
behalf of the appellant that section 138 being a penal provision it should be
strictly interpreted. Section 138 according to the appellant applied only in
two situations i.e. either because the money standing to the credit of the
account of the drawer is insufficient to honour the cheque or it exceeds the
amount arranged to be paid from that account by an agreement made with
the bank. Rejecting the contentions raised on behalf of the accused this Court
held that return of a cheque on account of account being closed would be
similar to a situation where the cheque is returned on account of insufficiency
of funds in the account of the drawer of the cheque. Before one closes his
account in the bank he withdraws the entire amount would therefore mean
that there were no funds in the account to honour the cheque which squarely
brings the case within section 138 of the Act. On the question of strict
interpretation of penal provisions raised on behalf of the accused it was
observed:
"If the interpretation, which is sought for, were given, then it would only
encourage dishonest persons to issue cheques and before presentation of the
cheques close 'that account' and thereby escape from the penal consequences
of section 138".
Therefore, the Supreme Court held that section 138 of the Act is attracted
in the facts of the present case. However, whether a case for punishment
under that provision is made out, will depend on the outcome of the trial. The
Court remanded the cases to the Judicial Magistrate concerned for deciding
the complaints filed by the appellant herein on merits in accordance with the
law.
The Supreme Court followed NEPC Micon Ltd. v. Magna Leasing Ltd.,
(1999) 4 SCC 253, affirmed Modi Cements Ltd. v. Kunchil Kumar Nandi,
(1998)3 SCC249 and overruled Electronics Trade &Technology Development
Corporation Ltd. v. Indian Technologists & Engineers (Electronics) (P) Ltd.,
(1996) 2 SCC 739.
Notes: (1) In K.R. Indira v. G. Adinarayana (Dr.) (2003) 8 SCC 300, it was
held that in the absence of specific demand for payment, the demand notice
would be invalid and the acquittal of the accused would be valid. However,
 Negotiable Instruments, Banking and Insurance 8.33
in a given case if the consolidated notice found to provide sufficient
information envisaged by the statutory provision and there was a specific
demand for the payment of the sum covered by the cheque dishonoured,
mere fact that it was a consolidated notice, and/or that further demands in
addition to the statutorily envised demand were also found to have been
made may not invalidate the same. (2) In Raja Kumari v. P. Subbaranima
Naidu, (2004) 8 SCC 774, it was held that if a statutory notice is sent to the
correct address of the drawer but returning with the endorsement that door
of the house was locked, non-service of the notice in such circumstances
could not be a ground for dismissal of a complaint even before the same was
numbered. Burden to show that the accused drawer had managed to get an
incorrect postal endorsement lies on the complainant and effects thereof
have to be considered during the trial on the background of the case. (3) In
Jeevanbose v. State of Kerala, (2004) 3 SCC 800, it was held that in view of
the settlement between complainant and the accused, sentence reduced to
one already undergone. (4) In Anil Kumar Haritwal v. Alka Gupta, (2004)
4 SCC 366, it was held that where the dispute settled between the parties,
conviction and sentence of the defaulter set aside, in view of the fact that
section 147 of the Negotiable Instrument Act allows compounding of an
offence.
C.C. Alavi Haji v. Palapetty Muhammad
(2007) 6 SCC 555: (2007) 7 SCALE 380
(While construing the Section 138, the object of legislation has to be borne in
mind. When the notice is sent by registered post by correctly addressing the drawer
of the cheque, the mandatory requirement of issue of notice in terms of clause (b) of
Section 138 of the Act stands complied with.)
Facts
Though the complainant issued lawyer's notice intimating the dishonour
of cheque and demanded payment on 4.8.2001, the same was returned on
10.8.2001 saying that the accused was " out of station". The returned envelope
showed that the notice was sent by 'registered post acknowledgement due'
to the correct address with an endorsement that "the addressee was abroad".
Issue
Whether requirements of Section 138 of the NI Act had been sufficiently
complied with?
Decision of the Supreme Court
The Supreme Court reiterated the view expressed by it in K. Bhaskaran
case and Vinod Shivappa case. It held that where the payee despatches the
 8.34 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds

notice by registered post with correct address of the drawer of the cheque,
the principle incorporated in Section 27 of the General Clauses Act would be
attracted; the requirement of clause (b) of proviso to Section 138 of the Act
stands complied with and cause of action to file a complaint arises on the
expiry of the period prescribed in clause (c) of the said proviso for payment
by the drawer of the cheque. Nevertheless, it would be without prejudice to
the right of the drawer to show that he had no knowledge that the notice was
brought to his address.
The Court also considered the implication of Section 114 of the Indian
Evidence Act, 1872 insofar as the service of notice under the said proviso is
concerned. Section 114 of the Indian Evidence Act, 1872 reads as follows:
"Section 114 —Court may presume existence of certain facts.—The
Court may presume the existence of any fact which it thinks likely to have
happened, regard being had to the common course of natural events, human
conduct and public and private business, in their relation to the facts of the
particular case."
Section 27 of the General Clauses Act is extracted below:
"Section 27: Meaning of service by post. —Where any Central Act or
Regulation made after the commencement of this Act authorizes or requires
any document to be served by post, whether the expression 'serve' or either
of the expressions 'give' or 'send' or any other expression is used, then,
unless a different intention appears, the service shall be deemed to be
effected by properly addressing, prepaying and posting by registered post,
a letter containing the document, and, unless the contrary is proved, to have
been effected at the time at which the letter would be delivered in the
ordinary course of post".
According to Section 114 of the Indian Evidence Act, when it appears to
the Court that the common course of business renders it probable that a thing
would happen, the Court may draw presumption that the thing would have
happened unless there are circumstances in a particular case to show that the
common course of business was followed. Thus, Section 114, enables the
Court to presume the existence of any fact which it thinks likely to have
happened, regard being had to the common course of natural events, human
conduct and public and private business in their relation to the facts of the
particular case. Consequently, the court can presume that the common
course of business has been followed in particular cases. When applied to
communication sent by post, Section 114 enables the Court to presume that
in the common course of natural events, the communication would have
been delivered at the address of the addressee. But the presumption that is
raised under Section 27 of the General Clauses Act is far stronger presumption.
 Negotiable Instruments, Banking and Insurance 8.35
Further, while Section 114 of the Indian Evidence Act refers to a general
presumption, Section 27 refers to a specific presumption.
Section 27 gives rise to a presumption that service of notice has been
effected when it is sent to the correct address by registered post. In view of
the said presumption, when stating that a notice has been sent by registered
post to the address of the drawer, it is unnecessary to further aver in the
complaint that in spite of the return of the notice unserved, it is deemed to
have been served or that the addressee is deemed to have knowledge of the
notice. Unless and until the contrary is proved by the addressee, service of
notice is deemed to have been effected at the time at which the letter would
have been delivered in the ordinary course of business.
The Supreme Court held that this "Court has already held that when a
notice is sent by registered post and is returned with a postal endorsement
'refused7 or 'not available in the house' or 'house locked' or 'shop closed' or
'addressee not in station", due service has to be presumed (vide Jagdish
Singh v. Nathu Singh; State ofM.P. v. Hira Lai; Raja Kumariv. P. Subbarama
v. Naidu). It is therefore, mainifest that in view of the presumption available
under Section 27 of the Act, it is not necessary to aver in the complaint under
Section 138 of the Act that service of notice was evaded by the accused or that
the accused had a role to play in the return of the notice unserved."
There is no material difference between Section 114 of the Evidence Act
and Section 27 of the General Clauses Act. Therefore, it was held that when
the notice is sent by registered post by correctly addressing the drawer of the
cheque, the mandatory requirement of issue of notice in terms of clause (b)
of proviso to Section 13 8 of the Act stands complied with. It is then for the
drawer to rebut the presumption about the service of the notice and show
that he had no knowledge that the notice was brought to his address or that
the address mentioned on the cover was incorrect or that the letter was never
tendered or that the report of the postman was incorrect. This interpretation
of the provision would effectuate the object and purpose for which proviso
to Section 138 was enacted, namely, to avoid unnecessary hardship to an
honest drawer of a cheque and to provide him an opportunity to make
amends.
Therefore, the appeal was dismissed.
Dashrath Rupsingh Rathod v. State ofMaharashtra & Anr
[2014] 9 SCC 129
(1. Territorial jurisdiction for filing of cheque dishonour complaint is restricted
to the court within whose territorial jurisdiction the offence is committed, which is
the location where the cheque is dishonoured is returned unpaid by the bank on which
 8.36 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
it is drawn. 2. Place of issuance or delivery of the statutory notice or where the
complainan t chooses topresen t the chequefor encashmen t by his bank are not relevan t
for purposes of determining territorial jurisdiction for filing of cheque dishonour
complaints.)
Note: To nullify first part of the decision an amendment was made in the
Negotiable Instruments Act in 2015 and section 142(2) was inserted for this
purpose Section 142(2) provides that the offence under section 138 shall be
tried only by a court within whose local jurisdiction (a) if the cheque is
delivered for collection through an account, the branch of the bank where the
payee or holder in due course, as the case may be, maintains the account, is
situated; or (b) if the cheque is presented for payment by the payee or the
holder in due course otherwise through his account, the branch of the drawee
bank where the drawee maintains his account, is situated.)
Facts
Criminal appeal No. 1593 of 2014 : The Respondent-accused, having
purchased electronic items from the Appellant-company, issued the cheque
in question drawn on UCO Bank, Tangi, Orissa which was presented by the
Complainant-company at State Bank of India, Ahmednagar Branch,
Maharashtra as its branch office wTas located at Ahmednagar. The cheque was
dishonoured by UCO Bank, Tangi, Orissa. A Complaint was filed before
JMFC, Ahmednagar. An application was filed by the Respondent-accused
under Section 177 CrPC questioning the jurisdiction of the JMFC Ahmednagar,
who held that since the demand notice was issued from and the payment was
claimed at Ahmednagar, he possessed jurisdiction to try the Complaint. The
High Court disagreed with the conclusion of the JMFC, Ahmednagar that the
receipt of notice and non- payment of the demanded amount are factors
which will have prominence over the place wherefrom the notice of demand
was issued and held that JMFC, Ahmednagar did not have the territorial
jurisdiction to entertain the Complaint.
Issues :
(i) When offence of dishonour of cheque is committed under section 138 of
the Negotiable Instruments Act, 1881?
(ii) Which court has territorial jurisdiction in case of dishonour of cheque
under section 138 of the Negotiable Instruments Act, 1881?
Decision of the Supreme Court
The Supreme Court quoted section 138 and 142 of the Negotiable
Instruments Act, 1881 for reference. It also quoted sections 177,178 and 179
of the Code of Criminal Procedure, 1973. Section 178 of the Code of Criminal
Procedure explicitly states that every offence shall ordinarily be inquired into
 Negotiable Instruments, Banking and Insurance 8.37
and tried by a Court within whose local jurisdiction is was committed. Section
179 of that Code is of similar tenor. The Supreme Court held as follows :
" (i) An offence under Section 138 of the Negotiable Instruments Act, 1881 is
committed no sooner a cheque drawn by the accused on an account
being maintained by him in a bank for discharge of debt/liability is
returned unpaid for insufficiency of funds or for the reason that the
amount exceeds the arrangement made with the bank.
(ii) Cognizance of any such offence is however forbidden under Section 142
of the Act except upon a complaint in writing made by the payee or
holder of the cheque in due course within a period of one month from the
date the cause of action accrues to such payee or holder under clause (c)
of proviso to Section 138.
(iii) The cause of action to file a complaint accrues to a complainant/payee/
holder of a cheque in due course if
(a) the dishonoured cheque is presented to the drawee bank within a
period of six months from the date of its issue.
(b) If the complainant has demanded payment of cheque amount
within thirty days of receipt of information by him from the bank
regarding the dishonour of the cheque and
(c) If the drawer has failed to pay the cheque amount within fifteen
days of receipt of such notice.
(iv) The facts constituting cause of action do not constitute the ingredients of
the offence under Section 138 of the Act.
(v) The proviso to Section 138 simply postpones/ defers institution of criminal
proceedings and taking of cognizance by the Court till such time cause
of action in terms of clause (c) of proviso accrues to the complainant.
(vi) Once the cause of action accrues to the complainant, the jurisdiction of
the Court to try the case will be determined by reference to the place
where the cheque is dishonoured.
(vii) The general rule stipulated under Section 177 of Code of Criminal
Procedure applies to cases under Section 138 of the Negotiable Instruments
Act. Prosecution in such cases can, therefore, be launched against the
drawer of the cheque only before the Court within whose jurisdiction the
dishonour takes place except in situations where the offence of dishonour
of the cheque punishable under Section 138 is committed along with
other offences in a single transaction within the meaning of Section
220(1) read with Section 184 of the Code of Criminal Procedure or is
covered by the provisions of Section 182(1) read with Sections 184 and
220 thereof." (para 56)
In the course of the Judgement the Supreme Court discussed a number of
cases. Some of the cases are discussed below :
 8.38 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
In K. Bhaskaran v. Sankaran Vaidhyan Balan (1999) 7 SCC 510, the court
held:
"The offence under Section 138 of the Act can be completed only with the
concatenation of a number of acts. The following are the acts which are
components of the said offence: (1) drawing of the cheque, (2) presentation of
the cheque to the bank, (3) returning the cheque unpaid by the drawee bank,
(4) giving notice in writing to the drawer of the cheque demanding payment
of the cheque amount, (5) failure of the drawer to make payment within 15
days of the receipt of the notice.
It is not necessary that all the above five acts should have been perpetrated
at the same locality. It is possible that each of those five acts could be done at
five different localities. But a concatenation of all the above five is a sine qua
non for the completion of the offence under Section 138 of the Code. In this
context a reference to Section 178(d) of the Code is useful. It is extracted
below:
"178. (a)-(c)
(d) where the offence consists of several acts done in different local areas,
it may be enquired into or tried by a court having jurisdiction over any of such
local areas."
Thus it is clear, if the five different acts were done in five different localities
any one of the courts exercising jurisdiction in one of the five local areas can
become the place of trial for the offence under Section 138 of the Act. In other
words, the complainant can choose any one of those courts having jurisdiction
over any one of the local areas within the territorial limits of which any one
of those five acts was done. As the amplitude stands so widened and so
expansive it is an idle exercise to raise jurisdictional question regarding the
offence under Section 138 of the Act."
InShrilshar Alloy Steel Ltd. V. Jayaswals Neco Ltd. (2001) 3 SCC 609, the
dishonoured cheque had been presented for encashment by the complainant/
holder in his bank within the statutory period of six months (now this period
is three months) but by the time it reached the drawer's bank the
aforementioned period of limitation had expired. The question before the
three-judge Bench of the Supreme Court was where the bank within the
postulation of section 138 read with section 3 and 72 of the Negotiable
Instruments was the drawee bank or the collecting bank. It was observed that
non-presentation of the cheque to the drawee bank within the period specified
in the section would absolve the person issuing the cheque of his criminal
liability under section 138 of the Negotiable Instrument Act. This decision
 Negotiable Instruments, Banking and Insurance 8.39
clarifies that the place where a complainant may present the cheque for
encashment would not confer or create territorial jurisdiction, and in this
respect runs counter to the essense of Bhaskaran.
In Prem Chand Vijay Kumar v. Yashpal Singh (2005) 4 SCC 417, instead
of the five Bhaskaran concomitants, only four have been spelt out.
In MosarafHossain Khan v. Bhagheeratha Engg. Ltd. (2006) 3 SCC 658, a
two-judge Bench of the Supreme Court expressed the view that, "where the
territorial jurisdiction is concerned the main factor to be concerned is the
place where the alleged offence was committed". In this case a complaint
under section 138 of the Negotiable Instruments Act was filed and cognizance
was taken by the Chief Judicial Magistrate, Birbhum at Suri, West Bengal for
the dishonour of a number of cheques issued by the accused company which
had its headquarters in Emakulam, Kerala where significantly the accused­
company's bank on whom the dishonoured cheques had been drawn was
located. Several judgements were referred by the court to, but not Bhaskaran.
The third ingrient in Bhaskaran, i.e. the returning of the cheque unpaid by the
drawee bank, was not reflected upon. It was held that cause of action arose
in West Bengal. Similarly, in Om Hemrajni v. State ofU.P. (2005) 1 SCC 617,
the Court held that in the context of sections 177 to 180 of the Code of Criminal
Procedure "For jurisdiction the emphasis is on the place where the offence is
committed".
The court also mentioned three recent decisions of the Supreme Court in
para 33 of the judgement. This para is as follows :
"Three recent decisions need be mentioned at this stage which have
followed Bhaskaran and attempted to reconcile the ratio of that case with the
subsequent decisions in Ishar Alloy Steels and Harman Electronics. In
NishantAgganval v. Kailash Kumar Sharma (2013) 10 SCC 72 this Court was
once again dealing with a case where the complaint had been filed in Court
at Bhiwani in Haryana within whose territorial jurisdiction the complainant
had presented the cheque for encashment, although the cheque was drawn on
a bank at Gauhati in Assam. Relying upon the view taken in Bhaskaran this
Court held that the Bhiwani Court had jurisdiction to deal with the matter.
While saying so, the Court tried to distinguish the three-judge Bench decision
in Ishar Alloy Steels (supra) and that rendered in Harman Electronics case
(supra) to hold that the ratio of those decisions did not dilute the principle
stated in Bhaskaran case. That exercise was repeated by this Court in FIL
Industries Ltd. v. Imtiyaz Ahmad Bhat (2014) 2 SCC 266 and in Escorts Ltd.
v. Rama Mukherjee (2014) 2 SCC 255 which too followed Bhaskaran and held
that complaint under Section 138 Negotiable Instrument Act could be instituted
at any one of the five places referred to in Bhaskaran's case."
 8.40 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
The three-judge Bench in the present case did not subscribe to the view
stated in Bhaskaran. The reasons stated are as follows :
"Section 138 is a penal provision that prescribes imprisonment upto two
years and fine upto twice the cheque amount. It must, therefore, be interpreted
strictly, Section 138 is in two parts. The enacting part of the provision makes
it abundantly clear that what constitutes an offence punishable with
imprisonment and/or fine is the dishonour of a cheque for insufficiency of
funds etc. in the account maintained by the drawer with a bank for discharge
of a debt or other liability whether in full or part. The language used in the
provision is unambiguous and the ingredients of the offence clearly discernible
viz. (a) Cheque is drawn by the accused on an account maintained by him
with a banker, (b) The cheque amount is in discharge of a debt or liability and
(c) The cheque is returned unpaid for insufficiency of funds or that the
amount exceeds the arrangement made with the bank. But for the proviso that
comprises the second part of the provision, any dishonour falling within the
four comers of the enacting provision would be punishable without much
ado. The proviso, however, draws an exception to the generality of the
enacting part of the provision, by stipulating two steps that ought to be taken
by the complainant holder of the cheque before the failure of the drawer gives
to the former the cause of action to file a complaint and the competent Court
to take cognizance of the offence. These steps are distinct from the ingredients
of the offence which the enacting provision creates and makes punishable. It
follows that an offence within the contemplation of Section 138 is complete
with the dishonour of the cheque but taking cognizance of the same by any
Court is forbidden so long as the complainant does not have the cause of
action to file a complaint in terms of clause (c) of the proviso read with Section
142"
The Court further said :
"A proper understanding of the scheme underlying section 138 of the
Negotiable Instruments Act would thus make it abundantly clear that while
the offence is complete upon dishonour, prosecution for such offence is
deferred till the time the cause of action for such prosecution accuses to the
complainant."
In view of the view above, the appeal was allowed with the direction that
the complaint be returned to the complainant for further action in accordance
with law.
Rangappa v. Sri Mohan
(2010) 11 SCC 441
(1. Section 138 can be attracted in case of dishonour of post-dated cheque on
account of "stop payment" instructions sent by drawer to his bank. 2. If the accused
 Negotiable Instruments, Banking and Insurance 8.41
is able to raise a probable defence which creates doubts about the existence ofa legally
enforceable debtor liability, the prosecution canfail. In thiscase, the appellant wasnot
able to contest the existence of a legally enforceable debt or liability. Hence, his
conviction was held proper.)
Facts
As per the respondent-complainant, the chain of facts unfolded in the
following manner. In October 1998, the accused had requested him for a hand
loan of Rs. 45,000 in order to meet the construction expenses. In view of their
acquaintance, the complainant had paid Rs. 45,000 by way of cash. On
receiving this amount, the appellant-accused had initially assured repayment
by October 1999 but on the failure to do so, he sought more time till December
2000. The accused had then issued a cheque bearing No. 0886322, post-dated
for 8-2-2001 for Rs. 45,000 drawn on Syndicate Bank, Kudremukh Branch.
Consequently, on 8-2-2001, the complainant had presented this cheque
through Karnataka Bank, Ranebennur for encashment. However, on 16-2-
2001 the said Bank issued a return memo stating that the 'Payment has been
stopped by the drawer' and this memo was handed over to the complainant
on 21-2-2001. The complainant had then issued notice to the accused in this
regard on 26-2-2001. On receiving the same, the accused failed to honour the
cheque within the statutorily prescribed period and also did not reply to the
notice sent in the manner contemplated under Section 138 of the Act.
Following these developments, the complainant had filed a complaint (under
Section 200 of the Code of Criminal Procedure) against the accused for the
offence punishable under Section 138 of the Act.
The appellant-accused had raised the defence that the cheque in question
was a blank cheque bearing his signature which had been lost and that it had
come into the hands of the complainant who had then tried to misuse it. The
accused's case was that there was no legally enforceable debt or liability
between the parties since he had not asked for a hand loan as alleged by the
complainant.
The trial judge found in favour of the accused by taking note of some
discrepancies in complainant's version. As per the trial judge, in the course
of the cross-examination the complainant was not certain as to when the
accused had actually issued the cheque.
However, an appeal against acquittal, the High Court reversed the
findings and convicted the appellant-accused. The High Court in its order
noted that in the course of the trial proceedings, the accused had admitted
that the signature on the impugned cheque was indeed his own. Once this fact
has been acknowledged, section 139 of the Negotiable Instrument Act
mandates a presumption that the cheque pertained to a legally enforceable
 8.42 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
debt or liability. This presumption is of rebuttable nature and onus is then on
the accused to raise a probable defence. With regard to the present facts, the
High Court found that the defence raised by the accused was not probable.
The accused appealed to the Supreme Court.
Issue before the Supreme Court
Whatis the proper interpretation of section 139 of the Negotiable Instrument
Act which shifts the burden of proof on to the accused in respect of cheque
bouncing cases?
Decision of the Supreme Court
The Supreme Court agreed with the High Court's view that the accused
did not raise a probable defence. The Court said, "The defence by the
appellant-accused of the loss of a blank cheque was taken up belatedly. In the
"stop payment" instructions sent to his Bank, the accused had mentioned the
date of the cheque different to that of the complainant's version. Moreover,
the High Court rightly noted that if the accused had indeed lost a blank
cheque bearing his signature, the question of his mentioning the date of the
cheque could not arise. Furthermore, the instructions to "Stop payment" had
not even mentioned that the cheque had been lost. A perusal of the trial record
also shows that the accused appeared to be aware of the fact that the cheque
was with the complainant. Furthermore, the very fact the accused had failed
to reply to the statutory notice under section 138 of the Act leads to the
inference that there was merit in the complainant's version. Apart from not
raising a probable defence, the appellant accused was not able to contest the
existence of a legally enforceable debt or liability."
The Court further said, "the fact that the accused had made regular
payments to the complainant in relation to the construction of his house does
not preclude the possibility of the complainant having spent his own money
for the same purpose. As per the record of the case, there was a slight
discrepancy in the complainant's version, insofar as it was not clear whether
the accused had asked for a hand Ioan to meet the construction-related
expenses or whether the complainant had incurred the said expenditure over
a period of time. Either way, the complaint disclosed the prima facie existence
of a legally enforceable debt or liability since the complainant has maintained
that his money was used for the construction expenses. Since the accused did
admit that the signature on the cheque was his, the statutory presumption
comes into play and the same has not been rebutted even with regard to
materials submitted by the complaint."
Hence, the Supreme Court did not find any reason to interfere with the
final order of the High Court, which recorded a finding of conviction against
the appellant.
 Negotiable Instruments, Banking and Insurance 8.43
Regarding the standard of proof for rebutting the presumption the Court
said that it is a settled position that when an accused has to rebut the
presumption under section 139, the standard of proof for doing so is that of
"preponderance of probabilities". Therefore, if the accused is able to raise a
probable defence which creates doubts about the existence of a legally
enforceable debt or liability, the prosecution can fail. The accused can rely on
the materials submitted by the complainant in order to raise such a defence.
Laxmi Dyechem v. State of Gujarat and Others
(2012) 13 SCC 375
(Dishonour ofa cheque on the ground that the "Signature do not match" or that
the "image is notfound" which too implies that specimen signatures do not match the
signature on the cheque can constitute a dishonour within the meaning ofsection 138
of the Negotiable Instrument Act.)
Facts
The appellant is a proprietorship firm engaged in the sale of chemicals. It
has over the past few years supplied Naphthalene Chemicals to the respondent­
company against various invoices and bills issued in that regard. The
appellant's case is that a running account was opened in the books of account
of the appellant in the name of the respondent-company in which the value
of the goods supplied was debited from time to time as per the standard
accounting practice. A sum of Rs.4,91,91,035/- (Rupees Four Crore Ninety
One Lac Ninety One Thousand Thirty Five only) was according to the
appellant outstanding against the respondent-company in the former's books
of accounts towards the supplies made to the latter. The appellant's further
case is that the respondent-company issued under the signatures of its
authorised signatories several post dated cheques towards the payment of
the amount aforementioned. Several of these cheques (one hundred and
seventeen to be precise) when presented were dishonoured by the bank on
which the same were drawn, on the ground that the drawers' signatures were
incomplete or that no image was found or that the signatures did not match.
Ihe appellant informed the respondents about the dishonour in terms of a
statutory notice sent under Section 138 and called upon them to pay the
amount covered by the cheques. It is common ground that the amount
covered by the cheques was not paid by the respondents although according
io the respondents the company had by a letter dated 30.12.2008, informed
he appellant about the change of the mandate and requested the appellant
o return the cheques in exchange of fresh cheques. It is also not in dispute that
fesh cheques signed by the authorised signatories, according to the new
nandate to the Bank, were never issued to the appellant ostensibly because
he offer to issue such cheques was subject to settlement of accounts, which
 8.44 Penalties in Case of Dishonour or Cheques for Insufficiency of Funds
had according to the respondent been bungled by the outgoing authorised
signatories. The long and short of the matter is that the cheques remained
impaid despite notice served upon the respondents that culminated in the
filing of forty different complaints against the respondents under Section 138
of the Negotiable Instruments Act before the learned trial court who took
cognizance of the offence and directed issue of summons to the respondents
for their appearance. It was at this stage that Special Criminal Applications
No.2118 to 2143 of 2009 were filed by Shri Mustafa Surka accused No.5 who
happened to be one of the signatories to the cheques in question. The principal
contention urged before the High Court in support of the prayer for quashing
of the proceedings against the signatory to the cheques was that the dishonour
of cheques on account of the signatures 'not being complete' or 'no image
found' was not a dishonour that could constitute an offence under Section 138
of the Negotiable Instrument Act.
Relying on the decision of the Supreme Court in Vinod Tanna and Another
v. Zaher Siddique and Others (2002} 7 SCC 541, the High Court held that
dishonour of a cheque on the ground that the signatures of the drawer of the
cheque do not match the specimen signatures available with the bank, would
not attract the penal provisions of section 138 of the Negotiable Instrument
Act, 1881.
Issue
Whether the provisions of section 138 of the Negotiable Instrument Act
are attracted in case where a cheque is dishonoured on the ground that the
signatures of the drawer of the cheque do not match the specimen signatures
available with the bank.
Decision of the Supreme Court
The Supreme Court set aside judgement and order passed by the High
Court and dismissed the special criminal applications filed by the respondents.
The Court also ordered that the trial court shall proceed with the trial of the
complaints filed by the appellants expeditiously.
The Supreme Court referred to a number of cases in course of its judgement.
Some of these cases are discussed below :
In Modi Cements Ltd. V. Kuchil Kumar Nandi : (1998) 3 SCC 249, the
question was whether dishonour of cheque on the ground that the drawer
had stopped payment was a dishonour punishable under section 138 of the
Negotiable Instrument Act. The Court held in this case that even though the
cheque is dishonoured by reason of "stop-payment" instruction an offence
under section 138 could still be made out. The presumption under section 139
is attracted in such a case. The accused can show that the "stop payment"
 Negotiable Instruments, Banking and Insurance 8.45
instructions were not issued because of insufficiency or paucity of funds but
for other valid causes including that there was no existing debt or liability at
the time of presentation of cheque for encashment.
In NEPC Micon Ltd. v. Magna Leasing Ltd. (1999) 4 SCC 253, the cheques
issued by the appellant-company in discharge of its liability were returned by
the company with the comments 'account closed'. The question was whether
a dishonour on that ground for that reason was culpable under section 138 of
the Negotiable Instrument Act. Relying upon a three-judge Bench decision of
this Court in Modi CementsLtd. v. Kuchil Kumar Nandi (1998) 3 SCC249, this
Court held that the expression " the amount of money................... is insufficient
to honour the cheque" is a genus of which the expression 'account being
closed' is a specie.
InM.M.T.C. Ltd. and Another v. Medchl Chemicals and Pharma (P.) Ltd.
and Another (2002) 1 SCC 234, it was held that in cases where the dishonour
was on account of "stop payment" instructions of the drawer, a presumption
regarding the cheque being for consideration would arise under section 139
of the Act. To the effect was the decision of the Supreme Court in Goaplast
(P.) Ltd. v. Chico Unsula D'souza and Another: (2003) 3 SCC 232, where the
Court held that "Stop payment" instructions and consequent dishonour of
the cheque of a post-dated cheque attracts provisions of section 138.
A three-judge Bench of this Court in Rangappa v. Sri Mohan (2010) 11
SCC 441 approved the above decision and held that failure of the drawer of
the cheque to put up a probable defence for rebutting the presumption that
arises under Section 139 would justify conviction even when the appellant
drawer may have alleged that the cheque in question had been lost and was
being misused by the complainant.
After discussing the above cases the Supreme Court said :
"The above line of decisions leaves no room for holding that the two
contingencies envisaged under Section 138 of the Act must be interpreted
strictly or literally. We find ourselves in respectful agreement with the
decision in NEPC Micon Ltd. (supra) that the expression "amount of money
.................. is insufficient" appearing in Section 138 of the Act is a genus and
dishonour for reasons such "as account closed", "payment stopped", "referred
to the drawer" are only species of that genus. Just as dishonour of a cheque
on the ground that the account has been closed is a dishonour falling in the
first contingency referred to in Section 138, so also dishonour on the
ground that the "signatures do not match" or that the "image is not found",
which too implies that the specimen signatures do not match the signatures
on the cheque would constitute a dishonour within the meaning of Section
138 of the Act. This Court has in the decisions referred to above taken note of
situations and contingencies arising out of deliberate acts of omission or
 8.46 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
commission on the part of the drawers of the cheques which would inevitably
result in the dishonour of the cheque issued by them. For instance this Court
has held that if after issue of the cheque the drawer closes the account it must
be presumed that the amount in the account was nil, hence insufficient to
meet the demand of the cheque. A similar result can be brought about by the
drawer changing his specimen signature given to the bank or in the case of a
company by the company changing the mandate of those authorised to sign
the cheques on its behalf. Such changes or alteration in the mandate may be
dishonest or fraudulent and that would inevitably result in dishonour of all
cheques signed by the previously authorised signatories. There is in our view
no qualitative difference between a situation where the dishonour takes
place on account of the substitution by a new set of authorised signatories
resulting in the dishonour of the cheques already issued and another
situation in which the drawer of the cheque changes his own signatures or
closes the account or issues instructions to the bank not to make the
payment. So long as the change is brought about with a view to preventing
the cheque being honoured the dishonour would become an offence under
Section 138 subject to other conditions prescribed being satisfied. There
may indeed be situations where a mismatch between the signatories on the
cheque drawn by the drawer and the specimen available with the bank may
result in dishonour of the cheque even when the drawer never intended to
invite such a dishonour. We are also conscious of the fact that an authorised
signatory may in the ordinary course of business be replaced by a new
signatory ending the earlier mandate to the bank. Dishonour on account of
such changes that may occur in the course of ordinary business of a company,
partnership or an individual may not constitute an offence by itself because
such a dishonour in order to qualify for prosecution under Section 138 shall
have to be preceded by a statutory notice where the drawer is called upon and
has the opportunity to arrange the payment of the amount covered by the
cheque. It is only when the drawer despite receipt of such a notice and despite
the opportunity to make the payment within the time stipulated under the
statute does not pay the amount that the dishonour would be considered a
dishonour constituting an offence, hence punishable. Even in such cases, the
question whether or not there was a lawfully recoverable debt or liability for
discharge whereof the cheque was issued would be a matter that the trial
Court will examine having regard to the evidence adduced before it and
keeping in view the statutory presumption that unless rebutted the cheque is
presumed to have been issued for a valid consideration/'

EXAMINATION QUESTIONS
1. When dishonour of a cheque is an offence?
Negotiable Instruments, Banking and Insurance 8.47
2. A cheque was given to B as his birthday gift. It was duly presented
by B but returned with the remarks "insufficient funds". Can B
prosecute A under section 138 of Negotiable Instrument Act, 1881.
Hint: No. There must be legally enforceable debt which is not the case
here.
3. (a) When dishonour of a cheque is an offence?
(b) Whether dishonour of cheque in the following cases in an
offence?
(i) A cheque given on one's birthday dishonoured due to
insufficient funds,
(ii) X, the drawer of a cheque, issued a cheque to meet a debt
without any funds on date of issue in the bank.
Hints: (i) No.
(ii) Depends on the circumstances. If the money is deposited in the
bank or arrangement is made with the bank so that the cheque can be
honoured at the time of presentment, then it is not an offence;
otherwise it is (Modi Cements Ltd. v. AT.K. Nandi, AIR 1998, SC
1057).
4. Discuss the amendments made in the Negotiable Instruments Act in
2002.
Notes: The Negotiable Instruments Act, 1881 has been amended by
the Negotiable Instruments (Amending arid Miscellaneous
Provisions) Act, 2002 as the existing provisions in the Negotiable
Instruments Act, 1881, namely sections 138 to 142 have been found
deficient in dealing with dishonour of cheques. The Act 55 of2002 has
made, the following amendments in the Negotiable Instrument Act,
1881, namely:
(i) to increase the punishment as prescribed in section 138 from
one year to two years;
(ii) to increase the period as prescribed in section 138 for issue of
notice by the payee to the drawer from 15 days to 30 days;
(iii) to exempt those directors from prosecution under section 141 of
the Act who are nominated as directors of a company by virtue
of their holding any office or employment in the Central
Government or State Government or a financial corporation
owned or controlled to the Central Government, or the State
Government, as the case may be.
8.48 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
(iv) to provide discretion to the Court under section 142 to waive
the period of one month if the complainant satisfies the Court
that he had sufficient cause for not making a complaint within
one month of the date on which the cause of action arises under
clause (c) of the proviso to section 138.
(v) to give power to court to try cases summarily;
(vi) to provided for mode of service of summons;
(vii) to provide for evidence on affidavit;
(viii) to make bank's slip prima facie evidence of certain facts; and
(ix) to make the offence compoundable.
5. When is dishonour of a cheque an offence? What is the procedure to
be followed to file a criminal complaint in such a case?
6. "The object of bringing Section 138 on statute book is to inculcate
faith in the efficacy of banking operations and credibility in transacting
business on negotiable instruments."
I
 Before 1936, there were no special provisions of law in respect of banking
companies which used to be governed by the Indian Companies Act, 1930,
except the Reserve Bank of Indian Act which itself was passed in 1934 and
consequently the Reserve Bank of India was established on April 1,1935. In
1936 some new provisions were introduced in the Indian Companies Act,
1913 relating to companies. But these provisions proved inadequate and the
necessity to bring a new legislation for banking companies was felt. Abuse
of powers by persons controlling some banks, absence of measures for
safeguarding the interests of depositors and economic interest of the country
were some of the causes to bring a new legislation which ultimately came
into force on 16th March, 1949 in the form of the Banking Companies Act,
1949. The Act was passed to consolidate and amend the law relating to
banking. The Act was later amended in 1965 in the form of the Banking
Companies Act, 1949. The Act was passed to consolidate and amend the law
relating to banking. The Act was later amended in 1965 and a new name "The
Banking Regulation Act, 1949" was given to it. The Act extends to the whole
of India. The provisions of the Act are in addition to and not, except as
provided in the Act, in derogation of the Companies Act, 2013 and any other
law for the time being in force. The Act does not apply to a primary
agricultural credit society, a co-operative land mortgagee bank and any'
other co-operative society, except in the manner and to the extent specified
in part.V of the Act. Section 4 of the Act gives powers to the Central
Government and the Reserve Bank of India to suspend the operation of all
or any of the provisions of the Act, either generally or in relation to any
specified banking company for a specified period mentioned in the section.

Meaning of “Banking” and “Banking Company”

According to Halsbury's Laws of England "A 'banker' is an individual,
partnership or corporation, whose sole or predominating business is banking,
that is the receipt of money on current or deposit account and the payment
of cheques drawn by and the collection of cheques paid in by a customer."
9.3
 9.4 Control of Banking System by Reserve Bank of India
Section 5(c) of the Banking Regulation Act, 1949 states : "banking
company" means any company which transacts the business of banking in
India.
Section 5(b) of the Banking Regulations Act, 1949 states : "banking"
means the accepting for the purpose of lending or investment, of deposits of
money from the public repayable on demand or otherwise, and withdra wable
by cheque, draft, order or otherwise.
Thus, primary functions of a banking company or_abank or abanker are:
1. Acceptance of deposits of money from the public.
2. Lending of the deposits of money.
3. Investment of the deposits of money.
4. Repaying the deposits on demand or otherwise
5. Permitting withdrawal of deposits by cheque, draft, order or
otherwise.
Forms of Business in which banking company may engage
In addition to the business of banking, a banking company may engage
in any one or more forms of business as specified in S. 6(1) of the Banking
Regulation Act, 1946. Some of these are as follows :
(a) the borrowing or raising of money;
(b) the lending or advancing of money either with or without security;
(c) the drawing, making, accepting, discounting, buying, selling,
collecting and dealing in bills of exchange, hoondies, promissory
notes, drafts, bills of lading, railway receipt, warrant, debentures,
certificates, scripts and other instruments and securities whether
negotiable or not;
(d) granting and issuing of letters of credit, traveller's cheques;
(e) the buying, selling and dealing in bullion;
(f) the buying and selling of foreign exchange;
(g) the acquiring, holding, issuing on commission, underwriting and
dealing in stock, funds, shares, debentures, debenture stock, bonds,
securities and investments of all kinds;
(h) the negotiating of Ioans and advances;
(i) receiving of all kinds of bonds, scripts or valuables on deposit or for
safe custody or otherwise;
(j) the providing of safe deposit vaults;
(k) the collecting and transmitting of money and securities;
The Banking Regulation Act, 1949 9.5
(1) acting as agents for any government or local authority or any other
person or persons;
(m) contracting for public and private loans and negotiating and issuing
the same;
(n) the effecting, insuring, guaranteeing, underwriting, participating in
managing and carrying out of any issue and lending of money for
the purpose of such issue;
(o) carrying on and transacting every kind of guarantee and indemnity
business;
(p) managing,-selling and realising any property which may come into
the possession of the company in satisfaction or part satisfaction of
any of its claims; and
(q) doing of all such otEer things as one incidental or conducive to the
promotion or advancement of the business of the company.
Section 8 of the Banking Regulation Act, 1949 states that no banking
company shall directlv or indirectly deal in buying or selling or bartering of
goods, except in connection with the realisation of security given to or held
by it.
Classification of Banks
1. On the basis of their area of operation, the banks can be classified as
follows:

Banks

1 I 1
Co-operative Banks Rural Banks Commercial Banks

(These banks are formed (Gramin Banks) (These banks are

to enhance co-operation (These banks exist in formed for earning
among specific group some specific area such profits. They operate
of persons.) as a district.) throughout the world.)

I
Domestic Banks Foreign Banks
(These are the banks (These are banks which
which are incorporated are incorporated outside
in India.) India and operate in India.)
 9.6 Control of Banking System by Reserve Bank of India
2. On the basis of the banks listed in the Second Schedule of the Reserve
Bank of India Act, 1934, the banks can be classified as follows :
Banks

Scheduled Banks Non-scheduled Banks

These are the banks which are included in the (These are the banks which are
aforesaid Schedule. The Reserve Bank of India not listed in the aforesaid
gives certain facilities to the scheduled banks such Schedule, namely 'Lord Krishna
as (i) the pur-chase, sale and re-discounting of Bank' and 'Sikkim Bank'.)
certain bills of exchange or promissory "notes; (ii)
purchase and sale of foreign exchange; (Hi)
purchase, sale and re-discounting of foreign bills
of exchange; (iv) making of loans and advances.
These banks include state co-operative banks,
rural or gramin hanks, public sector banks, private
hanksand foreign banks. Examples of these banks
are : Andhra Pradesh State Co-operative Bank
Ltd., Hyderabad; Manipur Rural Bank, Imphal;
Himachal Gramin Bank, Mandi; Hindon Gramin
Bank, Ghaziabad (Uttar Pradesh); Bank of Baroda;
Bank of India; State Bank of India; Punjab National
Bank; Oriental Bank of Commerce; Axis Bank
Ltd.; ICICI Bank Ltd.; HDFC Bank Ltd.; Citi Bank
N.A.; Deutche Bank A.G.; HongKong and
Shanghai Banking Corporation. The term
"Scheduled banks" includes public sector banks,
private banks and foreign banks.
Requirement as to Minimum Paid up Capital and Reserves
The provisions in respect of minimum paid up capital and reserves can
be divided into the following two main categories:
1. For companies incorporated outside India; and
2. For companies incorporated in India.
Companies incorporated outside India.—Section 11 of the Banking
Regulation Act, 1949 states that in case of a banking company incorporated
outside India, the aggregate value of its paid up capital and free reserves shall
not be less than 15 lakhs of rupees if it has no place of business in Bombay
(Mumbai) or Calcutta (Kolkata). If the banking company incorporated
outside India has a place of business jn Bombay or Calcutta or both, then the
aggregate value of its paid up capital and reserves shall not be less than 20 lakhs
of rupees. Further, the banking company shall deposit and keep deposited
with the Reserve Bank of India either in cash or in the form of unencumbered
 The Banking Regulation Act, 1949 9.7

approved securities, partly in cash and partly in the form of such securities
an amount which shall not be less than the minimum required as stated
above.
Companies incorporated in India.—Section 11 of the Banking Regulation
Act, 1949 the requirement as to minimum paid up capital and reserves are
as follows:
1. If a banking company has a place of business in more than one
state, but having no place of business in Bombay (Mumbai).or
Calcutta (Kolkata), the aggregate amount of paid up capital and
reserves shall not be less than 5 lakhs of rupees. If a banking
company has a place of business in more than one state and also have
a place of business in Bombay or Calcutta or both, the aggregate
amount of paid up capital and reserve shall not be less than 10 lakhs
of rupees.
2. If a banking company has all its places of business in one state
none of which is situated in the city of Bombay or Calcutta, the
aggregate value of its paid up capital and reserves shall not be less
than 1,00,000 rupees in respect of its principal place of business plus
10,000 rupees in respect of each of its other places of business
situated in the same district in which it has a principal of business,
plus 25,000 rupees in respect of each place of business situated
elsewhere in the state otherwise than in the same district. This is
subject to a total of 5,00,000 rupees. If a banking company has only
one place of business and it is not in Bombay or Calcutta,
therequirementrfor aggregate value of paid up capital and reserves
is 50,000 rupees.
3. If a banking company has all its places of business in one state, one
or more of which is or are situated in the city of Bombay or Calcutta, z
the aggregate amount of paid up capital and reserves shall not be
less than 5 lakhs of rupees, plus 25,000 rupees in respect of each
place of business situated outside the city of Bombay or Calcutta, as
the case may be. This is subjectto a total of ten lakhs of rupees.

Regulation of Paid up Capital, Subscribed Capital and Authorised

Capital and Voting Rights of shareholders
Section 12 of the Banking Regulation Act, 1949 provides as follows:
1. Subscribed capital of the company should not be less than one-half
of the authorised capital.
2. Paid up capital should not be less than one-half of-the subscribed
capital.
 9.8 Control of Banking System by Reserve Bank of India
3. The capital of a banking company should comprise of ordinary
shares only; or of ordinary shares or equity shares and such
preferential shares as have been issued prior to 1st day of July, 1944
4. The voting rights of a shareholder on poll la respect of shares held
by him shall not be in excess of 10% of the total voting rights of all
the shareholders of the banking company, There is a proposal to
increase this limit.

Restrictions as to payment of Dividend

Section 15 of the Banking Regulation Act, 1949 provides that no hanking
company shall pay any dividend on its shares until all its capitalised
expenses (irmludmg preliminary expanses, organisation expenses, share­
selling commission, brokerage, amounts of losses incurred and any other
items of expenditure not represented by tangible assets) have been completely
written off.
However, a banking company may pay dividends on its shares without
writing off—
(i) the depreciation, if any, in the value of its investment in approved
securities in any case where such depreciation lias not actually been
capitalised or otherwise accounted for as a loss;
(ii) the depreciation, if any, in the value of its investments in shares,
debentures or bonds (other than approved securities) in any case
where adequate provision for such depreciation has been made to
the satisfaction of the auditor of the banking company;
(iii) the bad debts, if any, in any case where adequate provision for such
debts has been made to the satisfaction of the auditor of the banking
company;

Statutory Reserve Fund

Section 17 of the Banking Regulation Act, 1949 lays down that every
banking company incorporated in India shall create a reserve fund and shall,
out of the balance of profit of each year as disclosed in the profit and loss
account and before any dividend is declared, transfer to the reserve fund a
sum equivalent to not less than 20% of such profit. The Reserve Bank of India
advises the banks, from time to time, to transfer high percentage to the
statutory reserve fund. The Institute of Chartered Accountants of India has
advised the CA students to assume this equal to 25% for solving questions.
The Reserve Bank of Indiahas asked the banks to transfer higher percentage
(z.e. 25% of the net profit) to the reserve fond, to strengthen the financial
 The Banking Regulation Act, 1949 . 9.9
position of the banks in certain eases. As stated above, transfer to reserve
fund should be made before declaration of any dividend.

Cash Reserve of Schedule Banks to be kept with the Reserve Bank of

India
The Cash Reserve Ratio (CRR) is the percentage of banks' deposits,
which they must keep as cash with the central bank. Section 42 of the Reserve
Bank of India Act, 1934 provides that every bank included in the Second
Schedule of the Reserve Bankmf India Act, 1934 (i.e. Scheduled banks), shall
maintain with the Reserve Bank of India an average daily balance the
amount of which shall not be less than such per cent of the total of the
demand arid time liabilities in India of such bank As the Reserve Bank of
India, from time to time, having regard to the needs of securing the
monetary stability in the country, notify in the Gazette of India. In other
words, every schedule bank should have prescribed percentage of net credit
deposits as its cash reserve with RBI on every alternate Friday. Such a
percent is called cash reserve ratio. This ratio varies, from time to time. For
the purposes of this section, "average daily balance" shall mean the average
of the balances held at the close of the business of each day of a fortnight;, and
fortnight shall mean the period from Saturday to the second following
Friday, both days inclusive. Thus, there is a lag of two weeks in the
maintenance of stipulated CRR. In March, 2016 prescribed percentage was
4% (with effect from the fortnight beginning from February 9, 2013).

Cash Reserve in case of Non-Scheduled Banks

Accordmg to. Section 18 of the Banking Regulation Act, 1949, every non­
scheduled bank, shall maintain in India by way of cash reserve with itself
or by way of balance in a current account with the Reserve Bank, or by way
of net balance in current accounts or in one or more of the aforesaid ways,
a sum equivalent to at least 8% of the total of its demand and time
liabilities in India as on the last Friday of the second preceding fortnight
and shall submit to the RBI before the 20th day of every month a return
showing the amount so held on alternate Friday during a month with
particulars of its demand and time liabilities in India on such Fridays, or if
any such Friday is a public holiday under the Negotiable Instruments Act,
1881, at the close of the business on the preceding working day.

Statutory Liquidity Ratio

Section 24 of the Banking Regulation Act, 1949 provides as follows : A
Scheduled bank, in addition to the average daily balance which it is, or may
be, required to maintain under section 42 of the Reserve Bank of India Act,
1934 and everv nthpr hanVina u— —u------------
 9.10 Control of Banking System by Reserve Bank of India
which it is required to maintain under section 18 of the Banking Regulation
Act, 1949, shall maintain in India assets, the value of which shall not be
less than such percentage not exceeding 40%, of the total demand and time
liabilities in India as on the last Friday of the second preceding fortnight
as the Reserve Bank may, by notification in the Official Gazette, specify
from time to time and such assets shall be maintained in such form and
manner, as may be specified in such notification. This prescribed percentage
was earlier 24% and it has been reduced by one percentage point in second
half of calendar year 2012 to 23%, later, it was further reduced. In March,
2016, statutory liquidity ratio Was 21.5%.
The specified assets for this purpose are:
1. Cash in hand
2. Cash with RBI in Non-current Account
3. Cash with other banks
4. Money at call and short notice
5. Gold
6. Unencumbered investments

Capital Adequacy Ratio

Capital adequacy ratio is a key indicator of a bank's financial strength.
The Reserve Bank of India decided in April, 1992 to introduce a risk asset
ratio system in line with Capital Adequacy Norms prescribed by Basel
Commi ttee. Accordingly, every bank maintains the capital adequacy ratio as
prescribed by the Reserve Bank of India in every quarter. Initially it was fixed
at 8%. All banks in India were to achieve this capital adequacy ratio of at least
8% by March 31,1996. Later it was raised to 9%. it is expected to go upto 12%
in a phased manner.
It is calculated as follows :
Capital Employed
Capital Adequacy Ratio =--------------------------------- x 100
Risk Weighted Assets

Restrictions on Loans and Advances

S. 20(1) provides that no banking company shall—
(a) grant any loans or advances on the security of its own:
(b) enter into any commitment for granting any loan or advance to or on
behalf of
■ (i) any of its directors,
 The Banking Regulation Act, 1949 9.11
(ii) any firm in which any of its directors is interested as partner,
manager, employee or guarantor, or
(iii) any company (except a subsidiary of the banking company or
a company registered under S. 25 of the Companies Act, 1956
or a Government Company) of which any of the directors of
the banking company is a director, managing agent, manager,
employee or guarantor or in which he holds substantial
interest
(iv) any individual in respect of whom any of its directors is a
partner or guarantor.
The Explanation to S. 20 provides that "loan or advance" shall not include
any transaction which the Reserve Bank may specify by general or special
order as not being a loan or advance for the purpose of this section. It further
states that in case any question arises whether any transaction is a loan or
advance for the purpose of this section, it shall be referred to the Reserve
Bank whose decision thereon shall be final.
Section 20A provides that a banking company shall not, except with the
prior approval of the Reserve Bank of India, remit in whole or in part any
debt due to it by:
(a) any of its directors, or
(b) any firm or company in which any of its directors is interested as
director, partner, managing agent or guarantor, or
(c) any individual, if any, of its directors is his partner or guarantor.
Any remission made in contravention of the above provisions shall be
void and of no effect.

Power of Reserve Bank to Control Advances by Banking Companies

Section 51 empowers the Reserve Bank to control the advances by
banking companies in the public interest or in the interest of depositors or if
necessitated by the banking policy. The Reserve Bankin this connection may
give directions to the banking companies, either generally or to any banking
company or group of banking companies in respect of the purpose, margins,
maximum amount and rates of interest for such advances.

Licensing of Banking Companies

Section 22 provides that every banking company must obtain a licence
before commencing banking business in India from the Reserve Bank of
India. The section is reproduced below:—
9.12 Control of Banking System by Reserve Bank of India
"(1) Save as hereinafter provided, no company shall carry on banking
business in India unless it holds a licence issued in that behalf by the
Reserve Bank and any such licence may be issued subject to such
conditions as the Reserve Bank may think fit to impose.
(2) Every banking company in existence on the commencement of this
Act, before the expiry of six months from such commencement, and
every other company before commencing banking business in India
shall apply in writing to the Reserve Bank for a licence under this
section.
Provided that in the case of banking company in existence on the
commencement of this Act, nothing in sub-section (1) shall be
deemed to prohibit the company from carrying on banking business
until it is granted a licence in pursuance of this section or is by notice
in writing informed by the Reserve Bank that a licence cannot be
granted to it.
Provided further that the Reserve Bank shall not give a notice as
aforesaid to a banking company in existence on the commencement
of the Act before the expiry of the three years referred to in sub­
section (l) of Section 11 or of such further period as the Reserve Bank
may under that sub-section think fit to allow.
(3) Before granting any licence under this section, the Reserve Bank
may be required to be satisfied by an inspection of the books of the
company or otherwise that all or any of the following conditions are
fulfilled, namely:—
(a} that the company is or will be in a position to pay its present
or future depositors in full as their claims accrue;
(b) that the affairs of the company are not being or not likely to
be conducted in a manner detrimental to the interests of its
present or future depositors;
(c) in the case of a company incorporated outside India that the
carrying on of banking business by such company in India
will be in the public interest and that the Government or law
of the country in which it is incorporated does not discriminate
in any way against banking companies registered in India
and that the company complies with all the provisions of the
Act, applicable to banking companies incorporated.
(4) The Reserve Bank may cancel a licence granted to a bankingcompany
under this section:
 The Banking Regulation Act, 1949 9.13

(i) if the company ceases to carry on banking business in India;,

or
(ii) if the company at any time fails to comply with any of the
conditions imposed upon it under sub-section (1); or (iii) if at
any time, any of the conditions referred to in sub (3) is not
fulfilled:
Provided that before cancelling a licence under clause (ii?) of this
sub-section on the ground that the banking company has failed to
comply with or has failed to fulfil any of the conditions referred to
therein, the Reserve Bank unless it is of the opinion that the delay
will be prejudicial to the interests of the company's depositors or the
public, shall grant to the company on such terms as it may specify an
opportunity of taking the necessary steps for complying with or
fulfilling such condition.
(5) Any banking company aggrieved by the decision of the Reserve
Bank cancelling a licence under this section may, within thirty days
from the date on which such decision is communicated to it, appeal
to the Central Government
(6) The decision of the Central Government where an appeal has been
preferred to it under sub-section (5) of the Reserve Bank where no
such appeal has been preferred shall be final/'

Restriction on Opening of New, and Transfer of Existing Place of

Business
Section 23 empowers the Reserve Bank to control the opening of new and
transfer of existing place of business. These restrictions do not apply to the
opening for a period not exceeding one month of a temporary place of
business for the purpose of affording banking facilities to the public on the
occasion of an exhibition, a conference or a mela or any other like occasion
within a town, city or village or the environs thereof within which the
banking company already has a place of business.
Before granting any permission under this section, the Reserve Bank
may required to be satisfied by an inspection under S. 35 or otherwise, as to
the financial condition and history of the company, the general character of
its management, the adequacy of its capital structure and earning prospects
and that public interest will be served by the opening or, as the case may be,
change of location, of the place of business.
The Reserve Bank may grant permission subject to such conditions as it
may think fit to impose either generally or with reference to any particular
 9.14 Control of Banking System by Reserve Bank of India
section if the conditions imposed are not complied with after giving a
reasonable opportunity to the banking company for showing cause against
the action proposed to be taken against it.
In Sajjan Bank v. Reserve Bank of India, AIR, 1961 Mad. 8, it was held
by the Madras High Court that S. 22 of the Act is not violative of the Art.
12(l)(g) of the Constitution. The section does not vest arbitrary power in the
Reserve Bank of India to grant or refuse a licence. The section is not in
restraint of trade, business or occupation, The Court said:—
The Reserve Bank of India was established with a view to fostering the
banking business and not for impending the growth of such business. Tire
powers vested in it under S. 22 are not one invested with a mere officer of the
Bank. The standards for the exercise of the power have been laid down in S.
22 itself. The Reserve Bank is a non-political body concerned with the
finances of the country. When a power is given to such a body under a statute
which prescribes the regulations of a banking company, it can be assured
that such power would be exercised so that genuine banking concerns could
be allowed to function as a bank; while institutions masquersing as banks or
those run on unsound lines or which would affect the interest of the public
could be weeded out. The power given is regulated by statutory body which
itself is regulating the credit of the country. The nature of the power, its
exercise after investigation prescribed by the statute invests it with a quasi­
judicial character. Such a power cannot be said to be an arbitrary one-. It is
mere licence granted as a matter of course of all genuine banking institutions
run on sound lines as the judicial character of power would indicate. It
cannot be held to be a permit."
The Court also rejected the contention of excessive delegation of legislative
powers. It said: "the power that is given to the Reserve Bank under the Act
is wide range of administrative discretion which it is peculiarly competent
to undertake, and the determination whether the conditions which required
before the licence could be given or refused exist, would be peculiarly within
its competence as an expert statutory body, and the legislature having
prescribed the nature of real banking institution in the country, it could not
be said that there has been excessive delegation of power."
The Court said that "in such cases the delegation as such could not be
held to be invalid, though in individual cases, if such a body exceeds its
jurisdiction or abuses its power it would be open to an aggrieved party to
apply to the Court for the issue of a writ under S. 226 of the Constitution."
The facts of Sajjan Bank v. Reserve Bank of India are as follows:-
The petitioner, which was carrying on business at Alandur, originated
 The Banking Regulation Act, 1949 9.15
main object of carrying on money lending business. In May, 1946 the
company was converted into a banking company and in November of that
year its name was changed into Sajjan Bank (P) Ltd. All its shares were held
by its three directors. The Banking Companies Act, 1949 came into force on
March 16,1949.
On 14th September, 1949 the petitioner bank applied under S.22 of the
Act to the Reserve Bank for a licence to carry on banking business. The
officers of the Reserve Bank inspected the petitioner bank under S. 22 in July,
1952. A report of that inspection was prepared on 11th Oct. 1952. The
inspection revealed the existence of certain defects in the working of the
bank. The Reserve Bank, therefore, decided to keep in abeyance the
consideration of the question of issuing a licence evidently with a view to
watch the progress of the bank in eradication the defects pointed out by the
inspection report.
The defects noticed were subject-matter of correspondence between the
petitioner bank and the Reserve Bank. A fresh inspection of the petitioner
bank was carried out in September, 1956 which also revealed certain defects.
The question of grant of licence was taken up. The Reserve Bank was not
satisfied that the affairs of the petitioner bank were being conducted in the
interests of the depositors and hence issued show cause noticeagainst the
refusal of the licence.
After considering the representation of the petitioner bank the Reserve
Bank by its letter dated 18th March, 1957 refused to grant licence to the
petitioner bank to carry on banking business. Aggrieved by that the petitioner
bank moved the Court for the issue of writ of certiorari to quash the order of
the Reserve Bank refusing grant of licence to carry on business as a banking
company. {Note: The petitioner bank being one that came into existence
before the passing of the Banking Companies Act, 1949, it could continue its
banking business till the licence was granted or refused).
The Court held, as aforesaid, that S. 22 is not violative of S. 19(l)(g) of the
Constitution. The Section does not confer arbitrary power on the Reserve
Bank to grant or refuse licence. Coming to the facts of the case the Court said
the petitioner was given more than one opportunity to show cause against
the refusal of licence. There were undesirable features noticed in the inspection
report. The paid up capital was only Rs. 50,000, the reserves were poor and
establishment charges had eaten up more than 50% of the income. It was only
after careful consideration of all matters that the Reserve Bank came to the
conclusion that continuance of the petitioner bank would be likely to prove
detrimental to the interests of depositors and that the petitoner was not
entitled to a licence. The Reserve Bank did not take anv hastv action. The
 9.16 Control of Banking System by Reserve Bank of India
progress and working of the bank was closely watched for more than four
years and every opportunity was given to the bank to justify its claim as a
sound banking concern.
Thus, the action of the Reserve Bank in refusing to grant the licence to the
petitioner bank was held to be within its jurisdiction and such jurisdiction
was held to be properly exercised in the case.
Maintenance of a Percentage of Assets—Section 24 provides that in
addition to cash reserve prescribed by S. 18 every banking company daily
required to maintain in India at least 25% of its total demand and time
liabilities in India in cash, gold or unencumbered approved securities,
valued at a price not exceeding the current market price. The overall
minimum liquidity ratio of any banking company is thus 28%. In the case of
schedule bank, however, this may even be increase upto 40% by the Reserve
Bank as S. 42 of the Reserve Bank of India Act authorizes the Reserve Bank
to increase the cash reserve from 3% to 15% in case of schedule banks.
Section 25 provides that every banking company must maintain a
minimum of 75% of its demand and time liabilities in India. To ensure
compliance quarterly returns have to be submitted in this connection.
Inspection— Section 35 deals with inspection of the account books etc.
of a banking company which is reproduced below:—
"(1) Notwithstanding anything to the contrary contained in S. 235 of the
Companies Act, 1956 (1 of 1956), the Reserve Bank at any time may,
and on being directed so to do by the Central Government shall,
cause an inspection to be made by one or more of its officers of any
banking company and its books and accounts, and the Reserve Bank
shall supply to the banking company a copy of its report on such
inspection.
(2) It shall be the duty of every director or other officer or employee of
the banking company to produce toany officer making an inspection
under sub-section (1) all such books, accounts and other documents
in his custody or power and to furnish him with any statements and
information relating to the affairs of the banking company as the
said officer may require of him within such time as said officer may

(3) Any officer making an inspection under sub-section (1) may examine
on oath any director or other officer or employee of the banking
company in relation to its business, and may administer an oath
accordingly.
 The Banking Regulation Act, 1949 9.17
(4) The Reserve Bank shall, if it has been directed by the Central
Government to cause an inspection to be made, and may, in any
other case, report to the Central Government, if it is of the opinion
after considering the report that affairs of the banking company are
being conducted to the detriment of the interests of its depositors,
may, after giving such opportunity to the banking company to make
a representation in connection with the report as, in the opinion of
the Central Government, seems reasonable, by order in writing:—
(a) prohibit the banking company to receive fresh deposits;
(b) direct the Reserve Bank to apply under S. 38 for the winding
up of the banking company:
Provided that the Central Government may defer, for such period as
it may think fit, the passing of an order, upon such terms and
conditions as it may think fit to impose. ,
(5) The Central Government may, after giving a reasonable notice to the
banking company, publish the report submitted by the Reserve
Bank or such portion thereof as may appear necessary.
Explanation— For the purposes of the section, the expression "banking
company" shall include:—
(i) in the case of banking company incorporated outside India, all its
branches in India; and
(ii) in the case of a banking company incorporated in India :—
(a) all its subsidiaries formed for the purpose of caryying on the
business of banking exclusively outside India;
(b) all its branches whether situated in India or outside India.
Powers of the Reserve Bank to give directions—
the Reserve Bank to give directions to banking companies generally or to a
particular banking company. The section is reproduced below:—
"(1) Where the Reserve Bank is satisfied that—
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the aflairs of any banking company beingconducted
in a manner detrimental to the interests of the depositors, or
in a manner prejudicial to the interests of the banking
company; or
(c) to secure the proper management of any banking company
11,,.
 9.18 Control of Banking System by Reserve Bank of India

it is necessary to issue directions to banking companies generally or

to any banking company in particular, it may, from time to time,
issue such directions as it deems fit, and the banking companies or
the banking company, as the case may be, shall be bound to comply
with such directions.
(2) The Reserve Bank may, on representation made to it or on its own
motion, modify or cancel any direction issued under sub-section (1),
and so modifying or cancelling any direction may impose such
conditions as it thinks fit, subject to which the modification or
cancellation shall have effect."
Section 36 gives further powers and functions of Reserve Bank which is
also reproduced below:—
"The Reserve Bank may—
(a) caution or prohibit banking companies generally or any banking
company in particular against entering into any particular transaction
or class of transactions, and generally give advice to any banking
company.
(b) on request by the companies concerned and subject to the provisions
of S. 44A, assists, as intermediary or otherwise, in proposals for the
amalgamation of such banking companies;
(c) give assistance to any banking company by means of grant of a loan
or advance to it under S. 11 (1)(3) of the Reserve Bank of India Act,
1934 (2 of 1934).
(d) at any time, if it is satisfied that in the public interest, or in the interest
of banking policy or for preventing the affairs of the banking
company being conducted in a manner detrimental to the interest of
the banking company or the depositors it is necessary so to, by order
in writing and on such terms and conditions as may be specified
therein:—
(i) require the banking company to call a meeting of its directors
for the purpose of considering any matter relating to or
arising out of the affairs of the banking company, or require
an officer of the banking company to discuss any such matter
with an officer of the Reserve Bank;
(ii) depute one or more of its officers to watch the proceedings of
any meeting of the Board of directors of the banking company
or of any committee or of any other body constituted by it;
require the banking company to give an opportunity to the
 The Banking Regulation Act, 1949 9.19
officers so deputed to be heard at such meetings and also
require such officers to send a report of such proceedings to
the Reserve Bank;
(iii) require the Board of directors of the banking company or any
committee or any other body constituted by it to give in
writing to any officer specified by the Reserve Bank in this
behalf at, his usual address all notices of, and other
communications relating to any meeting of the Board,
committee or other body constituted by it;
(iv) appoint one or more of its officers to observe the manner in
which the affairs of the banking company or of its officers or
branches are being conducted and making a report thereon;
(v) require the banking company to make within such time as
may be specified in the order, such changes in the management
as the Reserve Bank may consider necessary.
(2) The Reserve Bank shall make an annual report to the Central
Government on the trend and progress of banking in the country,
with particular reference to its activities under S. 17(2) of the Reserve
Bank of India Act, 1934 (2 to 1934), including in such report its
suggestions, if any, for the strengthening of banking business
throughout the country.
(3) The Reserve Bank may appoint such staff at such places as it
considers necessary for the scrutiny of the returns, statements and
information furnished by banking companies under this Act, and
generally to ensure the efficient performance of its functions under
this Act."
Amendments of provisions relating to Appointments of Managing
Directors etc., to be subject to previous approval of the Reserve Bank-
Section 35B(l)(a) provides that "in the case of a banking company no
amendment of any provision relating to the appointment or re-appointment
or termination of appointment or remuneration of a chairman, a managing
director or any other director, whole-time or otherwise or of a manager or a
chief executive officer by whatever name called, whether that provision be
contained in the company's memorandom or articles of association, or in an
agreement entered into by it or in any resolution passed by the company in
general meeting or by Board of directors shall have effect unless approved
by the Reserve Bank.
Section 35B(l)(b) provides that "no appointment or reappointment or
termination of appointment of a chairman, a managing or whole-time
 9.20 Control of Banking System by Reserve Bank of In<Iia

director, manager or chief executive officer by whatever name called shall

have effect unless such appointment, re-appointment or termination of
appointment is made with the previous approval of the Reserve Bank."
The Explanation to S. 35-B(I) says that for the purposes of S. 35 B(I) "any
provision conferring any benefit or providing any amenity or perquisite, in
whatever form, whether during or after the termination of office of the
chairman or the manager or the chief executive officer by whatever name
called or the managing director, or any other director, whole-time or otherwise,
shall be deemed to be a provision relating to his remuneration."
In Emphrem Ambooken v. Assistant Chief Officer, Reserve Bank of
India, AIR 1966 Kerala 6, a question arose whether the provision of S. 35-
B(l)(b) of the Act was violative of Art. 19(l)(g) of the Constitution, Art.
19(l)(g) of the Constitution gives a person freedom to practise any profession
or to carry on any occupation, trade or business. The main point urged on
behalf of the petitioner was that S.35- B(l)(b) gives arbitrary and naked
powers to the Reserve Bank and that there is nothing in the section which
helps to chanalise or guide this power 3nd therefore, the section is violative
of Art. 19(l)(g) of the Constitution. The Kerala High Court rejected the
arguments put forward on behalf of the petitioner. His Lordship said;—
"S. 35-B(l)(b), of course, does not specify the grounds on which approval
can be refused. Nor does it indicate the matters that should be weighed
before the approval is declined. But this section contained in a statute which
has been promulgated for the protection of a special class of institutions—
banking institutions is but a small wheel in the machinery that has been set
up by the Act for a purpose, and the Supreme Court has held that such a
machinery is in the interests of the general public and the depositors in the
banking institutions. I cannot conceive of S. 35-B(l)(b) being pressed into
service for any purpose or object other than what is provided in the statute
to serve the interests of the depositors and the general public. It cannot,
therefore, be said that the power granted under the section is so arbitrary or
naked that it can be exercised in a capricious manner. There are sufficient
indications in the statute as to the circumstances under which such power
can be exercised."
In the course of its judgment the Court said "similar provisions are
contained in the Companies Act, 1956 in Sections 268,269,310,311 and 388.
Banking companies are specialcompanies and they form a class by themselves.
Apart from public interest the interests of the depositions will have to be
safeguarded. Provisions similar to those contained in the Companies Act
which have been adverted to, have therefore been incorporated in the
Banking Companies Act as well. Instead of the Central Government being
The Banking Regulation Act, 1949 9.21

the approving authority, the Reserve Bank is constituted the controlling

body. The Reserve Bank is an expert body and is in control of the banking
institutions. The Reserve Bank had alsobeen conferred vast powers and has
been enabled to not only to watch the day-to-day working of the banking
institutions but to gather information .regarding the working of the banking
institution by inspection or otherwise; it is this body, the Reserve Bank, that
has been given the power to approve the appointment or re-appointment of
a Managing Director."

LEADING CASES
Sajjan Bank (Private) Ltd. v. Reserve Bank of India
AIR 1961 Mad 8
(The power given to the Reserve Bank of India under S. 22 of the Reserve Bank
of India is o/quasi-judicial character and not arbitrary.)

Facts
The Sajjan Bank (Private) Ltd., which is carrying on business at Alandpur,
originated from Sajjan and Co. Ltd., which was incorporated in November
1944 with the main object of carrying on money-lending business. In May
1946, the company was converted into a banking company and in November
of that year its name was changed into Sajjan Bank (Private) Ltd. All its
shares are held by its three directors who were said to be closely related. The
Banking Companies Act, 1949 (now called The Banking Regulation Act,
1949), came into force on 16.3.1949.
Section 22 of the Act provided amongst other things that every banking
company in existence at the commencement of this Act should before the
expiry of six months from such commencement and, every other company
before commencing banking business in India, apply in writing to the
Reserve Bank for a licence under the section to carry on banking business.
The section further provided that the Banking Companies in existence at the
commencement of the Act could continue to carry on their banking business
till final orders were passed on their application for licence.
On 14.9.1949, the petitioner bank applied under S. 22 of the Act, to the
respondent for a licence to carry on banking business. The Officers of the
Reserve Bank inspected the petitioner bank under S. 22 of the Act in July
1952. A report of that inspection was prepared on 11.10.1949. The inspection
revealed the existence of certain defects in the working of the bank. The
Reserve Bank therefore decided to keep in abeyance the consideration of the
question of issuing a licence evidently with a view to watch the progress of
the bank in eradicating the defects pointed out by the inspection report.
 -9.22 Control of Banking System by Reserve Bank of India

The defects noticed were the subjectmatter of subsequent correspondence

between the petitioner and the Reserve Bank. A fresh inspection of the
petitioner bank was carried out in September 1956 under S. 35 of the Act.
That also revealed certain defects. Therespondent was evidently not satisfied
that the affairs of the petitioner Bank were being conducted in the interests
of the depositors. The question of the grant of licence was taken up. The
petitioner was directed to show cause against the refusal of the licence. The
bank was also furnished with a copy of the inspection report.
After considering the representation of the petitioner the respondent by
its letter dated 18.3.1957, declined to grant the licence to the petitioner to
carry on banking business in the terms of the first proviso to sub-section (2)
of S. 22 of the Act. Aggrieved by that the petitioner has moved the High Court
for the issue of a writ of certiorari to quash the order of the respondent
refusing to grant a licence to carry on business as a banking company.

Issues
1. Whether Section 22 of the Act was unconstitutional in so far as it
proceeded to restrict the fundamental right of the petitioner to carry
the banking business?
2. Whether action of the respondent was arbitrary?
3. Whether the procedure by the respondent was illegal?

Decision of the High Court

The Reserve Bank of India came into existenpe on 1.4.1935. It is central
bank combining in its functions the regulation of both the credit and the
currency of the country prior to its formation the responsibility for the
currency was vested in the Central Government. The banking functions
were perfomed by the Imperial Bank of India. Its structure was modeled very
largely on the Bank of England.
It is a non-political statutory body, the general superintendence and
management of the bank's affairs being vested in the Central Board of
Directors. For each of the four regional areas, Bombay, Calcutta, Madras,
and New Delhi, there is a local board functioning. The functions of the local
Boards are to advise the Central Board on such matters as may be referred
to them or perform such duties as the Central Board may validly delegate to
them. The preamble to the Reserve Bank Act states that the bank was.
constituted to regulate the issue of bank notes, to keep up reserves with a
view to secure monetary stability in India and generally to operate currency
and credit system of the country to its advantage.
 The Banking Regulation Act, 1949 9.23

The main function, therefore, of the Reserve Bank is to regulate the

monetary system of the country so as to ensure the maintenance of economic
stability and assist in its growth. The Bank has got the sole right to issue
currency notes and it also acts as the Banker to the Government. It also acts
as a banker to the various commercial Banks and other financial institutions
and it has got various rights and duties prescribed in Chapter II of the
Reserve Bank Act. For the performance of its duties in regard to the
regulation of the credit of the country, the Reserve Bank is invested with
powers of control of the bank rate, open market transactions etc.
The Reserve Bank's responsibilities include the development of an
adequate and sound banking system not only for trade and commerce but
also for the agricultural industry. The Reserve Bank is, therefore, occupying
a position of considerable importance in the economic development of the
country and its monetary system.
Originally joint stock banks were governed in respect of their
incorporation, organization and management by the Indian Companies Act
of 1913, which was common to banking as well as non-banking companies.
In 1936 certain new provisions were introduced to the Indian Companies Act
of 1913, in regard to the banking companies. In 1949, the Banking Companies
Act was passed to consolidate and amend the law relating to the Banking
Companies. The necessity for the legislation was for safeguarding the
interests of the depositors, shareholders and of the economic interests of the
country in particular. Under S. 5 (b) of the Act, the term "banking" has been
defined as
"accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdrawable
by cheque, draft, order or otherwise".
This definition follows the accepted legal concept of the word "banking".
The essence of a banking business is, therefore, receiving money on current
account for deposit from the public repayable on demand and withdrawable
by cheque, draft or otherwise.
An ordinary money lender who does not accept moneys on terms
enabling a depositor to draw cheques upon him would not, therefore, be a
bank or banker properly so called. The provisions of the Act would, therefore,
apply only to the limited class of cases where the bank orbanker allows the
withdrawal of money by the issue of cheques. A banking company has been
defined to be a company which transacts the business of banking in India.
Section 6 provides that in addition to banking business a banking company
may engage themselves in various allied businesses which are more or less
_•__ : j __ <._! ’ t •’ • ' •
 9.24 Control of Banking System by Reserve Bank of India
Section 13 prescribes the minimum standards as to paid up capital and
aggregate reserves. Section 12 and 12 (a) prevent the control of companies by
a few persons to the detriment of a majority of shareholders and permits the
Reserve Bank of India to require a banking company to call for a general
meeting of the shareholders of the company, to elect fresh directors in
accordance with the voting rights. Section 14 prohibits the creation of
charges on unpaid capital. Section 17 and 18 provide for minimum reserve
funds and cash reserve. Section 20 prohibits loans on security of the company's
shares and unsecured loans to its directors to firms or private companies in
which they are interested. Section 21 gives power to the Reserve Bank of
India to control its advances. Section 22 prescribes a system of licensing of
banks, the power of licensing being vested in the Reserve Bank of India. I
shall advert to that section in greater detail presently.
Section 23 places restrictions on the opening of new places of business or
change of existing place of business. Section 24 and 25 require the maintenance
of sufficient liquid assets. Section 26 obliges a bank to report to the Reserve
Bank every year about unclaimed deposits. Section 27 and 28 invest a power
in the Reserve Bank to call for information and to punish them if i t so decides.
Section 35 and 36 confer power in the Reserve Bank of India to call for
periodical returns and inspection of books of accounts and empowers the
Central Government to take action against banks conducting business in a
manner detrimental to the interests of the depositors. Section 35-A gives
powers to the Reserve Bank of India to give directions to the banking
companies in general, or to any banking company in particular, in the
national interest or to prevent the affairs of any banking company being
conducted in a manner detrimental to the interests of the depositors or in a
manner prejudicial to the interests of the banking company or to secure
proper management thereof.
There are also other provisions relating to the management, restriction
on the holding of shares and in regard to the winding up of banking
companies. Thus, the legislation is a comprehensive measure, covering the
establishment, the working and the liquidation of the banks. The Reserve
Bank of India is substantially invested with the power of regulation of the
banking companies. In this country there are various types of banks ranging
from the village money lender to a big commercial bank. It was found
necessary in the interests of the public that there should be a regulation of the
banking system. Section 22 introduces a complete system of licensing of
banks by the Reserve Bank. Shortly stated the grant of a licence in the case
of banks incorporated in Inofia is dependent upon the maintenance of a
satisfactory financial condition. In the case of foreign banks there is a further
mnrliHnn imnnenrl kin kino r>r\i infrv /nf 4-ln nir rri-m •» 1 z4 »nmk- <4 ■»ocrirv
*
 The Banking Regulation Act, 1949 9.25
any way against the banks registered in India sub-sections (1) and (2)
provide for the necessity of obtaining a licence by a banking company and
the time at which the licence is to be applied. The proviso to sub-section (2)
authorizes an existing banking company to continue to function until it is
granted a licence or refused a licence. The conditions for granting the licence
by the Reserve Bank are set out in sub-section (3). The section also provides
for the cancellation by the Reserve Bank of a licence granted by it. In that case
the concerned bank is given a right of appeal. Similar enactments exist in the
laws of certain foreign countries like America.
The Reserve Bank of India was established with a view to fostering the
banking business and not for impeding the growth of such business. The
powers vested in it under S.22 are not one invested with a mere officer of the
Bank. The standards for the exercise of the power have been laid down in
S.22 itself. The Reserve Bank is a non-political body concerned with the
finances of the country. When a power is given to such a body under a statute
which prescribes the regulations of a Banking Company, it can be assumed
that such power would be exercised so that genuine banking concerns could
be allowed to function as a bank, while institutions masquerading as banks
or those run on unsound lines or which would affect the interests of the
public could be weeded out.
The power given is regulated by the statute and being entrusted to a
statutory body which is itself regulating the credit of the country the nature
of the power, its exercise after the investigation prescribed by the statute
invests it with a quasi-judicial character. Such a power cannot be said to be
an arbitrary one. It is a mere licence granted as a matter of course to all
genuine banking institutions run on sound lines as the judicial character of
power would indicate. It cannot be held to be a permit. Section 22 of the Act
is not repugnant cf the constitution. ,
It must also be noticed that the refusal of the licence under S. 22 of the Act
does not mean a stoppage of business. The essence of banking is the opening
of current account and the enabling of the constituent to draw by cheques.
It follows that the refusal of a licence would only entail a loss of that type of
business and it would be perfectly open to the petitioner to carry on business
as money lenders the only disability or restriction being that it cannot have
transactions under which the constituents could draw cheques on him.
As pointed in the report of the Reserve Bank on more than one occasion,
the petitioner bank was not able to effectuate any material improvement in
the pattern of its working. It was not able to attract sufficient funds from the
public.
 9.26 Control of Banking System by Reserve Bank of India
The paid up capital was only Rs. 50,000. Its reserves were found to be
poor and the establishment charges had absorbed more than 50 per cent of
the gross income. The Reserve Bank gave more than one opportunity to the
petitioner to show cause against the refusal of licence. In the report placed
before the Central Committee the court found a comparative statement of
the undesirable features noticed in the inspection reports with the
corresponding representation of the bank and the comments of the bank. It
was only after a careful consideration of all the matters that the Reserve Bank
came to the conclusion that the continuance of the bank would be likely to
prove detrimental to the interests of prospective depositors and that the
petitioner was not entitled to a licence.
The respondent did not take any hasty action. The proposed and
working of the bank was closely watched for more than 4 years and every
opportunity was given to the bank to justify its claim as a sound banking
concern. Far from the action of the Reserve Bank being arbitrary, satisfied
that it has given the utmost consideration to the petitioner's case.
The petition was dismissed with costs.

Can ara Bank v. P.R.N. Upadhyaya

(1998) 6 SCC 526
Facts
The appellant-Bankhad advanced certain amounts as loan toRespondent
3 in the years 1980, 1986 and 1991 for construction of strong rooms which
were to be taken, and were subsequently taken, by the appellant-bank on
lease. The Ioans were repayable with a certain rate of interest which was to
be compounded quarterly. Respondent 2 to 5 filed a complaint before the
Banking Ombudsman in August 1996 assailing the action of the appellant
bank in charging interest at the contractual rate with quarterly rests in
respect of the loans granted in the years 1980 and 1986 and also for debiting
interest with quarterly rests in respect of the loan granted in 1991. The
respondent requested the Banking Ombudsman for a direction to the
appellant-Bartk to recast the interest debited in all the loan accounts by
debiting interest at simple rate and to adjust the excess amount charged by
way of higher interest to the loan account in 1991 and to pay the balance
amount, if any, to the respondents. Without examing the relevant circulars
of the Reserve Bank of India issued under Section 21 and 35, the Ombudsman,
relying on the Supreme Court's decision in State Bank ofPatiala v.Harbans
Singh, (1994) 3 SCC 495, allowed the complaint. He opined that the loans
granted by the banks to their landlords for construction/renovation of
premises which the banks take.on lease or rent later on, cannot be termed as
 The Banking Regulation Act, 1949 9.27
"bank loans". He further opined that on the basis of the judgment in Harbans
Singh case the interest could not be charged in respect of such loans at
quarterly rests and that the appellant-Bank could only charge simple interest
at the rate of not more than 15% in respect of the loan granted to a landlord.

Issue
Whether the impugned award of the Ombudsman is sustainable?

Decision of the Supreme Court

It was held as follows:
The circulars issued by the Reserve Bank of India under Section 21 or 35
of the Banking Regulation Act, 1949 are statutory in nature and are required
to be complied with by the banks. An Ombudsman appointed under the
Scheme is obliged to regulate the working of the banks and issue directions
to them to carry out the directions and circulars issued by the Reserve Bank
of India under Section 21 or 35 of the Act. The view taken by the Ombudsman
to the effect that the loans granted by the banks to their landlords for
construction/renovation of premises which are taken on lease or rent by the
banks cannot be termed as "term loans" and that only those loans which are
taken for commercial purposes can be construed to be term loans, is clearly
erroneous.
Tire expression "term loan" is well understood in banking parlance. The
expression implies the grant of loan for a fixed term. It has no relevance with
the purpose for which loan is granted. Where the term for repayment is long,
the loan is called "long-term loan" and where the term exceeds one year but
not five to seven years, it is commonly known as "medium-term loan".
According to Tannan's Banking Law and Practice in India, 18lh Edn., the
expression loan is defined as follows: /
"Loans. - When a banker makes an advance in a lump sum the whole of
which is withdrawn and is supposed to be repaid generally wholly at one
time is called a loan. If the customer repays the same either, wholly or
partially and wishes to have accommodation subsequently, the latter will be
treated as a separate transaction to be entered into if the bank agrees to do
so and subject to such terms as the bank may like to impose. Thus, the bank
does not suffer any loss of interest as a result of carrying excessive cash which
is necessary in the case ofcash credits and overdrafts. Loan accounts are said
to have a lower operating cost than cash credits and overdrafts because of the
larger number of operations in the case of the latter is compared to the former
and consequently a lower rate of interest on loans appears to be justifiable
than in the case of overdrafts and cash credits".
 9.28 Control of Banking System by Reserve Bank of India
The expression term loan has been defined in the same book as follows:
"Term Loan. — Where a loan is granted for a fixed period exceeding one
year and is repayable according to a schedule of repayment, as against on
demand and at a time, it is known as a 'term loan'. Where the period exceeds
one year but not, say 5 to 7 years, it is commonly known as a medium-term
loan; a loan with longer repayment schedule is known as long-term loan. A
term loan is generally granted for fixed capital requirements, although such
loans for working capital are not unknown, and are supposed to be repaid
out of future earnings of the fixed assets in particular and of the borrower in
general. It therefore requires a proper and more sustained appraisal of
various factors connected with,the proposition than an ordinary commercial
demand loan".
There have been more than a dozen circulars/notifications/directions
issued by the Reserve Bank of India, which deal with the subject of rate of
interest to be charged from the landlord-loanees and the manner of its
calculation. A critical examination and application of those circulars was
necessary to decide the complaint filed by the respondents against the
appellant-bank, which the Ombudsman did not do. Since an Ombudsman is
appointed by virtue of the Scheme framed under the Section 35A of the
Banking Regulation Act, 1949, he is obliged to comply with the directions/
circularsand notifications issued by the Reserve Bank of India under Section
35 or 21 of the Act. He is also required to issue directions to the banks based
on those directions/circulars and ensure their compliance. The Ombudsman
could not have ignored the circulars and directions while dealing with the
complaint filed by the respondent. The impugned award having been made
ignoring various circulars7cfirections issued by the Reserve Bank oflndia,
cannot be sustained.
Therefore, the Supreme Court remanded the complaint to Ombudsman
for its fresh disposu: on merits.

Shivabhai Zaverbhai Patel v. Reserve Bank oflndia

AIR 1986 Guj 19

Facts
The two petitioners, who were promoters of a proposed Urban
Cooperative Bank, had applied for such licence by their application of 12111
September, 1980.
Therein they have mentioned thatChaklashi town (in which the proposed
Urban Co-operative Bank was to be established) was having population of
about 30,000 and as per the census of 1971 the population was 20900. A case
 The Banking Regulation Act, 1949 9.29
was sought to be made out for the necessity and feasibility of the proposed
co-operative bank by citing various needs of different kinds of business,
industries, etc. On that application, the Reserve Bank by its letter dt. 27th
September, 1980 asked the Assistant District Registrar of Co-operative
Societies, Nadiad, to conduct a preliminary survey of the area of operation
of the proposed bank with the assistance of its promoters and their State/
District central co-operative bank to identify the potentials for the growth of
the proposed bank i.e. potential for deposit mobilization as well as lending,
particularly lending to small scale and cottage industries. In pursuance
thereof a Joint Report prepared by the Assistant District Registrar and the
Manager of Kaira District Central Co-op. Bank Ltd. was sent by the letter dt.
21 October, 1980.
2. However, by the letter dt. 3rd March, 1982, the Reserve Bank refused
the licence after considering the preliminary survey report and the Joint
Su rvey Report and observed that the areas of operation of the proposed bank
was limited to Nagar Panchayat, Chaklashi and the inclusion of non-urban
area was not permissible in the area of operation of a Urban Co-operative
Bank and it was further observed that Chaklashi was reported to have the
population of 9000 (urban population) and was served by two commercial
banks and therefore there was existing adequate banking facility. It was also
observed that the Chaklashi and the surrounding villages were predominantly
agricultural in character and the preliminary and joint studies showed that
there was little scope for industrial advances and therefore a need for
organizing a new primary (Urban) co-operative bank was not established
and, therefore, the Reserve Bank refused the licence and refused the registering
authority to proceed with the registration of the co-operative bank.
3. A further representation was made by the promoters by letter dt. 22nd
March, 1982 and thereby an attempt was made to rebut the points made by '
the Reserve Bank for refusing the licence. It appears that on 10lh April 1982
there was a meeting and some further discussion in pursuance thereof the
promoters had written a letter dt. 13 May, 1982 reminding about fresh
decision. It appears that there was some further discussion on 8th June 1982
and in pursuance of that discussion the promoters by their letter dt. 21s! June
1982 forwarded more details and facts justifying the grant of the licence.
4. Taking into consideration the various representations, the Reserve
Bank by its letter dt. 4th May 1983 took a decision wherein it is observed that
the area of operation of the proposed bank was predominantly agricultural
in character and was adequately served by the existing banking structure
and that the area did not have adequate non-agncultural business potential
so as to sustain another new urban bank as a viable unit.
 9.30“ Control of Banking System by Reserve Bank of India
However, the petitioners were not satisfied and they made further
representation by letters dt. 15lh July 1983 and Is' August 1983 and therein it
was complained that even though the petitioners were refused licence on the
ground that the area was predominantly agricultural and was served by
existing banking facilities and did not have adequate non-agricultural
business potential, yet another Urban Co-operative Bank, namely, Natpur
Co-op. Bank Ltd. Nadiad was allowed to open a branch at Chaklashi by the
Reserve Bank; and therefore the refusal to the petitioners seem to be
unjustified. This was replied by the Reserve Bank by its letter dt. 11 August
1983 and it was pointed out that opening of a new bank and a new branch of
an existing bank were altogether different things and that an area which
could not sustain a new Co-op. Bank and can sustain a new branch of an
existing Co-op. bank and they stood entirely on different footing. It was also
pointed out that the matter of the petitioners was considered on merits and
studies were conducted and the results showed that there were no special
and adequate factors in justification of a new urban Bank in Chaklashi
functioning as a viable unit.
The petitioner, therefore, came to the High Court.

Issue
Whether the decision of the Reserve Bank of India refusing licence to the
petitioners was vitiated?

Decision of the High Court

On behalf of the respondent-Reserve Bank an affidavit was filed where
in it was pointed out that conditions (a) and (b) of Section 22 (3) were not
fulfilled and as a result of studies and inquiries made it was found that the
Urban Co-operative Bank in Chaklashi would not be a financially viable
unit. In the affidavit in reply it was stated that the Reserve Bank undertook
a survey of the area and it was observed that the present banking structure
functioning therein was taking care of both agricultural as well as business
finance and that Chaklashi village of having (urban) population of 9000 did
not require any new bank so as to sustain a new urban bank as viable unit.
It was alsopointed out that a population of 17446 was engaged in agricultural
pursuits and they reside in the surrounding agricultural fields and not in
Chaklashi village itself, and the banking requirement of agricultural
community was taken care of by rural co-operative credit structure comprising
of district central co-operative banks, primary agricultural credit societies,
farmers service societies etc. and since the urban co-operative Banks are part f
of the co-operative credit structure, they are not allowed to enter rural area ]
and thus come into competition with the rural co-operative credit structure.
 The Banking Regulation Act, 1949 9.31
It is to be noted that the petitioners wanted to open a new Urban Co­
operative Bank. There was no dispute about it. Thus, the Reserve Bank had
conducted a viability study to find out whether there were prospects of
business potential so as to make the proposed Urban Co-operative Bank in
the area a viable unit thereby enabling it to properly deploy its resources and
earn sizable income so that the interests of all its depositors are well
protected and the proposed Urban Bank would be able to pay not only it's
present but also its future deposits in full as and when their claims accrue.
On these materials and findings the Reserve Bank came to the conclusion
that the proposed Urban Co-operative Bank in Chaklashi would not be a
viable unit, and considering all these relevant factors decision was taken not
to grant the licence to the petitioners to open the proposed bank.
The High Court said :
"The decision of the Reserve Bank is based on relevant material and
germane considerations and the High Court cannot sit in appeal over the
judgment of the Reserve Bank unless it is shown that the decision of the
Reserve Bank is based on extraneous considerations or is perverse. In the
present case, the Reserve Bank has clearly shown that on relevant material
and on germane considerations it had come to a conclusion that the proposed
Urban Bank in Chalashi would not be a viable unit and, therefore, the licence
has been refused. It is the discretion of the licensing authority to grant or
refuse the licence and when such decision is based on relevant material and
germane considerations the High Court cannot sit in appeal over the
decision of the Reserve Bank. Thus, the contention of the petitioners fail".
The High Court further said :
"In affidavit in reply as also in the correspondence the Reserve Bank had
pointed out that the viability norms in case of a branch of an existing urban
co-operative bank are much lower than whathave been laid down in the case
of new urban co-operative bank and the cost of operation of a new branch of
a bank is comparatively lower than the cost of setting up a new bank and
moreover it was pointed out that a branch may not be a self balancing centre
as in the case of a new Urban bank office in the sense that the deposits
collected by the branch may not invariably be in a proportion to its lending;
whereas on the other hand a branch may be a more deposit mobilization
centre and may have little scope for lending in the area; and the surplus
funds raised at the branch may be gainfully deployed through its head office
and or other branches, where there is a larger potential for providing loans
can draw on the pooled resources at the head office. All these opportunities
will not be available in case of a new urban bank which has to rely on the
mobilization of its resources and proper and gainful deployment thereof in
 9.32 Control of Banking System by Reserve Bank of India
the area and quite a big contingent of staff is required for a new urban bank
which being unitary office is required to control and operate a number of
Head office functions such as calling of board meetings, issue of shares,
administration, scrutiny and sanction of loan application etc. thus the
economics and norms of the working of a branch vis-a-vis that of a new urban
bank are always much lower and always on a different footing. Therefore
granting of licence or permission for opening a new branch cannot take the
case of the petitioners any further".
Thus, the petition was dismissed no order as to costs.

Janata Sahakari Bank Ltd. v. State of Maharashtra

AIR 1993 Bom 252
Facts
By a Circular dated 3rd August, 1992 issued by the Reserve Bank of India
addressed to the Registrars of Co-operative Societies of all States and Union
Territories in India, the Reserve Brink of India communicated that in so far
as normal donations by Co-operative Banks from out of their net profits are
concerned, such donations may not exceed one per cent of the published
profits of the previous year and such normal donations together with those
that may be made to National Funds and other Funds recognised or sponsored
by the State or Central Government may not exceed two per cent of the
published profits of the previous year. The said Circular also communicated
that individual donations from out of the profits by such Co-operative Banks
may not exceed Rs. 10,000/-. In pursuance of the said Maharashtra State
issued a Circular dated 27th August, 1992 in turn addressed to all the Co­
operative Banks. Petitioner No. 1, a Co-operative Bank, registered under the
Co-operative Societies Act, feeling aggrieved by the said Circulars, filed writ
petition to the High Court.

Contentions of the petitioners

The petitioners challenged the said Circulars mainly on the ground that
petitioner No. 1 Co-operative Bank being Society registered under the
Maharashtra Co-operative Societies Act was governed as such by the said
Maharashtra Co-operative Societies Act and the Reserve Bank of India
exercising its powers under the Banking Regulation Act, 1949could not have
issued a Circular giving directions and putting restrictions on the
disbursement of profits for charitable and public purposes superseding
those as prescribed under S. 69 of the Maharashtra Co-operatiye Societies
Act. It was pointed out that S. 69 of the Maharashtra Co-operative Societies
Act permits a Co-operative Society to disburse donations for charitable
 The Banking Regulation Act, 1949 9.33
purposes to the extent of twenty per cent of its net profits of the previous
year. Not only this, but the scheme of the Maharashtra Co-operative Societies
Act has put in several checks and cross-checks on such disbursement which
are that the donation should be for a public charitable purpose, that it should
be not exceeding twenty per cent of the net profits of the previous year, that
it should be in conclusion with the Federal Co-operative Society and lastly
that it should be approved by the General Body of the Co-operative Society.

Contentions of the RBI

On the other hand it was contended on behalf of Reserve Bank of India
that even though the Co-operative Societies and their management fall
within the State subjects, yet by virtue of the Banking Regulation Act.
especially S. 56, a Banking Company shall be construed as having a reference
to a co-operative Bank for the purposes of the Banking Regulation Act. It was
further contended that under Section 35 A of the Banking Regulation Act
where the Reserve Bank is satisfied that in the public interest or in the interest
of banking policy or to prevent the affairs of any banking company being
conducted in a manner detrimental to the interests of the depositors or in a
manner prejudicial to the interests of the banking company or to secure the
proper management of any banking company generally it is necessary to
issue directions to banking companies generally or to any banking company
in particular, it may from time to time issue such directions as it deems fit,
and the banking companies or the banking company, as the case may be,
shall be bound to comply with such directions. It was further urged that in
Ss. 5 (c ) and 5 (ca) 'banking company' and 'banking policy' have been
defined.

Issue
Whether the Circulars issued by the Reserve Bank of India are not
binding on Co-operative Banking Societies?

Decision of the High Court

The High Court did not accept the submission of the petitioners and
dismissed the petition. The Court said:
"S. 35A(1) (aa) states that "in the interest of banking policy" "it is
necessary to issue directions..........." "Banking policy" as defined in S. 5 (ca)
clearly stipulates that it means a policy which is specified from time to time
by the Reserve Bank of India in the interest of the banking system or in the
interest of monetary stability or sound economic growth, having due regard
to the interests of the depositors, the volume of deposits and other resources
of the bank and the need for equitable allocation and the efficient use of these
 9.34 Control of Banking System by Reserve Bank of India
being of a Banking Company, in improving monetary stability and economic
growth as well as keeping in view the interests of depositors, the Reserve
Bank of India has to formulate its policy vis-a-vis Banking Companies.
'Banking' as defined in S. 5(b) oniy gives a grammatical meaning of the
transactions of a bank and nothing more. If any management or supervision
is to be done over the banking activities of a bank, it will have tobe governed
by banking policy. Regard will have to be given to the fact that Co-operative
Banks like any other Banking Companies are entrusted with the funds from
the public. The amounts are in trust with them which are payable orj,
demand to the public and hence deposits or the profits earned from the
same-or their capital have to be augmented rather than depleted and if
excess amounts are likely tobe depleted by way of donations for charitable
and public purposes, the very stability of a Co-operative Bank may come in
danger. We feel that 'banking policy' and 'banking' are not independent but
coordinating subjects and both are covered within the supervisory powers
of the Reserve Bank of India within the meaning of S. 35A of the Banking
Regulation Act. Even otherwise, we feel that the directions issued by the
Reserve Bank of India are in the larger interest of the public and the Reserve
Bank of India being a body of experts in banking, the directions given by it
should not be lightly brushed aside."

1. Write a critical note on licensing of banking company under the Banking

Regulation Act, 1949. (CLC)
2. Explain the powers of the Reserve Bank of India under the Banking
Regulation Act, 1949 to give directions to the banking companies.
3. Write short note cm the powers of the RBI under Section 22 of the
Banking Regulation Act, 1949.
4. What are the powers of Reserve Bank of India to grant or refuse licence
under Section 22 of the Banking Regulation Act, 1949? Are these powers
constitutionally valid?
 1

I
I

I
 CHAPTER 10

GENERAL PRINCIPLES OF INSURANCE

Risk and uncertainly are part of life. A person may die at an early age.
He may suffer from accident, destruction of goods and property from fire,
sea perils and many other causes. It is to provide against risk and uncertainty
of the aforesaid nature that insurance came into being. Insurance does not
avoid or eliminate the loss arising from uncertain events; it only spreads
the loss over a larger number of people who insure themselves against that
risk. Thus, it is a co-operative device to spread the loss caused by an
uncertain event which is covered by insurance over a large number of
persons who are also exposed to the same risk and insure themselves
against the risk.
The risks which can be insured have increased in number and extent.
Insurance business can mainly be divided into two categories, namely—
life insurance business and general insurance business./'General insurance
business" means fire, marine or miscellaneous insurance business, whether
carried on singly or in combination with one or more of them (S. 6-B of
The Insurance Act, 1938).
The law of insurance is contained in the following four Acts:
1. The Insurance Act, 1938
2. The Life Insurance Corporation Act, 1956
3. The Marine Insurance Act, 1963
4. The General Insurance Business (Nationalisation) Act, 1972
The provisions of the Insurance Act, 1938 are applicable to both life
and general insurance business in so for as these are not inconsistent with
those contained in the special Acts governing them. All types of insurance
business have been nationalised in India—life insurance business in 1956
and general insurance business in 1972v In this chapter general principles
of life, fire, and marine insurance contracts have been discussed.

in
 10.4 General Principles of Insurance
Definition of life insurance, five insurance, marine insurance and
contract of insurance
The Insurance Act, 1938 gives the definitions of fire insurance business
(S. 6-A), life insurance business (S. 11), marine insurance business (S. 13-
Al and miscellaneous insurance business (S. 13-B) but does not give the
definition of contract of insurance or the definition of any other special type
of contract of insurance; only S. 3 of the Marine Insurance Act, 1963
prescribe a definition of contract of marine insurance.
Contract of life insurance—A contract of life Insurance is a contract
in which one party agrees to pay a specified sum upon the happening
of a certain event, contingent upon the duration of human life, in
consideration of the immediate payment of a smaller sum or certain
equivalent periodical payments by another. The consideration is called
the premium. It is payable either in one lump sum, e.g., single premium
or by successive periodical payments depending upon the terms of the
policy and usually by way of periodical payments. In case of periodical
payments, payment on or before the due date, is generally the condition
precedent to the continuance of the policy. A contract of life insurance or
assurance is not a contract of indemnity. The person who promises to pay
a specified sum is called the insurer or assurer; and the other party is called
the insured or assured.
Contract of fire insurance—A contract of fire insurance is a contract
whereby one party undertakes to indemnify another, against loss by, or
incidental to, fire, happening within an agreed period, in return for
payment in lump sum or by installments. It is a contract of indemnity.
Contract of marine insurance—Section 3 of the Marine Insurance
Act, 1963 says that, "contract of marine insurance is an agreement whereby
the insurer undertakes to indemnify the assured in the manner and to
the extent thereby agreed, against marine losses, that is to say, the losses
incidental to marine adventure." It is thus a contract of indemnity against
loss, incidental to marine adventure, accruing to ship, cargo, freight, or
other subject-matter of a policy, during an agreed voyage or voyages or
during a specified length of time. It need not be limited to the actual loss
sustained, as in fire insurance, not be limited to the actual loss sustained,
as in fire insurance, but is generally based on value agreed to in advance,
which may be greater or less than the risk involved. The consideration for
the policy is called premium. The person who undertakes the risk is called
the insurer or underwriter.
Contract of insurance—A contract of insurance is a contract whereby, one
party, in consideration of sum of money called premium, undertakes to van certain
 Law of Insurance 10.5
specified sum of money on death or on happening of any contingency dependant
on human life or to indemnify the other party against loss by or incidental to fire
or against marine losses or to make good the losses of another against any other
specified risk. The party undertaking the risk is called the insurer, assurer
or underwriter and the party whose loss is to be made good is called the
insured or assured. The document which contains the terms and conditions
of the contract of insurance is called a "policy", and the insured is, therefore,
also called a policy-holder. The consideration which the insured has to pay
to the insurer to undertake the risk is called the "premium". The amount
for which the policy is taken is called the "insured amount" or "policy
amount". The thing or goods or property which is insured is calied the
"subject matter" of insurance.
The four essentials of a contract of insurance are: (1) definition of the
risk, (2) duration of the risk, (3) premium and (4) amount of insurance.
A contract of insurance is a contingent contract as defined in S. 31 of
the Indian Contract, 1872. It is not a wager under S. 30 of the Indian
Contract Act, 1872. The general principles of the law of contract apply to
a contract of insurance.

GENERAL PRINCIPLES OF CONTRACT OF INSURANCE

1. Insurable Interest
It is only the presence of insurable interest that distinguishes a contract
of insurance from a wagering contract. All the statutes dealing with law
of insurance say that contract will become a wagering contract and hence
void if it is effected without an insurable interest.
Then what is insurable interest? None of the above mentioned statutes
attempts a comprehensive definition of insurable interest. W.H. Rodda
says in his book : Fire and Property Insurance, "Insurance interest may be
defined as an interest of such a nature that occurrence of the event
insured against would cause financial loss to the insured." R. M. Ray in
this book, Life-insurance in India, defines insurable interest as, "When the
assured is so situated that the happening of the event on which the insurance
money is to be payable would as an approximate result involve in the loss
or diminution of any right recognised by law or in any legal liability there
is insurable interest to the extent of the possible loss or liability."
In Litcena v. Crauftird, (1806) 2 BOS & PNR 269 (HL), Lawrence, J.,
defined insurable interest thus: "A man is interested in a thing to whom
advantage may arise or prejudice happen from the circumstances which
may attend it; interest does not necessarily imply a right to the whole or
 10.6 General Principles of Insurance

of the insurance, which relation or concern, by the happening of the perils

insured against may be so affected as to produce a damage, deteriment
or prejudice, to the person insuring and where a man is so circumstanced
with respect to matters exposed to certain risks or dangers, he may be said
to be 'interested in' the safety of the thing with respect to it as to have
benefit from its existence, prejudice from its destruction."
Ownership or possession or the right to possession of the property
insured is not a necessary requirement of an insurable interest. A legal right
of use the goods, the benefit of which would be lost by their damage or
destruction, might be sufficient to constitute an insurable interest therein.
A person might also have an insurable interest in property if loss of or
damage to that property would deprive him of that opportunity of carrying
out work in relation to that property and being paid for such work. A
person exposed to liability in respect of custody or care of property can
as an alternative to taking out liability insurance to protect his exposure,
insure the property itself. It may be a right to the whole or part of a thing.
The following points explain the nature of insurable interest:
(i) Tire interest should not be a mere sentimental right or interest. For
example, a mere love and affection cannot constitute insurable
interest. However, in India in case of life insurance sentimental
interest or an interest based on close family relationship may
constitute a sufficient insurable interest. In India, only an insurance
contract which is in the nature of a wager is void and it would not
be reasonable to hold that an Indian father taking a policy on the
life of the child is entering into a wagering agreement.
(ii) It should be a right in property or a right arising out of a contract
in relation to the property.
(iii) The interest must be pecuniary. Mere inconvenience or mental
distress cannot be regarded as insurable interest.
(iv) The interest must be lawful, z.f., enforceable. The mere hope of
acquiring an interest is not enough:
Insurable interest and life insurance.01-02—The time when the insurance
interest must be present varies with the nature of insurance contracts. In
Dalby v. India & London Life Assurance Co., (1854) 15 CP 5, it was held
that the life insurance is not a contract of indemnity and that it is enough
that insurable interest should exist at the time of the contract though not
at the time of loss. This decision of the English Court can be taken to be

QL A contract without insurable interest is a wager. Comment [LL.B., D.UJ

r>7 WKor ----------- -------------------- — a:.. r-----
1 Law of Insurance 10.7.
1 the law in India. This decision has been adopted by American Courts also.
! Thus, in the case of life insurance insurable interest must be present at the
. time of formation of the contract of insurance and it is not necessary
' afterwards, not even at the time of occurrence of the risk or when the claim
is made as it is not, strictly speaking, a contract of indemnity. For example,
when the creditor insured the life of the debtor, the policy continues even
3 after the payment of debt. Similarly, when a husband insures the life of the
' wife or vice versa, the policy subsists, notwithstanding the dissolution of
marriage as the subject matter of the policy is life of other spouse and not
’ the marriage.
In Harse v. Pearl Life Assurance Co., (1904) 1 KB 558; and Hughes v.
Liverpool Victorial Legal Friendly Society, (1918) 2 KB, 482, it was held
that where a life policy is taken out by a person who has no insurable
? interest in the life assured, and so the policy is illegal, an action will lie
. for recovery of premiums paid if the person taking out the policy was
induced to do by fraudulent misrepresentation on the part of the insurance
company's agent, but not otherwise.
A person has insurable interest in his own life; in the life of a person
upon whom he depends wholly or in part for support; and in the life
of any person who owes certain money to him.
In India certain dependent relatives have a legal right of maintenance.
For example, a Hindu wife is entitled to be maintained by her husband
during his life time and after his death by her father-in-law as per S. 18
and S. 19 of Hindu Adoption and Maintenance Act, 1956. A Hindu is
bound to maintain his or her legitimate or illegitimate children and his or
her aged and infirm parents according to S. 20 of the same Act. The heirs
of a deceased Hindu are bound to maintain certain dependents of the
deceased mentioned in S 21 of this Act, out of the estate inherited by them
from the deceased. Thus, apart from relationship these persons have a
pecuniary interest as well and may be deemed to have insurable interest
in the life of the person who is liable for maintenance.
According to M.N. Srinivasan—Principles of Insurance Law, 8th Edition,
2002, reprint 2008, page 719, the insurance money that can be recovered
need not be exact amount of maintenance or debt or other amount
recoverable, because life insurance is not a contract of indemnity. It is
enough that the amount bears a reasonable relationship to the value of the
interest and is not speculative.
In life policies, the following persons inter alia have been recognised
as having insurable interest:
10.8 General Principles of Insurance
(i) A person in his own life—Every person is presumed to have insurable
interest in his own life without any limitation. If he dies, his nominee
or dependents are entitled to receive the amount
(ii) A person in the life ofhis/her spouse—It is well settled that a husband
has an insurable interest in the life of his wife and wife has insurable
interest in the life of her husband. S.S. Hubuer in his book, Life
Insurance, observes that "life insurance is a husband's privilege, a
wife's right and a child's claim." The rule that a wife has an
insurable interest in the life of her husband was recognised earlier
on the logic that she depends on him. In Reed v. Royal Exchange
Assurance Co., (1795) Peake (Add. Case) 7, it was laid down that
the husband and wife are presumed to have an insurable interest
in the life of the other. It forms an exception to the general rule
that interest necessary to support the insurance of another person's
life must be capable of expression in terms of money or pecuniary
interest. It should be noted that presumption arises only during the
period of coverture (that is when they are husband and wife) and
the policies taken during that period will be valid and will continue
to be operative even after the dissolution of marriage. For example,
'A takes out a policy on life of his wife 'B' and subsequently even
if they are divorced the policy already taken will remain valid. On
the other hand, if T' takes out a policy on life of'Q' whom he
proposes to marry, or who has been divorced by him, the policy
is not valid due to lack of insurable interest at the time of
commencement of the risk, that is, at the time when the policy is
taken. A person does not have insurable interest in the life of his
girl friend or would-be-wife
(iii) Parent and Child—A child is presumed to have insurable interest
in the life of the parent, whether natural or adopted as the child
depends on his/her parent for support. A son does not have
insurable interest in the life of his father dependent on him for
support or an independent father having strained relations with
him.
It has been laid down in relevant statutes in England that a parent
has no insurable interest in the life of the child as mere love and
affection is not sufficient to constitute insurable interest. If the
person has any pecuniary interest in the life of the child, whether
natural or adopted, he can take out an insurance policy on the life
of such child. In America, apart from the relationship of husband
and wife, a few courts have held that the relationship of parent
 Law of Insurance 10.9
and child, grand parent and grand child, brother and sister as
sufficient to revise the presumption of insurable interest. There is
no express statutory provision in India on insurable interest. It is
submitted that we may draw on the decisions of the foreign courts
including those of England and America. In India, it is submitted
apart from husband and wife in each other's life, child in the life
of his/her parent, and person legally entitled to claim maintenance
can take out an insurance policy on such other person's life without
proof of insurable interest.
(iv) Other relations—In case of other relations the relationship by itself
does not create insurable interest. When one person effects an
insurance on the life of his/her relative there must be actual
dependence on the person whose life is assured. Thus in the case
of other relations insurable interest has to be proved.
(v) Creditor in the life of his debtor and surety in the life of the -principal
debtor— A creditor has an insurable interest in the life of the debtor
to the extent of amount of the debt as the chance of getting the
payment depends upon the continuance of the life of the debtor.
Similarly, the creditor has insurable interest in the life of the surety;
and surety in the life of the principal debtor. A policy taken on the
life of the debtor continues to be operative even after the payment
of the debt or debt becoming time barred. Again a surety has
insurable interest in the life of co-surety and a mortgagee in the
life of the mortgagor.
It should be noted that a debtor does not have insurable interest
in the life of his creditor. In Powell v. Dewy, (1898) 123 Log NC,
it was held that a partner has insurable interest in the life of another
partner only when the other partner is indebted to him or to the
partnership and to the extent of such indebtedness.
(vi) Servant in the life of his master—An employee has insurable interest
in the life of his employer for his salary for the term of service
contracted for.
According to M.N. Srinivasan—Principles of Insurance Law, 8th Edition,
2002, reprint 2008, page 233, "In life insurance, close relationship such as
husband and wife which cannot be strictly described as pecuniary, parent
and child, employer and debtor, partners in business, may give an insurable
interest in the life of each other."
Insurable interest and fire insurance.—A person is presumed to have
insurable interest in the property if he has a pecuniary interest in the
 10.10 General Principles of Insurance
continued existence of property. In case of contract of fire insurance an
insured must have insurable interest both at the commencement of the
policy and at the time the risk occurs because this is treated as a personal
contract and also a contract of indemnity. For example, if a house is
insured against risk of fire, the person taking out a fire policy must have
insurable interest in the house as it is a personal contract. If the owner of
the house takes out a fire policy and later on sells the house, he loses the
insurable interest and he cannot claim under the policy if the fire takes
place and the house is damaged as he has no insurable interest because
a contract of fire insurance is a contract of indemnity.
Owner of property has insurable interest in property. A bailee has lien
over the goods and is entitled to insure the goods for full value as he will
be liable for loss or damage to the goods to the owner {Vijay Kumar v.
Newzealand. Insurance Co., 1954 Bom. 347). An agent who is in possession
of goods has an insurable interest in the goods for full value of goods. An
agent without possession of the goods has no insurable interest. A mortgagor
as the owner of the property has an insurable interest and he can insure
for the full value of the property. According to S. 72 of the Transfer of
Property A.ct, a morgagee is entitled to insure the property but only to the
extent provided in the mortgage deed or if no amount is fixed to the extent
of two-third of the va)ue of the property. It is further provided that
mortgagee cannot get the property insured if there is already an insurance
by the mortgagor. A lien or charge holder has insurable interest to the
extent of the value of the lien or charge. The following also have insurable
interest in the property : (i) warehouseman as regards customer's goods;
(ii) trustee or executor; (iii) a common carrier; (iv) a finder of goods; (v)
lessor and lessee; (vi) a lien holder; and (vii) insurer himself.
Insurable interest and marine insurance.—According to S. 7 (1) and
S. 7(2) of the Marine Insurance Act, 1963, A person has an insurable interest
if he is interested in the marine adventure. In particular a person is interested
in the marine adventure if he stands in any legal or equitable relation to
the adventure or to any insurable property and in consequence he may
benefit by its safety or due arrival of the property or he may be prejudiced
by the loss or damage to the property or by detention or may incur liability
with reference to the property.
In case of contract of marine insurance insurable interest must be
present at the time of loss and need not exist at the time of entering into
the contract of marine insurance. The following person inter alia, have
insurable interest: (i} shipowner for full value; (ii) cargo owner; (iii} the
master or any member of the crew of a ship in respect of wages; (iv) the
 Law of Insurance 10.11
person advancing money on the security of the ship, or any goods arriving
by the ship; (v) the insurer of the ship or cargo; (vi) a seller of goods who
has not yet received the price or a buyer who has not yet got possession
of the goods. But the buyer of a vessel to whom property in the vessel has
not passed has no insurable interest. A partial interest of any nature is
insurable. The lender of money on bottomary
* has an insurable interest in
respect of the loan. In case of advance freight, the person advancing the
freight has an insurable interest in so far as such freight is not repayable
in case of loss. Insurance premium can also be insured against loss by
marine perils. The mortgagee of a ship or cargo also has insurable interest
in the super cargo in respect of the sum due under the mortgage, and the
mortagor too has insurable interest to the full value thereof in spite of the
mortgage. The mortgage, consignee or other person having insurable interest
may insure on behalf of and for the benefit of other persons interested in
the property as well as for his own benefit.

2. Indemnity
A contract of insurance except life, personal accident and sickness
insurance is a contract of indemnity. In Castellain v. Preston, 1883,11 Q.B.D.
380, BREETT, L.J., said:—
"The very foundation, in my opinion, of every rule which has been
applied in insurance law is this, namely, that the contract of insurance
contained in a marine or fire policy is a contract of indemnity, and of
indemnity only, and that this contract means that the assured, in case of
loss against which the policy has been made, shall be fully indemnified,
but shall never be more than fully indemnified".
In Castellain's case, Preston entered into a contract to sell his hosue
which he had insured against fire. Before the completion of the sale the ,
house was partly damaged by fire. The insurer indemnified the insured.
The buyer also paid the agreed price and completed the sale, and thus there
was gain to the seller by the insurance. But the insurer came to know of
this and sued the insured. It is argued on behalf of the insurer that there
was no loss due to the fire, as the insurer received the agreed price from
the buyer, and therefore there was nothing for which the insured had to
be indemnified by the insurer. The Court upheld the contention of the
insurer and ordered Preston to refund the amount received from the insurer.
Thus, indemnity is the fundamental principle in contracts of fire, marine,
burglary and other property insurance. It means that the insured will be

* Bottomary is a contract by which a ship owner borrows money for equipment, repairs, etc. pledging
 10.12 General Principles of Insurance

paid the actual amount of loss not exceeding the amount of the policy as
the object of a contract of insurance is to put the insured in the same
financial position, as nearly as possible, after the loss as if the loss had not
taken place and the insured is not entitled to make a profit of his loss. In
the absence of the principle of indemnity the insured might, be tempted
to bring about the event insured against in order to get the money and there
may be tendency to insure the goods or property for more than their value
which will be against, public interest.
A contract of indemnity is a contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor
himself or by the conduct of any other person as contempeated in S. 124
of the Indian Contract Act, 1872. But indemnity, as applicable to marine
insurance, must not be an indemnity, as contemplated by the Indian Contract
Act, as the loss in such a contract is covered by the contract itself and such
loss is not caused to the assured by the conduct of the insurer nor by the
conduct of any other person [State of Orissa v. United India Insurance Co.
Ltd., AIR 1997 SC 2671].
In actual practice the terms of the policy may prevent indemnity of
actual loss. For example, the actual loss may be. greater than the sum
insured and policy may be subject to average clause. In marine policies,
the contract is to indemnify 'in manner and to the extent agreed' (S. 3
Marine Insurance Act, 1963). Thus, in practice there is only a commercial
indemnity rather than a strict common law indemnity.
Life insurance, personal accident and sickness insurance form an
exception to the indemnity principle as no money payment can indemnify
for loss of life or bodily injury. Moreover, valued policies where the value
of the subject-matter is agreed beforehand, are strictly speaking also an
exception.

3. Subrogation
The doctrine of subrogation is a corollary to the principle of indemnity
and applies to fire and marine insurance. According to it, the insurer steps
into the shoes of the insured when he has paid the actual loss suffered by
the ' insured
as the insured is not allowed to make a profit out of his loss. In other words
the insurer is entitled to the advantage of every right of the insured against
a third party. This applies to all policies of insurance which are contracts
of indemnity.
Speaking of the doctrine of subrogation BRETT, L.J., said as follows
in Castellain y. Preston, (1883) QBD 380:—
 Law of Insurance 10.13
"The doctrine does not arise upon any of the term of the contract of
insurance, it is only another proposition which has been adopted for the
purpose of carrying out the fundamental rule (of indemnity) which I have
mentioned, and it is a doctrine in favour of the underwriters or insurers
in order to prevent 'the assured from recovering more than a full indemnity;
it has been adopted solely for that reason......... Now it seems to me that
in order to carry out the fundamental rule of insurance law, this doctrine
of subrogation must be carried to the extent which I am now about to
endeavour to express, namely, that as between the underwriter and the
assured, the underwriter is entitled to the advantage of every right of the
assured, whether such right consists in contract fulfilled or unfulfilled, or
in remedy for tort capable of being insisted or already insisted on, or in
any other right, whether by way of condition or otherwise, legal or equitable
which can be, or has been exercised or has accrued, and whether such right
could or could not be enforced by the insurer in the name of the assured
by the exercise or acquiring of which right or condition the loss against
is insured, can be, or has been diminished."
In Scottish Union and National Insurance Co. v. Davis, (1970) 1 Lloyd's
Rep 1, it was held that it is necessary for this right to arise that the insured
has been fully paid. In Napier v. Hunter, (1993) AC 713, it was held that
subrogation is concerned only with the loss against which the policy is
addressed rather than any general loss.

4. Mitigation of Loss
In case the event insured against happens, the insured must take all
necessary steps to mitigate or minimise the loss as if he were not insured
to preserve the property. The insured must act as a prudent uninsured
person would do in similar circumstances, otherwise the insurer can avoid
the payment of loss attributable to his negligence. Thus, an insured is
bound to do his best under the circumstances, but he is not bound to do
at his own peril.

5. Risk must attach

An agreement without consideration is void. In a contract of insurance
the insured pays the premium to the insurer for running a certain risk. If
the risk lis not run, the consideration for which the premium is paid fails
and therefore, the premium received by the insurer must be returned. For
example, if the subject-matter had already destroyed or the ship had already
returned safely but both the parties are ignorant about it, the risk does not
attach and the contract is thus void ab-initio.
 10.14 General Principles of Insurance
6. Contribution
When the same risk and the same subject-matter is insured with more
than one insurer, the co-insurers, in case of loss, are liable to contribute
in the proportion to the amount which each has undertaken to pay. Thus,
an insurer who has paid the assured more than his share of loss is entitled
to contribution from his co-insurers in proportion to the amount which
each has undertaken to pay. This principle applies in case of contract of
indemnity.
The‘following are the conditions necessary for right of contribution:
(i) The subject-matter of insurance about which claim to contribution
arises, must be common to all the policies, though they may include
other properties,
(ii) The peril which causes the loss, must be common to all the policies,
though these policies may include other perils,
(iii) All the policies must be taken by or on behalf of the same assured,
(iv) All the policies must be in force at the time of the loss,
(v) There must not be any stipulation in the policy excluding the right
of contribution.
Examples
(1) Insurer A and Insurer B have independly covered a risk. If A fully
indemnifies the insured, then, other things being equal, he can
claim half contribution from B.
(2) Insurer A and Insurer B have covered a risk. Both the policies
contained the usual rateable proportion clause that the insurer will
not pay more than its share of loss. If A indemnifies the insured
then B is not bound to reimburse A, because rateable proportion
clause excludes the right of contribution.

7. Proximate Cause0304
'"Where there is a succession of causes which must have existed in
order to produce the loss, or which has in fact contributed, or may have
contributed to produce it, the doctrine of proximate cause has to be applied
for the purpose of ascertaining which of the successive causes is the cause

Q3. What is the importance of "doctine of proximate course" in marine insurance? Explain.
[LL.B., D.U.]
Q4. Sugar bags loaded on a ship were insured against lossby sea water. A rat made a hole in the pipe
of the ship. Sea water leaked through that hole into the ship and damaged sugar in the bags lying
there. Whether insurance company is liable to pay this loss under policy of ship's goods?
1LL.B..D.U.1
 Law of Insurance 10.15
to which the loss is to be attributed within the intention of the policy." M.N.
Srinivasan—Principles of Insurance Law, 8th Edition 2008, Page 275.

An insurer is only liable to pay for loss which has been proximately
caused by a pei 5. insured against. In Pink v. Fleming it was held that
proximate cause or causa proximo means "in law the immediate and not
the remote cause is to be considered in measuring the damages." Where
there is a succession of causes which must have existed in order to
produce a particular result, the direct and proximate cause i.e. the last
cause must be looked into and the others rejected although the result
would not have been produced without their concurrence.

In Ley land Shipping Co. v. Norwich Union Fire Insurance Society Ltd.,
(1918) AC 350: All ER 443 HL, the learned judge gave a new dimension
to the concept. He explained that the proximate cause of an event is the
real and efficient cause to which an event may be attributed. Where the causes
are successive the peril insured against may be the last cause for the loss
in which case it can safely be said that the loss is caused by the peril insured
against. On the other hand, if the peril insured against is not the last cause
for the loss but it is only a preceding cause, the question arises whether
the last cause is a mere sequence of the preceding cause, the peril insured
against, or was there a break in the chain of causation? If the connection
between the preceding cause and the last cause is not interrupted by
intervention of a fresh cause, the peril insured against will have to be
treated as the real and the efficient cause and the insurer will be liable.
On the other hand, if the connection between the preceding cause and the
last cause is interrupted by intervention of a fresh cause, which is not a
mere reasonable and probable consequence directly and naturally resulting
in the ordinary course of events from the peril insured against the insurer
will not be liable. Thus, proximate cause does not mean the "nearest in'
time." It is the 'cause which is truly proximate in efficiency.' It is the
"effective or predominant cause." It is the cause which sets the other causes
in motion.
The rule of causa promixa is applicable in all types of insurance contracts.
To make a marine insurer liable the insured must prove the following :

(a) the loss is caused by the perils of the sea;

(b) that the peril is one that is insured against in the policy; and

(c) that the peril insured against is the proximate cause for the loss
sustained.
 1046 General Principles of Insurance
In Pink v. Fleming, (1899) 25 QBD 396 LORD ESHER said: "The question
can only arise where there is succession of causes which must have existed
in order to produce the result. There that is the cause, according to the law
of marine insurance, the last cause only must be looked to and the others
rejected, although the result would not have been produced without them."
In this case a cargo of oranges was insured. The peril insured was collision
with another ship. The ship collided and put into port for repairs, the
oranges were taken on lighter and then reloaded which caused damage
to the oranges. It was held that the proximate cause of the damage was
not collision but due to mishandling while unloading and reloading of the
oranges, and therefore, loss could not be recovered.
In LeylandShipping Co. Ltd. v. Norwich Union Fire Insurance Society
Ltd., (1918) A.C. 350, it was explained by the learned judge that the proximate
cause of an event is the real and efficient cause to which the event may be attributed
and the application of the doctrine varies according to the question whether the
loss was caused by the peril insured against. Here a ship was insured under
a time policy against perils of sea, but consequences of hostilities were
excepted. While on a voyage from S. America to Havre the ship was
torpedoed by a German submarine, but although she was struck forward
and tended to settle down by the head she reached Havre with the aid of
tugs. There the vessel was moored in the inner harbour, where she grounded
on each ebb tide and floated again on each flood, but after a few days her
bulk heads 'gave way, and she sank, becoming a total loss. It was held that
the grounding was not a new cause of the loss, but that the proximate cause
was still the torpedoing, which had been expressly excepted by the terms
of the policy, so that the underwriters were not liable. Lord Shaw stated
that The proximate cause is "the cause which is Truly proximate in
efficiency". The efficiency of a cause may have been preserved, though
other causes in the meanwhile sprung up. If the ultimate event is the result
of such an efficient cause, it will be regarded as the "proximate cause"
though not proximate in time.
In Scaramanga v. Stamp (1880), 5 G.P.D. 295, a ship, which was insured
against "hostilities", ran on a sunken wreck of another vessel, torpedoed
by an enemy submarine, which happened to be lying at the place of the
accident, it was held that the insurer was not liable for the loss, as "hostilities"
were not the proximate cause of the loss but the accident of the sunken
vessel, lying at the place where it lay. On the other hand, in William &
Co. v. North of England Indemnity Association, (1917) 2 KB 527, when an
enemy had purposely sunk a vessel at the entrance of a port, in order to
damage vessels entering therein, it was held that the loss was recoverable,
being covered bv a similar clause as the above, in the oolicv.
 Law of Insurance 10.17

In Hamilton Fraser & Co. v. Pandorf & Co., (1887) 12 App. Cas. 518.
the cargo (rice) was insured against damage by sea water. During the
voyage, rats made a hole in a pipe which connected the bathroom with
the sea with the result that sea water got through this hole and damaged
the rice. It was held that the proximate cause of damage being sea water,
the insured was entitled to damages, the rats being a remote cause. In
another case, where hides and tobacco were shipped in the same vessel,
and the hides became polluted by reason of sea water during a storm, and
the stench from them spoiled the tobacco, the damage thus caused was held
as having been proximately caused by perils of the sea.
In Taylor v. Dunbar, (1899) 38 L.J.C.P. 178, a ship carrying meat was
delayed by storm. The meat became decomposed and had to be thrown
overboard. It was held that the loss of meat was not a loss by the perils
of the sea, the proximate cause being delay, although the delay was caused
by a peril insured against.
Thus, an insurer is only liable to pay for loss which has been proximately
caused by a peril insured against. The principle is most vigorously applied
to contract of marine insurance where there are more chances of succession
of causes leading to a loss, some of which may not be insured against.
Section 55 of the Marine Insurance Act, 1963 provides that "unless the policy
otherwise provides, the insurer is liable for any loss proximately caused by a peril
insured against. " Thus, in order to recover loss under a marine policy the loss
(i) must have arisen from any of the "accepted perils ", and (ii) the "accepted
perils" must be the proximate cause of the loss. It further provides that (a) an
insurer is not liable for loss attributable to the wilful misconduct of the
assured but in the absence of a contract to the contrary, he is liable for loss
caused by a peril insured against although the loss would not have occurred
but for the misconduct of the master or the crew; (b) unless the contract'
otherwise provides, insurer of ship or goods is not liable for loss caused
by delay although the delay is caused by a peril insured against; (c) subject
to the contract to the contrary, the insurer is also not liable for loss caused
by ordinary wear and tear, ordinary leakage and breakage and by inherent -
vice or nature of the subject matter nor for any loss presumably caused
by rats or injury to machinery not proximately caused by maritime peril.
Thus, S. 55 of the Marine Insurance Act 1963 adopts the principles laid
down in the aforesaid cases.
In New India Insurance Company Ltd. v. M/s Zuari Industries, (2009)
8 SCC 70, the complainant had taken two insurance policies—one policy
was fire policy and the other was a consequential loss due to fire policy.
On Tanuarv 8. 1999 at about 3.20 n.m. there was a short cirmitintr in the
 10.18 General Principles of Insurance

main switch board installed in the sub-station receiving electricity from the
“State Electricity Board, which resulted in a flashover producing over
currents. The flashover and over currents generated excessive heat. The
paint on the panel board was charred by this excessive heat producing
excessive smoke and soot and the partition of the adjoining feeder developed
a whole. The smoke/soot along with the ionised air travelled to the generator
compartment where also there was a short circuiting and the generator
power also tripped. As a result the entire electric supply to the plant
stopped and due to the stoppage of electric supply, the supply of water/
steam to the waste heat boiler by the flue gases at high temperature
continued to be fed into the boiler, which resulted in damage due to fire.
It was held that the fire was the efficient and active cause of the damage.
Had the fire not occurred, the damage would not have occurred. There was
no intervening agency which was independent source of damage. It was
further held that duration of the fire is not relevant. As long as there is
a fire which caused the damage the claim is maintainable even if the fire
is for a fraction of a second.

8. Utmost good faith0506 Q7O7A

It is a fundamental principle of insurance law that utmost good faith
must be observed by the contracting parties. Good faith forbids either party
from concealing (non-disclosure) what he privately knows, to draw the
other into a bargain, from his ignorance of that fact and his believing the
contrary. Contracts of insurance are uberrima fides and, therefore, the insured
as well as insurer owe a duty to disclose before the contract is made every
material fact of which they know or ought to know. If a material fact is
not disclosed by the insured the insurers have the right at any time to avoid
the contract. Similarly if a 'material fact is not disclosed by the insurer, the
contract can be avoided by the insured. A fact is material if it is one that
would affect the mind of a prudent man even though the materiality is not
appreciated by the insured. Thus, in all cases of insurance whether on
ships, houses or lives, the underwriter must be informed of every material
circumstance within the knowledge of the insured and that the proper

Q5. "Contracts of Insurance are uberrimae fides" Elucidate with the help of judicial decisions and
statutory provisions on the subject. [LL.B., DiU.J
Q6. "Insurance is a contract based on utmost good faith and if it is not observed, the other party
may avoid the contract." Explain with the help of decided cases the scope of this duty.
[LL.B., D.U.)
Q7. What d'o you understand by the statement that the contracts of insurance are "contacts of
uberrimae fides"? Describe the extent of the assured's duty of disclose. What is the object and
scope of S. 45 of the Insurance Act, 1938? [LL.B., D.L?}
 Law of Insurance 10.19
question is whether any particular circumstance was in fact material, and
not whether the party believed it to be so. This is the position of law of
insurance for centuries in England.
The duty to disclose all material facts to the insurer arises from the fact
that many of the relevant circumstances are within the exclusive knowledge
of one party, and it would be impossible for the insurer to obtain the facts
necessary for him to make a proper calculation of the risk he is asked to
assume without this knowledge. Accordingly law of insurance'requires the
prospective insured not merely to refrain from actively misleading the
insurer but he must also disclose all material circumstances.
In the leading case, Caster v. Boehm, (1766) 3 Burr 1905, (this case
concerned a policy which had been taken out against the taking of a fort
by a foreign enemy) Lord Mansfield said:
"Insurance is a contract upon speculation. The special facts, upon
which the contingent chance is to be computated, lied most commonly in
the knowledge of the insured only; the underwriter trust to his
representation, and proceeds upon the confidence that he does not keep
back any circumstance in his knowledge, to mislead the underwriter into
a belief that the circumstance does not exist, and to induce him to estimate
the.risk as if it did not exist. The keeping back such circumstances is a fraud
and, therefore, the policy is void. Although the suppression should happen
through mistake without any fraudulent intention yet still the underwriter
is deceived and the policy is void; because the risk run is really different
from the risk understood and intended to be run at the time of the
agreement.... Good faith forbids either party, by concealing what he privately
knows, to draw the other into a bargain from his ignorance of the fact and
his believing the conirary."
In London Assurance v. Mansel, (1879} 11 Ch.D 363, (this case concerned
life insurance policy) Jessel, MR. observed "... whether it is life or fire or
marine assurance I take it good faith is required in all cases and though
there may be certain circumstances from the peculiar nature of marine
insurance which require to be disclosed and which do not apply to other
contracts of insurance, that is rather, in my opinion, an illustration of the
application of the principle, than a distinction in principle."
In India the duty to disclose in the case of marine insurance is prescribed
by S. 19 and S. 20 of the Marine Insurance Act, 1963. S. 19 states that a
contract of insurance is a "contract based upon the utmost good faith, and
if the utmost good faith be not observed by either party, the contract may
be avoided by the opposite party." S. 20 lays down as follows:—
 10.20 General Principles of Insurance
"S. 20. (1) Subject to the provisions of this section, the assured must
disclose to the insurer before the contract is concluded, every material
circumstance which is known to the assured and the assured is deemed
to know every circumstance which in the ordinary course of business,
ought 'to be known to him. If the assured fails to make such disclosure,
the insurer may avoid the contract
(2) Every circumstance is material which would influence the judgment
of prudent insurer in fixing the premium or determining whether he will
take the risk." ’
The provisions of Marine Insurance Act in India are in pan materia with
the English Act in this respect. In Krishnawati Puri v. L.I.C., AIR 1975
Delhi 16, it was observed that the "test of what is material fact and the
degree of good faith which is required is otherwise the same in all classes
of insurance." The Act uses the words "prudent insurer" which means that
in a dispute the court must apply the objective standard of business usage
and disregard the exacting standard of a particular insurer. "Circumstances
that need not be disclosed include those diminishing the risk and matters
of common knowledge generally or in the insurer's business. The prospective
assured must disclose material circumstances, that he knows or ought to.
know."
The following facts have been held to be material:
(1) Facts which suggest that the subject matter of insurance is exposed
to more than ordinary danger from the peril insured against. For
example in case of highly inflammable goods the risk of loss by
fire is more as compared to other goods.
(2) Facts which suggest that the purpose of the assured in taking out
an insurance policy is not based on good faith.
(3) All facts relating to the previous history of the assured which are
relevant for the contract of insurance. For example the question
whether the insurance proposal has been rejected by any other
company is material. Similarly the question whether the proposer
has ever been a claimant under the insurance policy is material,
Kasim Ali Bulbul v. The India Insurance Co.
(4) All facts are material which the assured knows that they are
regarded by the insurer as material.
(5) Facts relating to serious ailment, health and habits of the assured
are material.
The duty of disclosure continues down to the time when the contract
 Law of Insurance ■ 10.21
between the date of the proposal and (that of final acceptance of the risk
by the insurance company that is, the date of the concluding of the contract),
that alteration must be disclosed [Looker v. Law Union and Rock insurance
Co. Ltd., (1928) 1 K.B., 554). In United India Insurance Co. Ltd. v. M.K.J
Corporation, (1996) 6 SCC 428, it was held that good faith is a continuing
obligation. Even after entering into the contract, no material alteration can
be made by insurer in the terms of the contract without consent of the
insured. Just as the insured has a duty to disclose, similarly it is the duty of the
insurers and their agents to disclose all material facts ivithin their knoivledge since
obligation of good faith applies equally with the assured.
If a person fills in a proposal form for a prospective insured he acts
as the agent of the insured and not as the agent of -the insurer even if the
form is filled in by an insurance agent. Thus, in Bigger v. Rook Life
Assurance Co., (1902) 1 K.B. 516, the agent filled in wrong answer, and the
applicant signed without reading the proposal or checking the particulars
given. Held, the applicant was guilty of non-disclosure, and the policy was
void. Similarly, in Newsholme Brother v. Road Transport and General
Insurance Co., (1929) 2 K.B. 365,, agent was told the true facts, but for some
unexplained reasons fill in wrong answers, and the applicant signed without
checking what the agent had written. It was held that the insurers were
not liable.
In Dewsons Ltd. v. Bonnin, (1922) 2 AC 413, it was held that where
the terms of a policy of insurance the proposal form is made the basis of
the contract of insurance, the insurer will not be liable if any of the statements
contained in the proposal form are untrue, whether they are on material
points or not. In this case a statement as to the place of garaging the lorry
was untrue, the claim of the insured under the policy failed although the
statement in question was not material. Thus, by inserting this warranty
of truth or "basis clause" in policies insurer can save himself from the
trouble of proving that untrue statement by the assured in the proposal
form were material, in other words, that, but for untruth they would not
have accepted the risk for the premium agreed. The courts in England tend
to construe the "basis of the contract" clauses strictly against due insurance
companies. The questions of legislating against such clauses have been
considered by the Law Reform Committee (1957-5th Report) but. no definite
recommendation was made.
In Mutual Life Insurance Company of New York v. Ontario Metal
Products Co. Lid., (1925) AC 344, no "basis clause" was contained in the
policy and the non-disclosure or misstatement was not material to the
 10.22 General Principles of Insurance
assured was asked for the name of any physician who had treated him
during the last five years before he took out the insurance. To this be
replied that he had received no treatment during the period in question,
and this was obviously untrue. The result of medical examination for the
insurance had revealed excellent health and therefore, had the facts
concealed been disclosed, it would not have influenced a prudent insurer
so as to induce him to refuse the risk or to alter the premium.
Section 45 ofthe Insurance Act, 1938 enacts a special provision of law
in this connection. The section is as follows:—
"45. Policy not to be called in question on ground of misstatement
after two years.QSQ9Q9A—No policy of life insurance effected before the
commencement of this Act shall, after the expiry of two years from the
date of commencement of this Act and no policy of life insurance effected
after the coming into force of this Act shall, after the expiry of tiva years
from the date on which it was effected, be called in question by an
insurer on the ground that a statement made in the proposal for insurance
or in any report of a medical officer, or referee or friend of the insured,
or in any other document leading to the issue of the policy, was inaccurate
or false, unless the insurer shows that such statement was on a material
matter or suppressed facts which it was material to disclose and that it
was fraudulently made by the policy-holder and that the policy holder

Q8. A, aged 48, had her attack in 2002 for which he had open heart surgery' in Laxmi Hospital. In
2005, he insured his life with Life Insurance Corporation of India (LIC) for Rs. 5,00,000. In the
proposal form to the question "Have you suffered any heart ailment?" A gave a negative
answer. A doctor of LIC examined the health of A but he recommanded A's life to be insured.
After 4 years of insurance of insurance policy, A died by another heart attack. Can Life
Insurance Corporation of India refuse to pay the sum insured to the nominee of the policy?Can
claimant plead estoppels and bar of Section 45 of the Insurance Act, 1938? Decide. [LL.B.,
D.U.]
Q9. The assured Kundon, had insured his life under a policy issued by the LIC of India on 1st
November, 2009 for a sum of Rs 65,000 In an answer to the question in the proposal from he
had stated as follows:
"Have you suffered from mental derangement within past three years? Answer: 'No', whereas
in fact he had, though not aware of the fact, been in confinement for mental derangement a
years ago."
Kundan died on 1st March, 2012. Sudha, wife of Kundon, claim the amount under the policy
as the person entitled to it. The LIC of India resists the claim on the ground that the assured,
Kundan, concealed the material fact regarding the mental derangement at the time of the
proposal. How will you decide. Discuss with referance to the statutory provisions and the case
law on the subject. [LL.B., E>UJ
Q9A. X insured his life with Birla Sun Life Insurance Company Ltd. At the time of the proposal-, he
replied to a number of questions, contained in the proposal form, including as to whether he
Was a graduate or not. He replied in affirmative. But in fact, he could not pass his graduation
degree examination. After 3 vears of this nolicv. he met with an accident and died Can X
 Law of Insurance 10.23
knew at the time of making it that the statement was false or that it
suppressed facts which it was material to disclose:
"Provided that nothing in this Section shall prevent the insurer from
calling for proof of age at any time if he is entitled to do so, and no policy
shall be deemed to be called in question merely because the terms of
the policy are adjusted on subsequent proof that the age of the life
insured was incorrectly stated in the proposal."
It would be noticed that the operating part of S. 45 states in effect that
no-policy of life insurance effected after the coming into force of the Act shall, after
the expiry of two years from the date on zvhich it zvas effected, be called in question
by an insurer on the ground that a statement made in the proposal for insurance
or in any report of a medical officer, or referee, or friend of the insured, or in any
other document leading to the issue of the policy, was inaccurate or false. The
second part of the section is in the nature of a proviso zvhich creates an exception;
it lays dozvn that if the insurer shozvs that such statement zvas on a material matter
or suppressed facts which it zvas material to disclose and that it was fraudulently
made by the policy-holder and that the policy-holder knew at the time of making
it that the statement was false or that it suppressed facts which it was material
to disclose, then the insurer can call in question the policy effected as a result of
such inaccurate or false statement.
Tire three conditions for the application of the second part of S. 45 as
pointed out by DAS S.K., J. in Mithoo Lai Nayak v. LIC, (1962) 32 (S.C.)
Comp. Cas. 177, AIR 1962 S.C. 814, are—
(a) the statement must be on a material matter or must suppress facts
which it was material to disclose;
(b). the suppression must be fraudulently made by the policy-holder;
and
(c) the policy-holder must have known at the time of making the
statement that it was false or that it suppressed facts which it was
material to disclose.
The test of materiality is, therefore, super-imposed by the statute on
the terms and conditions of the proposal. The contractual freedom of the
insurers has been severely restricted by Indian legislature. The insured has
thus been sufficiently protected and the resulting contract cannot be
rescinded merely upon proof that the information is inaccurate unless all
the three conditions of S. 45 are satisfied. In this sense Indian law is a
distinct advance upon the English law.
 10.24 General Principles of Insurance
"Fraud" means and includes any of the following acts committed by
a party to a contract, or with his connivance or by his agent, with intent
to deceive another party thereto or his agent; or to induce him to enter into
the contract:—
1. the suggestion, as a fact, of that which is not true by one who does
not believe it to be true;
2. the active concealment of a fact by one having knowledge or belief
of the fact;
3. a promise made without any intention of performing it;
4. any other act fitted to deceive.
5. any such act or omission as the law specially declares to be
fraudulent
In Mithoo Lal Nayak v. LIC, AIR 1962 SC 814, it was observed that
consideration of material facts when making a proposal for insurance by
one having knowledge and belief of fact would fall under S. 17 of the
Contract Act and the policy issued would be vitiated thereby.
Coming back to S. 45 of the Insurance Act, 1938 it has been held in
Vaid Mahesh Chandra v. LIC, (1968) 38 Comp. Cas. 767, that the section
does not apply merely because the assured died within two years of the
date of the policy. Again in New India Assurance Co. v. Sulochana
Chaudhrani, (1962) 32 Com. Cas. 1029 Assam, it was held that S. 45 applies
also to cases where the assured dies within two years of the date of the
policy, if the insurer seeks to avoid the policy only after the expiry of two
years from the date of the policy.
The policy does not become effective from the date the formal document
is executed or issued. The phraseology used in S. 45 relates to a date from
which the policy of insurance becomes effective and such date would be
the date of acceptance of the proposal from which the risk on the life of
the proposer is covered, Sheoshanker v LIC, (1973) 43 Comp. Cas. 284
(Bom.).
In All India General Insurance Co. Ltd. v. S.P. Maheshwari, AIR 1960
Mad. 848, it was held that the insurance company is entitled to avoid the
policy on the grounds of deliberate misrepresentation about drinking habit
and non-disclosure of venereal disease. Again in New India Assurance Co.
v. Sulochana Chaudhrani, (1962) 32 Comp Cas. 1029 (Assam), it was held
that if the assured is accustomed to heavy drinking it is a material fact.
But a statement concerning the literacy of the insured or observance of
__ i. *—:~i t.. f-xanA\ aa
 Law of Insurance 10.25
In Mithoo Lal Nayak v. LIC, AIR 1962 SC 814, the assured, fraudulently
made a false statement relating to his health. It was held that the mere fact
that the insurance company had the assured examined by its own doctor
will not relieve him from the legal consequences of the false statement.
In Krishnawatt v. LIC of India, AIR 1975 Delhi 19, it was held that
the Corporation was entitled to avoid the policy on the grounds available
to the insurers under S. 45 of the Insurance Act, 1938, as the assured not
only failed to disclose what it was material for him to disclose, but he made
a false statement to the effect that he had never suffered from any disease
of the heart.
The Supreme Court in its decision in LIC v. Asha Goel (2001) 2 SCC
160: AIR 2001 SC 549, analysed S. 45 in terms of its operative points a
follows:
"On a fair reading of Section 45 of the Insurance Act it is clear that
it is restrictive in nature. It lays down three conditions for applicability of
the second part of the section namely: (a) the statement must be on a
material matter or must suppress facts which it was material to disclose;
(b) the suppression must be fraudulently made by the policy-holder; and
(c) the policy-holder must have known at the time of making the statement
that it was false or that it suppressed facts which it was material to disclose.
Mere inaccuracy or falsity in respect of some recitals or items in the proposal
is not sufficient. The burden of proof is on the insurer to establish these
circumstances and unless the insurer is able to do so there is no question
of the policy being avoided on ground of misstatement of facts. The contracts
of insurance including the contract of life assurance are contracts uberrima
fides and every material fact must be disclosed, otherwise, there is a good
ground for rescission of the contract. The duty to disclose material facts
continues right up to the conclusion of the contract and also implies any
material alteration in the character of the risk which may take place between
the proposal and its acceptance. If there are any mis-statements or there
is suppression of material facts^ the policy can be called into question. For
determination of the question whether there has been suppression of any
material facts, it may be necessary to also examine whether the suppression
relates to a fact which is in the exclusive knowledge of the person intending
to take the policy and it could not be ascertained by ah enquiry by a
prudent person."
In PC. Chacko v. L.I.C. of India, (2008) 1 SCC 321 : AIR 2008 SC 424,
it was held that misstatement by itself was not material for repudiation
of the policy unless the same is material in nature. But a deliberate wrong
answer which has a great bearing on the contract of insurance, if discovered
 10.26 General Principles of Insurance

may lead to the policy being vitiated in law. The purpose of taking a policy
of insurance is not very material. It may serve the purpose of social security
but then the same should not be obtained with a fraudulent act by the
insured.
In Dipashri, Widow of Vilas Anandrao Talpade v. Life Insurance
Corporation of India, 1984 (2) Bom CR 155 : AIR 1985 Bom. 192, PENDSE,
J. said:
"In the first instance, there was no suppression whatsoever by the
deceased. It was not necessary for the deceased to disclose trivial ailments,
like fever, flue or dysentary. There is nothing to warrant the conclusion
that the deceased had consulted Medical Practitioner within five years
prior to the taking out of the policy. The concept of consultation with
Medical Practitioner is entirely different from securing medical certificate
on the ground that the person is down with fever. The perusal of the
proposal form leaves no manner of doubt that it is not each and every petty
ailment which has to be disclosed by the proposer and what it required
to be disclosed is a serious ailment. The deceased was not suffering from
any serious ailment and was a young man of 41 years age at the time of
taking out the policy. The Medical Practioner on the panel of the Corporation
had examined him and in these circumstances, it is futile for the Corporation
to claim that the deceased was suffering from any serious ailment. In my
judgement, the non-disclosure of the fact that the deceased was sufferingfrom fever
or down with flue on some occasions is not a material matter and, therefore, the
failure to disclose the same cannot be construed as suppression of the relevant fact.
As laid down by the Supreme Court, it is not suppression of the fact which is
sufficient to attract second part ofS. 45 of the Insurance Act but what is required
is that such suppression should be fraudulently made by the policy holder. The
expression "fraudulently" connotes deliberate and intentional falsehood or
suppression and some strong material is required before concluding that
the policy holder had played fraud on the Corporation."
In Life Insurance Corporation of India v. Smt. G. M. Channabasama, (1991)
1 SCC 357, it was held that the burden of proving that the insured had
made false representation and suppressed material facts is undoubtedly
on the insurer. If the insurer fails to discharge this burden the life insurance
policy cannot be called in question by the insurer.
In Life Insttrance Corporation of India v. Ajit Gangadhar Shanbhag,
AIR 1997 Kant 157, the Karnataka High Court held that when there is no
violation of any statutory duty on the part of the Corporation and in view
of the fact that the matter arises out of a contract between the insurer and
' Law of Insurance 10.27
| insured and there being several disputed questions of fact, a writ cannot
. be issued.
j In Life Insurance Corporation of India v. Asha Goel, AIR 2001 SC 549,
it was held that the insured remains duty-bound to disclose any material
alteration in the character of the risk, which might occur in the period
between the proposal and its acceptance. Titus, the duty to disclose facts
continues right upto the conclusion of the contract. It was further held that
ordinarily the High Court should not entertain a writ petition filed under
Article 226 of the Constitution for a mere enforcement of a claim under
contract of insurance. The pros and cons of the matter in the context of the
facts and situation of the case should be carefully weighted and appropriate
decision should be taken. Ir> -;c;p where claim by an insured or a nominee
*
is repudiated by the ins ing a serious dispute and the Court finds
the dispute to be a b- one which requires oral and documentary
evidence for its determi .■n then the appropriate remedy is a civil suit
and not a writ pc der Article 226 of the Constitution. Similarly,
where a plea of fr. aded by the insurer and on examination is found
prima facie have ind oral and documentary evidence may become
necessary for determination of the issue raised, then writ petition is not
an appropriate remedy.

Recasting of Section 45 Suggested

The Law Commission of India has, in a working paper, suggested in
April 1985 that Section 45 of the Insurance Act, 1938 should be recast to
reconcile the right of the insured or claimant by pre-empting a challenge
on frivolous grounds, and the right of the insurer to repudiate the claim
on "good" grounds only.
Under the English common law, contracts of insurance are contracts
uberrima fides or contracts of utmost good faith, so that, if the insured makes
incorrect statements or suppresses facts, the insurer is not bound to honour
the contract even after the policy has been in force for several years. In the
event all premium paid would be forfeited to the insurer.
Section 45 of the Insurance Act, 193 8 was enacted to modify the said
rule and to mitigate the rule of utmost good faith.
The Commission, after examining the various case laws on the subject
and the law as it stands in the UK and the USA has stated that the section
should be recast as follows:
"Section 45. Policy not to be called in question on ground of
misstatement after 3 years—(1^ No policy of life insurance shall be called
 ju.zo General Principles of Insurance
in question after the expiry of three years from the date on which the policy
is effected.
(2) A policy of life insurance may be called in question at any time
within three years from the date on which the policy is effected on ground
that any statement being a statement material to the expectancy of the life
of the insured was incorrectly made in the proposal or other document on
the basis of which the policy was issued or revived."

9.Interpretation of Liability Clauses in Favour of lnsuredQ9BQ9C

Each term in the policy and each phrase in the policy, is prima facie to
be construed according to its ordinary meaning. Construction depends not
upon the presumed intention of the parties but upon the meaning of the
words used. The ordinary meaning of the word is not to be discarded for
some hidden meaning. The courts will try to ascertain the meaning of the
words used by adopting ordinary rules of construction.
The words in the policy must not be used with extreme liberalism, but
with reasonable latitude and at the same time to give effect to all the
conditions and stipulations. As the object of the parties is to enter into a
contract of insurance, any construction which defeats this objective is not
to be followed. As the illiteracy is high in India as compared to Western
countries the principles of construction should not be applied with the
same amount of strictness as in Western countries.
The following points should be kept in mind while interpreting an
insurance policy :
1. Intention:—It is common place that it is the court's duty to give
effect to the bargain of the parties according to their common
intention. While construing an insurance policy the intention of the
parties must prevail. The intention of the parties is to be gathered
from the words used in the policy. All the clauses of the policy
must be looked into and not only a particular clause.
In United Indian Insurance Co. Ltd. v. Harchand Rai Chandanlal,
(2004) 8 SCC 644, it was held that terms of the policy shall govern

Q9B. Analyse the principles of construction/interpretation of insurance policies. [LL.B., D.U.]

Q9C. One bank 'P took two insurance policies with Oriental Insurance Co. Ltd. One was a cash
insurance policy and the other a burglary insurance policy for Rs. 25 lakh, covering a period
of one year. During the currency of the policies, bank was burgled one night and the cashier's
cash chest was found missing. The bank reported the matter for the value of pledged jewellery
in the stolen cash box along with Rs. 10,000 in cash. The insurance surveyor reported that the
jewellery had not been kept in a safe looker and so the theft was not covered under the policy.
The record show that in the insuranceproposal from, the bank had answered in the affirmative
to the question whether all valuables were secured in "burglary resisting safes when the
premises are locked." The insure disclaimed liability. Decide. [LL.B., D.U.]
 Law of Insurance 10.29
the contract between the parties and they have to abide by the
definition given therein, and all those expressions appearing in the
policy have to be construed as it is and something cannot be added
subtracted or substituted; the parties cannot rely on the definition
given in other enactments. It was held in this case that definition
of "burglary" in criminal law was held to be of no help to the
insured as it was defined in the policy as theft preceded by use
of force or violence. Theft not so preceded, was held not covered
by policy.
2. Construction according to ordinary meaning—A policy is to be
construed according to the same rules of construction, which are
applied by English Court to the construction of every other
mercantile instrument [West Indian and Panama Telegraph Co. v.
Home and CoIonian Marine Insurance Co. (1880) 6 QBD 51]. The
rule of construction is, except where words have acquired special
"conventional meaning", namely what do the words mean on "fair
reading, having regard to the whole documents" [Nelson Lone v.
James Nelson & Sons]. Where the language of the policy is clear
the full effect must be given to it although it may operate harshly
against the assured. Tire condition or warranty must be interpreted
according to the natural meaning of the words used in the policy.
In Parameshwari v. Nihal Chand, AIR 1938 Sind 20, it was held
that if a clause is in small print and is such that no reasonable man
reading with reasonable care would regard it as forming part of
the contract will not be enforceable.
In Harris v. Poland,Q1° ER (1941) 1 KB 462, the plaintiff took a
Lloyd's "Hpuseholder's Comprehensive Policy" of insurance with
the defendant, insuring contents of her flat including jewellery,
against loss or damage caused, inter alia by fire. For purpose of
protection against theft, on leaving her flat one day, she concealed
the jewellery in the grate under coal and wood, which were ready
for lighting. On returning in the evening she inadvertently lit the
fire and the jewellery was damaged. The question before the court

Q10. A lady X, aged 68, very nerous about the safety of her costly Jewellary insured it for Rs. 90,000
against theft and fire with AB Insurance Company. One day, while goint out, X kept the
jewellary in the grate under coal which was ready for lighting up. On return, unmind he about
the jewellary, she lit the grate which resulted in total distinction of the insured jewellary. X's
claim under the policy has been subjected by the AB Insurance company on the ground that
the insurance policy destruction of tire jewellaryby fine ary at a place where no fine eight to be
and, maeover, jewellary was destroyed due to the grass neghigence of policy holder X.
Disscuss the principles of interpretation which should be applied in deciding the claim of X and
decide whether X's claim has been nightly rejected by the company.
10.30 General Principles of Insurance

was whether there was a loss by fire within the meaning of the
policy; where the damage was done to the insured property in
place where the fire was intended to be. It was held that the risk
against which the plaintiff is insured include the risk of insured
property coming unintentionally in contact with fire and being
thereby destroyed or damaged, and it matters not whether fire
comes to the property or insured property comes to the fire. The
words of the policy are as descriptive of one as the other and the
honourable judge said, "I cannot read into the contract a limitation
which is not there. To enable me to accept the contention of the
underwriters, I should have to read something into the contract
some words as "unless the insured property comes into contact
with fire in a place where fire is intended to be."
3. Ambiguity in the language of the policy (contra proferentum)—As
a policy is prepared by the underwriters any ambiguity therein
must be. taken most strongly against the underwriters by whom
it has been prepared. If a policy is reasonably susceptible of two
constructions, that one will be adopted which is more favourable
to the insured. (Anderson v. Fitzerald, (1853) 4 HLC 484; Co­
operative Assurance Co. v. Sachdeva, AIR 1936 Lah. 685; Baxendale
v. Harvey (1859) 28 L.J. Exch. 236; Harris v. Poland (1941) 69 LL
Kep. 35 KB). The warranties particularly are to be read liberally
in favour of the assured and against the insurance company. In the
Central Bank of India v. The Hardford Fire Insurance Ca. Ltd., AIR
1965 SC 1228, it was held that contra preferentum rule had no
application in that case as there was no ambiguity. In Joel v. Law
Union & Crown Insurance Company (1908) 2 K.B. 863, it was held
that rule of contra proferentum is applicable equally whether the
contracts of fire, marine or life insurance.
In United India Insurance Co. Ltd. v. Pushpalaya Printers, (2004) 3
SCC 694: AIR 2004 SC 1700, it was held by the Supreme Court that
it is a settled law that if there is any ambiguity or a term is capable
of two possible interpretations, one beneficial to the insured should
be accepted consistent with the purpose for which the policy is
taken, namely to cover the risk on the happening of a certain event.
In this case the word "impact" in the instant policy was construed
against the appellant. ~
4. Efusdem generis rule—It is well known rule of construction that
where a particular (not heterogenous collection of items)
enumeration is followed by such words as "and others" or "etc."
 Law of Insurance 10.31
then such expressions are usually limited to matters eiusdem generis
with those specifically enumerated.
5. Incorporation of proposal form and statements in policy—Where
the proposal form or answers in the declaration form are declared
on the basis of the contract, they will form part of the contract.
However, in case of inconsistency between the proposal form and
the policy, the policy would prevail.

LEADING CASES
Nezo India Insurance Company Ltd. v. Mis Zuari Industries Ltd.
(2009) 8 SCC 70
Note—This case deals with the principle ofproximate cause and interpretation
of fire policy.

Facts
The complainant (respondent in this case) had taken two insurance
policies— one policy was a fire policy and the other was a consequential
loss due to fire policy. On January 8, 1999 at about 3.20 p.m. there was a
short circuiting in the main switch board installed in the sub-station receiving
electricity from the State Electricity Board, which resulted in a flashover
producing over currents. The flashover and over currents generated
excessive heat producing smoke and soot and the partition of the adjoining
feeder developed a whole. The smoke/soot along with the ionized air
travelled to the generator compartment where also there was short circuiting
and the generator power also tripped. As a result, the entire electric supply
to the plant stopped and due to the stoppage of electric supply, the supply
of water/steam to the ’waste heat boiler by the flue gases at high temperature
continued to be fed into the boiler, which resulted in damage to the boiler.
The complainant approached the Insurance Company informing it
about the accident and making its claim. The Insurance Company contended
that the loss to the boiler and other equipments was not caused by fire,
but by stoppage of electric supply due to short circuiting in the switch
board.

Issue
Whether the flashover and fire was the proximate cause of the damage
in question?

Decision of the Supreme Court

The Court held that, "It is evident from the chain of events that the
fire was the efficient and active cause of the' damage. Had the fire not
 1U.32 General Principles of Insurance
occurred, the damage also would not have occurred and there was no
intervening agency which was independent source of damage/'
MARKENDEY KATJU, J. further said:
"In our opinion the duration of the fire is not relevant. As long as there
is a fire which caused the damage the claim is maintainable even if the fire
is for a fraction of a second. The term 'Fire' in clause (1) of the Fire Policy
'C is not qualified by the word 'sustained'. It is well settled that the Court
cannot add words to statute or to a document and must read it as it is.
Hence repudiation of the policy on the ground that there was no '^sustained
fire' in our opinion is not justified."
Simmond v. Cockell (1920)Qri
1 K.B. 843
Note—The case is on ambiguity rule of construction.

Facts
The plaintiffs premises were insured against loss or damage by (inter
alia) burglary, house breaking or theft. The policy contained the following
clause: "warranted that the said premises are always occupied". The plaintiff
and his wife and no other person resided at that place which was used as
a shop also. On Sunday June 21, 1919 during the currency of the policy
the plaintiff and his wife left the premises unattended between 2.30 p.m.
and 11.30 p.m. except for a short interval between 6 p.m. and 7 p.m. when
the plaintiff was on the premises. On the return of the plaintiff and his wife,
it was found that during their absence the premises had been broken into
and some of the contents of the value of £ 400 had been stolen. The
defendant insurer, refused their liability.

Decision
It was held that the words "premises are always occupied" does not
mean that premises are never to be left unattended. It means that premises
are to be used continuously and without interruption, for occupation that
is to say as a residence and not merely as a lock up ship which is left
unoccupied after business hours.
It was observed that it is a ivell known principle of insurance law that if the
language of a warranty in a policy is ambiguous it must be construed against the
Q11. Reena has an insurance policy against theft and house breaking, with a condition that her
house shall always remain occupied. The house was left unattended on one Sunday between
2 p.m. and 7 p.m., when she had gone to see her ailing mother. On her return she found the locks
of her safe broken and her jewellery worth Rs. 20,000 missing. Reena claims the loss under the
policy from the insurer. Decide, stating the principles of interpretation of insurance policy with
reference to decided cases, if any. [LL.B., D.U.]
 Law of Insurance 10.33
underwriter who has drawn the policy and inserted the warranty for his own
protection.
The Court said: "if the premises are used for residential as well as for
business purposes, it is obvious that a thief would never know at what
moment the occupation which the warranty requires and which has been
secured. The defendant has not stipulated for the continuous presence of some
one in the premises, which he could have done by providing that the premises were
never to be left unattended. There must therefore be judgment for the plaintiff."

Harris v. Po/andQ12'Q13,Q14,Q15
(1941) 1 K.B. 462
Note—The case deals with the proper construction of the words "loss by
fire".

Facts
The plaintiff took a "Lloyd's Householder's Comprehensive Policy" of
insurance with the defendant and other underwriters, insuring the contents
of her flat, including jewellery against loss or damage caused (inter alia)
by fire. For purposes of protection against theft, on leaving her flat one day,
she concealed the jewellery in the unlighted grate under coal and wood,
which were ready for lighting. On returning in the evening she inadvertently
lit the fire and the jewellery was partly destroyed and partly damaged. The
underwriters repudiated liability contended that the loss was not covered
since it did not fall within the terms of the policy which only applied to
"loss or damage caused by fire", because the damage had been done to
the insured property by fire in a place where it was intended i.e. in the
grate. On the other hand, it was contended on behalf of the insured (plaintiff) .
that the indemnity in the policy is against any "loss or damage by fire"
to the property. The fact that the plaintiff in ignorance caused the loss does
not affect it.

Q12. State the facts of Harris v. Polland (1941) All ER 204 and exaplain the rules applied for proper
construction of the phrase ' loss by fire' in a Fire Insurance Policy. [LL.B., D.U.]
QI3. State the main rules of construction of an insurance policy elaberating how the judiciary
applied there ruler in the case of Harris v. Poland (1941) All ER 204. [LL.B., D U.}
Q14. A took a "compehensive policy" of insurance with Company B, insuring the constent of her
flat, including jewellary, against loss by theft, On leaving her flat one day, she canceled the
jewellary in the grate under coal and wood, which was ready for lighting. On returning in the
evening, she inadvertently lit the fire, and the jewellary was damaged. Decide with the help
of case law. [LL.B., D.U.]
 10.34 General Principles of Insurance
Issue
Whether there was a loss by fire within the meaning of the policy,
where the damage was done to the insured property in a place where the
fire was intended to be?

Decision
. /t was held that “it mattered not whether the property had gone to the fire
or the fire had gone to the property. There had been ignition of insured property
not intended to be ignited, and the loss falls within the plain words of the policy."
In the course of his judgment ATKINSON J. said: "I have no doubt that
the ordinary man when insures against loss by fire believes that he is
insuring against every kind of loss which he may suffer from the more or
less compulsory use of fire by himself or his neighbour."
His Lordship said in the text books there is no clear consensus as to
the meaning of the words "loss or damage caused by fire" which might
force him to hold that they have acquired a recognised meaning to which
one can give effect. There is difference of opinion or ambiguity in the text
books; and ambiguity is fatal to the underwriter's case as in case of ambiguity
the interpretation most favourable to the insured must be adopted. If there
is no ambiguity each term in the policy and each phrase in the policy prima
facie to be construed according to its ordinary meaning and not upon the
presumed intention of the parties. Guided by these principles His Lordship
said :—
"In my judgment the risks against which the plaintiff is insured included
the risk of insured property coming unintentionally in contact with fire and
being thereby destroyed or damaged, and it matters not whether that fire
comes to the insured property or the insured property comes to fire. The words
of the policy are just as descriptive of one as the other and I cannot read
into the contract a limitation which is not there. To enable me to accept
the contention of the underwriters, I should have to read something into
the contract some such w’ords as "unless the insured property is burnt by
coming in contract with fire in a place where fire is intended to be."
The test of liability according to Holt's Reports referred to in the case
is this: "Has something been consumed by fire which was not intended
to be consumed?" If the fire is cause of the damage, it maters not whether the
fire was properly or improperly lighted but the question is whether the fire
occasioned the damage.
ATKINSON J. based his views in substance on what Byles, J. said in
Evert v. The London Assurance, 19 C.B. (NS) 126. In this rasp it wac
 Law of Insurance 10.35
construed as ordinary people would construe them. They mean loss or
damage either by ignition of the article consumed or by ignition of part of the
premises where the article is, in the one there is a loss in the other damage
caused by fire. ATKINSON J. said, "I think there is loss or damage caused by
fire zohen there has been ignition of insured property which was not intended to
be ignited, or when insured property has been damaged otherwise than by ignition
as a direct consequence of the ignition ofother property not intended to be ignited."
NOTES—A fire policy protects the assured against fire. There is no
fire unless there is ignition. Mere heating, however intense, is not fire.
"Loss or damage caused by fire" means loss or damage either by ignition
of the articles consumed, or by ignition of that part of the premises, where
the article is. In one case there is loss, in the other case there is a damage
caused by fire. The cause of the fire is immaterial, unless it was the deliberate
act of the assured. Fire may be caused by the negligence of the assured
himself or his servants. Fire does not include explosion. If, however, the
explosion is caused by fire or if explosion causes fire which causes the loss,
the loss is covered. Same is the case with , lightening and electricity.
"Any loss resulting from apparently necessary and bona fide efforts to
put out a fire, whether it be the spoiling goods by water or by throwing
articles of furniture out of the window, or even by destroying a neighbouring
house by explosion for the purpose of arresting fire; in fact every loss
directly, if not indirectly at least consequently resulting from fire is within
the policy," Stanley v. Western Instirance Co. (1868) 37 L.J. Ex. 73, at page
75 per Kelly, C.B.
In Austin v. Drewe. (1815) 4 Camp. 360, sugar was damaged not by
smoke but by the excessive heat but nothing took fire; it was held that
assured could not recover. It may be noted here that if the heat is caused
by actual ignition of the Premises where the sugar is kept the damage shall
be deemed as "damage by fire", although the sugar is not actually burnt.

The Central Bank of India Ltd. v. The Hartford Fire Insurance Co. Ltd.
AIR 1965 SC 1228
Note—A clause in a policy terminating the policy at any time by either party
is valid.
Facts
By a policy the respondent insurance company insured the appellant
as the mortgagee and a firm of the name of Bombay Import and Export
Agency as the owners against loss suffered by destruction of or damage
 10.36 General Principles of Insurance

fire between March 20,1947 and March 20,1948. The insurance was subject
to various conditions and one of them (clause 10) was that "This insurance
may be terminated at any time at the request of the insured" and "this insurance
may also at any time be terminated at the option of the co." (insurer), no notice
to that effect being given to the insured", in which case the insurance
company shall be liable to repay on demand a rateable proportion of the
premium for the unexpired term of the policy. By mutual agreement the
policy was extended to cover riot risks occurring between July 18,1947 and
August 17, 1947.
From early 1947 the whole of the Punjab including the town of Amritsar
was disturbed by serious riots which preceded the partition of India. On
or about July 23,1947 some of the insured goods were looted; the information
of it was given to the insurance company and thereafter on August 7,1947,
the insurance company served a notice to the insured that goods lying in
the godown at Backarwana Bazar, Amritsar be removed to a safe locality
before the 10th August, 1947 otherwise the policy would stand terminated
at 4 p.m. on the 10th August, 1947. The insured did not remove the goods
to any other place by the stipulated time and were lost as the godown was
burnt down by rioters on August 15,1947. Insured claimed damage which
the insurance company refused. Hence the action. On behalf of the insured
it was contended (i) that policy could be terminated only for a reasonable
cause; (ii) that the clause 10 was unreasonable; (iii) that there being ambiguity
the clause be interpreted in favour of the insured; and (iv) that the Insurance
Co. could not avoid liability by termination.

Issue----------------------------------------------- ;—
Whether the policy had been terminated on August 10, 1947?

Decision of the Supreme Court

Regarding intention of the parties and the interpretation of the impugned
clause 10 of the contract of insurance SARKAR, J. said:—
"Now it is common place that it is the Court's duty to give effect to
the bargain of the parties according to their intention and when that
bargain is in writing the intention is to be looked for in the words used
unless they are such that one may suspect that they do not convey the
intention correctly. If these words are clear there is very little that the Court
has to do. The Court must give effect to the plain meaning of the word
however, it may dislike the result. We have earlier set out clause 10 and
we find no difficulty or doubt as to the meaning of the language there used.
Indeed the language is the plainest. The clause says, "This insurance may
 Law of Insurance 10.37
may also at any time be terminated at the instance of the company." These
are all the words of the clause that matter for the present purpose. The
words "at any time" can only mean "at any time the party concerned likes."
Shortly clause 10 says a party at its' will can terminate the policy. No other
meaning of the words is conceivable. The plain and categorical language
cannot be radically changed by relying upon the surrounding circumstance,
a right to terminate at will cannot by reason of the circumstances be read
as a right to terminate for a reasonable cause. There is no ambiguity in the
words used or defect in the operation of the instrument."
The Court said there is nothing capricious or unreasonable in clause
10. It sanctions no repudiation of liability already incurred but only
terminates a contract as to future; it prevents liability arising in future
which is not a fundamental term of the contract. Clause 10 gives the liberty
to terminate the policy to both the parties. Clause 10 was in effect a proviso to
the term fixing the tenure of the policy at one year. The Court said:—
"We are besides of the opinion that there is nothing capricious or unreasonable
in clause 10. The insurer was free at the beginning to decide whether he would
agree to indemnify the assured against the risk or not, and if he decided to
indemnify, for hozu long he would indemnify. If the assured cannot compel an
insurer to take up a risk, he cannot complain of unreasonableness, caprice or even
abuse of power if the insurer is prepared to take it up only on a condition that
he would be free at any time to change his mind as to the future. Furthermore
clause 10 gives the assured the same liberty to terminate the policy. Besides a term
in the form contained in clause 10 is a common term in policies and must,
therefore, have been accepted as reasonable. See Mac Gillivary on Insurance
Law, 5th Ed. Vol. 2 p. 963. The Privy Council in the Sun Fire Office v. Hart,
(1889) 14 AC 98, held of a clause similar to clause 10 in the present case that
it gave an insurer the right to terminate the contract at will and that there zoas
nothing absurd in such a term."
Regarding the rule of contra-proferen turn
* it was held that this rule should
be applied only where there is ambiguity in the terms bitt the rule has no application
where there is no ambiguity in the zvords in the standard form contract.
The Court also rejected the argument that it was impossible to remove
the goods from the godown at Backarwana Bazar to any other safe place
in the same town in the circumstances prevailing. It said if a party has a
right al will to terminate a contract, the imposition by him of a condition,
however hard, on failure to fulfil which the termination was to take effect,
would not make the termination illegal.
 10.38 General Principles of Insurance
Titus, the Court held that the insurance company had power under
clause 10 of the policy to terminate the contract at will and it had only
exercised that power.

Castellain v. Preston
(1883) 11 QBD 380
Note—The case deals with the rule of indemnity and subrogation.

Facts
The defendants-assured owned certain premises in Liverpool, and in
March, 1878, they effected an insurance on buildings against loss by fire
with an insurance company- The policy was in the usual form giving the
insurers the option of reinstating the property. In July, 1878, the defendants
agreed to sell the premises for £ 3,100 and received some money as deposit.
The contract was to be completed on a day within two years to be named
by the defendants. In August, 1878 a fire occurred which damaged part
of the buildings, and a claim was agreed at £ 330. The insurers paid the
sum to the defendants (assured) in ignorance of the contract made for the
sale of the property. The contract for sale was eventually completed in
December, 1879, and the balance of the purchase money was then paid to
the defendant (assured) by the purchasers.
The insurance company claimed to be repaid by the defendants
(respondents-assured) the sum of £ 330 paid by them, on the ground that
a contract of fire insurance was a contract of indemnity and that in the
circumstances the defendants (assured) had not lost anything in fact, because
the contract of sale of property had been duly completed, and the defendants
had suffered no loss by -fire; and the insurance company also claimed to
be subrogated to the rights of the defendants, under that contract of sale,
to the extent of the sum off 330.
In the trial Court CHITTY, J., gave judgment for the defendants, and
the insurance company then appealed.
Decision of the Court of Appeal
The Court upheld the contentions of the insurance company and allowed
it to claim £ 330 on the ground of doctrine of indemnity and subrogation.
Speaking of indemnity BRETT, L.J., said:
"The very foundation, in mv opinion, of every rule which has been
applied to insurance law is this, namely, that the contract of insurance
contained in a marine or fire policy is a contract of indemnity, and of indemnity
only, and that contract means that the assured, in case of any loss against which
 Law of Insurance 10.39
the policy has been made, shall be fully indemnified, but shall never be more than
fully indemnified."
Speaking of the doctrine of subrogation, he said:—
"That doctrine does not arise upon any terms of the contract of insurance;
it is only another proposition which has been adopted for purpose of
carrying out the fundamental rule which I have mentioned, and it is a
. doctrine in favour of the underwriters or insurers in order to prevent the
assured from recovering more than a full indemnity; it has been adopted
solely for that reason. Now it seems to me that in order to carry out the
fundamental rule of insurance law, this doctrine of subrogation must be
carried to the extent which I am now about to endeavour to express,
namely, that as between the underwriter and the assured, the underwriter
is entitled to the advantage of every right of the assured, whether such right
consists in contract, fulfilled or unfulfilled, or in remedy for tort capable
of being insisted or already insisted on, or any other right, whether by way
of condition or otherwise, legal or equitable, which can be or has been
exercised or has accrued, and whether such right could not be enforced
by the insurer in the name of the assured, by the exercise or acquiring of
which right or condition the loss against which the assured is insured, can
be, or has been diminished."
Notes—1. The indemnity and subrogation principles forbade the vendor
of insured premises in the above case to keep the insurance payment and
the full purchase price. But in this type of case the insurance company need
pay no indemnity for a loss it covered, and for which it received premiums
and the loss instead falls on the purchaser. Therefore, to protect himself
the purchaser of immovable property should insure it in his own name.
2. In Page v. Scottish Insurance Corporation, (1929), 98 L.J., K.B. 308,
it was decided that the right of subrogation only arises when the insurer
has actually paid the loss. In case of subrogation the underwriter cannot
sue in his own name. His rights are the rights of the assured. The underwriter
has no right to subrogation unless and until he fully indemnifies the
assured under the policy. The right arises on payment of the whole loss.
If the property is insured for less than its actual value, the insurer will not
enjoy this right on payment of the policy amount.
3. In Yorkshire Insurance Co. Ltd. v. Nisbett Shipping Co. Ltd., (1961)
2 All E.R. 487, it was held that subrogation does not mean that the insurer
can compel the assured to pay over more than he was paid under the
policy. Tire assured can keep windfalls. In this case a ship, insured for
72,000 was lost following a collision with » Canadian vpccoI ar>.rl fho
 10.40 General Principles of Insurance

the Canadian owners the assured recovered the value of the ship in Canadian
currency—some 36,000 dollars. Meanwhile, however, the pound sterling
had been devalued, so that the dollars, when remitted to Britain, yielded
some 1,26,000. The assured repaid the insurers 72,000 received earlier
under the policy, but the insurers claimed that under the doctrine of
subrogation they were also entitled to the windfall of 54,000. The Court
rejected the contention of the insurer.

Pink and Others v. Fleming

(1899) 25 Q.B.D. 396
Note—The case explains the doctrine of causa proxima, in marine insurance.

Facts
A cargo of oranges was insured, free from particular average, unless
the ship be stranded, sunk or burnt or unless damage be consequent on
collision with any other ship. The ship collided and put into port for
repairs, a portion of the oranges and lemons were taken on lighters and
then re-loaded. When the ship arrived at the port of discharge, a portion
of the fruit had gone bad. The evidence showed that the damage had been
partly caused by the delav and partly by the handling of the fruit which
necessarily took place in discharging and re-shipment of it for the purpose
of the repairs.

Decision
It was held that the proximate cause of the loss was not the collision or any
peril of the sea. It zvas the perishable character of the articles combined with the
handling in one case and the delay in the other, which caused the damage. Hence
the underwriters were held not liable. As per LORD EISHER, MP. the judgment
is as follows:—
"It is well settled that by the law of England there is a distinction in
this respect between cases of marine insurance and those of other liabilities
in cases upon the proximate cause of the loss. In the case of an action for
damage of which the breach is an efficient cause or cause causends; but in
cases of marine insurance only the proximate cause can be regarded. This question
can only arise where there is a succession of causes which must be existed in order
to produce the result. There that is the cause, according to the law of marine
insurance, the last cause only must be looked to and the others rejected, although
the result zvould not have been produced zvithout them. Here there is such a
succession of causes. First there was the collision. Without that no doubt
the loss would not have happened. But would such loss have resulted from
the collision alone? Is it the natural result of a collision that the ship should
 Law of Insurance 10.41
be taken to a port for repairs, and that the cargo, being of a kind that must
be injured by handling, it should be injured in such removal? A collision
might happen without any of these consequences if it had not been for the repairs
and for the removal of the cargo for the purpose of such repairs and for the
consequent delay and handling of the fruits, the loss would not have happened.
The collision may be said to have been a cause, and an effective cause of
the ship's putting into a port and of repairs being necessary to remove the
fruit and such removal necessarily caused the damage to it. The agent,
however, which proximately caused the damage to the fruit, was the
handling though no doubt the cause of the handling was the repairs, and
the cause of the repairs was the collision. According to the English law of
marine insurance only the last cause can be regarded. There is nothing in
the policy to say that the underwriters will be liable for loss occasioned
by that. To connect the loss with any peril mentioned in the policy, the
plaintiffs must go back two steps and that according to English law, they
are not entitled to do."

Mithoolal Nayak v. Life Insiirance Corporation of India

AIR 1962 SC 814
Note—The case deals with the deliberate suppression of material facts.

Facts
In 1942, one Mahajan Deolal sent a proposal for the insurance of his
wife. He was examined by Dr. D. D. Desai who submitted two reports, one
with the proposal form and one confidential report. The confidential report
showed that Mahajan Deolal was anaemic, had a dilated heart and his right
lung showed indications of an old attack of pneamonia or pleurisy and that
he was a total physical wreck. Nothing came out of this proposal and it
lapsed.
In 1943, Mahajan Deolal consulted and was treated by one Dr. P.N.
Lakshmanan, Consulting Physician at Jabalpur, for anaemia oedema of the
feet, diarrhoea and fainting on exertion. In 1944, Mahajan Deolal made a
fresh proposal for insurance of his life. Against the question in the proposal
form whether he had consulted any medical man for any ailment within
the last five years, he gave the answer "No". He also did not disclose any
of his ailments. After medical examination by one Dr. Kapadia the proposal
was accepted and a policy for Rs. 25,000 issued on March 13,1945. The
policy lapsed for non-payment of premium but was received in July, 1946.
In Nov., 1946, Mahajan Deolal died. His assignee, the appellant, made a
demand for Rs. 26,000/- but the Company on Oct. 1, 1947, repudiated it
on the ground that the policy had been obtained bv deliberate misstatement
 10.42 General Principles of Insurance

and fraudulent suppression of material facts. Thereupon, the appellant

fiied a suit to recover the amount of the policy contending that S. 45 of
the Insurance Act, 1938, barred the Company from calling in question the
policy after two years on the ground that any statement made in the
proposal was inaccurate or false.

Decision
It was held that the insured, Mahaian Denial, was guilty of fraudulent
suppression of material facts relating to his health and the Company was
entitled to avoid the policy under S. 45 of the Insurance Act. 1938.
It was observed that in view of the language of the section two years
could not be counted from the date of the revival of the policy. Thus, S.
45 was applied to the case as two years had elapsed since the policy was
effected. The Court said that second part of S. 45 entitled the Company
to repudiate the contract even after the expiry of two years if three
conditions were fulfilled viz; (1) the statement was on a material matter
or there was a suppression of fact which was material to disclose (2) the
suppression was fraudulently made by the policy-holder; and (3) the
policy-holder must have known at the time of making of the statement
that it was false or that it suppressed facts which it was material to
disclose. When Mahajan Deolal was treated in 1943 by Dr. P.N. Lakshmanan
he was suffering from serious ailments. He must have known that it is
material to disclose this but "made false statement that he had not been
treated by any doctor for any serious" ailment. There was deliberate suppression
of materialfactsfraudulently made by Mahajan Deoloal. Even though the Company
had got Mahajan Deolal examined by four doctors before issuing the policy, it ivas
not estopped from questioning the policy. It had no means of knowledge that
Mahajan Deolal had been treated by Dr. P.N. Lakshmanan for serious ailments.
It was further held that the appellant was not entitled even to a
refund of the money paid as premium as one of the terms of the policy
was that all monies paid belonged to Company if the policy was vitiated
by fraudulent suppression of material facts. To such a contract neither
S. 65 nor S. 64 of the Indian Contract Act had any application.
It was also held that the assignee had no insurable interest in the life
of the assured and cannot sue on the policy. As the title of the assured was
defective, he cannot transfer a better title to the assignee.
 Law of Insurance 10.43
Sint. Krishnazoati Puri v. L.I.C. of India
AIR 1975 Delhi 19
Note—The case deals with the non-disclosure of material matter

Facts
Dharam Pal Puri insured his life with the Life Insurance Corporation
and took out four policies between 12-10-1959 to 15-6-1964 amounting in
aggregate to Rs. 85,000. He died on 5-8-1964. His widow, the plaintiff­
appellant, instituted the suit against the Corporation on the ground that
she was the assignee. The Corporation resisted the suit mainly on the
ground that Dharam Pal Puri was suffering from heart disease, that he
knew about his ailment, that he had consulted doctors about his disease
but fraudulently suppressed these facts. In the proposal form and the
personal statements he made declarations knowing them to be false because
he never disclosed to the Corporation that he was suffering from heart
disease. On evidence it was found that Dharam Pal Puri had suffered from
heart diseases, consulted doctors but did not disclose this in the proposal
form or his personal statement although three doctors who examined
Dharam Pal Puri deposed that in their opinion the deceased was fit to be
insured at the time of their examination.

Decision
It was held that non-disclosure of heart disease was a material matter
and that the insured, Dharm Pal Puri, had fraudulently suppressed the fact
which was material to be disclosed and he knew the statements to be false
when he made them.
It was further held that the fact that the insured was examined by three
doctors of the Corporation and that they deposed that in their opinion the
person was fit to be insured at the time of their examination did not
advance the claim of the plaintiff-claimant. The Corporation did not know
that there was a fraudulent suppression of facts and that the material
statements made by the insured in the proposal were the basis on which
the policy was issued.
Thus, it was held that the Corporation was entitled to avoid the claim
on the policy under S. 45 of the Insurance Act, 1938.
 10.44 General Principles of Insurance
Manohar Lal v. L.I.C. of India
AIR 1981 Delhi 171
Note—The case deals with the meaning of material matter.
Facts
The plaintiff Manohar Lal took a joint life policy on his life and the
life of his wife, Sita Rani, from Sun Light of India Insurance Co. Ltd. on
May 23, 1956 for a period of 25 years in the amount of Rs. 25,0007. He paid
the annual premium of the Rs. 906/-. The term of the policy was that in
the event of death of either of them before the date of maturity the sum
assured was payable to the survivor. Sita Rani died on June 22, 1957. The
plaintiff made a claim on the defendant, Life Insurance Corporation of
India, which took over the assets of the Sun Light Insurance by virtue of
Act 31 of 1956. The Corporation repudiated the claim on the ground that
the plaintiff was guilty of fraudulent misrepresentation. In the proposal
form which the plaintiff filled up, the question put to him was to state his
'(c)(i) Profession, (ii) Exact nature of duties." The answer of the plaintiff
was "Tutor and photographer." The plaintiff was in fact working as a
"labourer" in Birla Cotton Mills, at a monthly salary of Rs. 120/-.

Decision
It zvas held that the wrong description of occupation in the proposal for
insurance zvould not avoid the policy. The plaintiff would have been insured
at the same rate of premium had he described himself as a factory hand
or a mill worker. The same premium would have been payable in that case.
There is no fraud upon the Corporation nor had they sustained any injury
by plaintiffs description of himself as a photographer and tutor.
The Court said if the financial status of the proponent is a material fact
in the eyes of the insurers they should ask the question in plain terms.
"Under the general law of insurance an insurer can avoid a policy if he
proves that there has been misrepresentation or concealment of material
fact by the assured. What is material is that zvhich would influence the mind
of a prudent insurer in deciding zvhether or not to take the risk. What was not
asked from the proponent at the time he made the proposal and the
personal statement obviously could not form the basis of the contract."
There was no statement on the subject of income in the proposal or any
other document leading to the issue of the policy. "The burden under S. 45
zvas on the insurer to show that the suppression of the fact zvas a circumstance
zohich it zvas material to disclose and its suppression was fraudulent and that the
policy-holder lenezv at the time of making it that his statement about occupation
zvas false, that it suppressed facts zohich it zvas material to disclose. Nothing short
 Law of Insurance 10.45
of the deliberate fraud has to be proved by the insurer if the policy is called in
question after three years. " The Corporation had utterly failed to discharge
the onus.
Thus, the court held that the plaintiff was entitled to the decree for
Rs. 25,000 with interest.

Kami Bai v. L.I.C. of India

AIR 1981 Madhya Pradesh 69
Note—The case deals with the deliberate wrong statement of age of the
assured.

Facts
The husband of the plaintiff insured his life with the defendant/
respondent with effect from 18-3-1970 which was to mature on 1-3-1976
for Rs. 25,000. The insured died on 8-8-1971 on account of congestive
cardiac failure. The insured had declared his age 48 years in the proposal
as well as in his personal statement and had submitted the horoscope in
proof of his age on the basis of which the respondent had admitted the
said age. On the death of the insured, his widow, the appellant, made a
claim for Rs. 25,000, as nominee of the insured. The respondent repudiated
the claim of the insured. The respondent repudiated the claim of the
plaintiff-appellant on the ground that at time of insurance the insured was
of non-insurable age of 60 but he had induced the respondent to insure
him giving a false statement about him. The insurer sought to prove the
age on basis of (i) Partnership Deed between him and other persons filed
with the Registrar of firms, (ii) application with Income-tax Department
filed for registration of firm, and (iii) entries in voters list.

Decision
The Court held that when the documents showed that the insured was
more than 60 years of age at the time of taking the policy, the lower age
as shown in the proposal and admitted by the insurer could not be taken
to be correct age.
The Court said that S. 45 of the Insurance Act, 1938 enables the insurer
to readjust the premium payable by the insured when the age stated is
found to be incorrect on calling for the proof of age after issuance of the
insurance policy on the basis of age that was mentioned in the proposal.
The proviso does not take away the right of the insurer under the body
of the section to avoid the policy on the ground of fraud.
The insured on the date of the proposal very well knew that he was aged over
and nhovp 60 years. knozvrn? this fact, he deliberately made a false statement about
 10.46 General Principles of Insurance
his age that he was only 48 years of age. By making this statement he led the
respondent to insure his life and thus practiced a fraud. In this viezv of the matter,
the court held that the policy cannot be enforced.
Thus, the respondent was held to be right in avoiding the policy and
refusing the payment of the claim.

Rati Lal & Co v. National Security Insurance Co. Ltd.

AIR 1964 SC 1896
Note—The case deals zvith the importance of cover note.
Facts
The plaintiff-appellant proposed to effect insurance against fire and
offered to pay the premium to insure goods to the extent of Rs. 1,00,000.
The risks to be covered were as per the policy no. 26625 dated 5th March,
1952 for twelve months from November, 1951. He was issued a cover note
wherein it was stated that the protection was in force for thirty days or
until the policy was prepared. He was issued an unstamped letter of cover
dated November 5,1951. The fire over which the claim is based, occurred
on the night of November 4, 1951 or during the early hours of the morning
of the next day. The respondent admitted liability on policy no. 26625 but
with regard to the letter of cover it contented that the letter was not
admissible in evidence for want of stamp.

Issue
Whether the letter of cover can be admitted in evidence?

Decision of the Supreme Court

The Court stated that the question depends on some of the provisions
of the Stamp Act, 1899. S. 35 of that Act provides that: "No instrument
chargeable with duty shall be admitted in evidence for any purpose unless
such an instrument is duly stamped: Provided that (a) any such instrument
not being an instrument chargeable with a duty not exceeding ten naya
paise only or a bill of exchange or promissory note, shall, subject to all just
exceptions, be admitted in evidence on payment of the duty with which
the same is charged together with a penalty of." Under An 47 of Schedule
I of the Stamp Act, 1899 the minimum duty chargeable on policy of the
fire insurance is fifty naya paise. This article contains at the end a general
exemption which is in these words:
"Letter of cover or engagement to issue a policy of insurance:
Provided that unless such letter or engagement bears the stamp
prescribed'by this Act for such policy, nothing shall be claimable under,
 Law of Insurance 10.47
nor shall it be, available for any purpose, except to compel the delivery
of the policy’ therein mentioned."
The Court stated that a letter of cover is contract granting insurance
for the period between its date and until a policy is prepared and delivered
if one is eventually issued or otherwise is upto a date mentioned in it
just as period of thirty days is mentioned in the present case. It gives
protection for thirty days or the period upto the date of issuance of the
policy.
Tire Court held that a letter of cover is not exempted from duty in all
cases. When it is not exempted, it is an instrument chargeable to duty. By
the use of words "bears stamp" the legislature intended to convey that a
letter of cover would be chargeable to duty in all cases except for compelling
delivery of a policy. Therefore it was held that a letter of covers an instrument
chargeable to duty under the Act and so admissible in evidence in payment
of requisite duty and penalty under S. 35 of the Stamp Act. Tire idea of
exempting a letter of cover from payment of duty was to avoid the hardship
of payment of duty twice over the same insurance, for the policy issued
after the letter of cover had to insure the goods from the time that the letter
of cover itself insured them and the policy had to be stamped. Secondly
in very few cases it would be necessary to enforce the letter of cover as
an insurance for it is unlikely that in many cases the fire would have
occurred during the period covered by it. Therefore, the appeal was allowed.

Howard v. Refugee Friendly Society

54 Q.B.D. 644
Note—The case deals with insurable interest

Facts
In the year 1877 James Howard, through an agent of the insurance
company (Refugee Friendly Society), effected a policy of insurance on the
life of his father for a particular sum upon a weekly premium of a certain
amount. Shortly after he had made the contract with the agent a policy of
insurance was sent to him. The policy contained a provision that the
amount of the insurance should be paid to the nominee of the assured. In
1881 another policy was effected through another agent for a particular
sum. Both the policies were made out in the name of the father John
Howard but signed by James Howard. In 1885 John Howard, the father,
discovered that his life had been so insured, objected to its being done, and
gave notice to the insurance company that he was no party to the contract.
Both classes of premium had been regularly paid by James Howard down
 10.48 General Principles of Insurance
to the time when John Howard objected to the insurance on his life, the
joint total amounted to £231.

Decision
It was held that the policy was a policy by James Howard effected on the life
of his father, and the contract was prohibited by reason of the want of interest
on the part of James in the life of his father. He had gone on paying on the
footing of these policies from 1877 as regards one, down to 1885, and from
the year 1881 as regards another, down to the year 1885.
It ivas held that the policies were wagering policies. In case of a wager is
a man deposits a stake in hands of a stakeholder, is entitled to recover the
stake at any time before it is paid over to the third party. But in this case
the insurance company was not a stake-holder but it was the other
contracting party.

Kasim Ali Bulbul v. New India Insurance Co.

AIR 1968 J&K 39
Note—The case deals with material matters.
Facts
The plaintiff carried on business in wood carving and paper machine.
On 8th June, 1960 he got his stock in trade consisting of wood carving,
paper machine, business furniture and two pieces of carpet contained in
the shop insured with the defendant-company for one year from Sth June,
1960 to 7th June, 1961 for a sum of Rs. 30,000. A policy was issued in his
favour by the defendant company. The plaintiffs shop 'caught fire on the
night between 4th/5th February, 1961 while he was asleep at his residence.
Next morning he came to his shop and found that the shop had been taken
possession of by the local official of the defendant company and the police
and it was sealed. The plaintiff gave tentative information of this fire to
the defendant company. The plaintiffs books were seized by the police. The
police inquired into the matter and declared the fire accidental.
According to the report of the surveyor the loss sustained by the
plaintiff was Rs. 27,342.31. The shop remained in the possession of the
defendant company when on the night of 3rd Nov., 1961 another fire broke
out which destroyed the remaining uninsured articles in the shop amounting
to Rs. 564.50. The plaintiff therefore claimed a decree for the amount of
Rs. 27342.31 and Rs. 564.30.
In defence the defendant company took a number of pleas. They were
inter alia, (1) that the plaintiff did not comply with condition 11 of the policy
and did not submit any claim within the period of 15 days from the date
 Law of Insurance 10.49
of the alleged loss, (2) the plaintiff was not entitled to any relief in terms
of condition 13 of the policy as the suit was not commenced within three
months after the rejection of his claim by the defendant company, (3) the
plaintiff made a false representation of material facts at the time of obtaining
the policy.

Main issues
1. Was the plaintiffs right to claim extinguished by lapse of time?
2. Was the plaintiffs suit not within time?
3. Was the plaintiff guilty of suppression of material facts and false
representation at the time of obtaining the policy from defendant
and as such was the policy of insurance void and unenforceable
and not binding on the defendant?
Decision
The High Court held that it was physically impossible for the plaintiff
till the 5th May, 1961 to give a complete and detailed list of the loss
sustained by him as his books were with the police till that date. Therefore,
to that date plaintiff had an explanation or a jurisdiction in not supplying
the detailed list to the company within 15 days of the damage.
The suit was instituted on 1st Feb., 1962 which was clearly about a year
after the rejection of the claim by the defendant. Therefore, in terms of
condition 13 of the policy the right of the plaintiff to recover the suit
amount was extinguished. The Court held that the condition of instituting
legal proceeding within three months of the rejection of the claim of the
insured by the insurance company is not against S. 23 and S. 28 of the
Indian Contract Act, 1872. Section 28 reads as under:
"Every agreement by which any party thereto is restricted absolutely
from enforcing his rights under or in respect of any contract, by the usual
legal proceedings in the ordinary tribunals, or which limits the time within
which he may thus enforce his rights, is void to that extent."
Section 23 lays down that the following agreements as unlawful:
"If they are forbidden by law; or are of a nature that if permitted they
would defeat the provisions of any law; or are fraudulent; or involve or
imply injury to the person or property of another; or if the court regards
them as immoral or opposed to public policy."
The Court discussed various cases on. this point and held that various
authorities have already settled this issue. In Porter's Law of Insurance (6th
Ed.) page 195 it is stated that insurance may lawfully limit the time within
which &n action may be brought to a period less than that allowed, by the
 10.50 General Principles of Insurance

statute of limitation and that the true ground, on which the clause limiting
the time of claim rests and is maintainable is that, by the contract of the
parties the right to indemnify in case of loss and the liability of the company,
therefore, do not become absolute, unless the remedy is sought within the
time fixed by the condition in the policy.
In AIR 1962 J & K 15 it was held as follows.
"What Section 28 forbids is not extinguishment of the right or liabilities
of a party to a contract on the happening of a specified event but the
limiting of tKe time within which a party may enforce its rights. A party
will have no right to enforce, if the rights have already been extinguished
by the contract. In such a case there can be no question of the time for the
enforcement of the rights being limited."
In the present case even if the plaintiff was entitled to any relief he
had forfeited all rights under the policy when he failed to bring his suit
within three months of 25th Feb., 1961 when his claim was rejected by the
insurance company. Tlius, the suit was clearly time-barred. (The students
should note that after passing of the Indian Contract (Amendment) Act,
1997 every agreement which extinguishes the rights of any party thereto
or discharge any party thereto, from any liability, under or in respect of
any contract the expiry of a specified period so as to restrict any party from
enforcing his rights is void to that extent).
Question No. 8 of the policy were as under 8(a) Has the property been insured
in the past or at the present time ? 8(b) Have you sustained loss? Give full
particulars.
To both these queries the plaintiff had said 'No'. In fact that plaintiff had
insured the goods of his shop with another insurance company in the year 1957
and during thc;t year also his shop zvas gutted by fire. He made a claim for Rs.
25,000/'-from the insurance company, but his claim zvas settled at Rs. 14,807.
The Court held that although the plaintiff was an illiterate person^ who
did not know English the answers to various questions were recorded by
the inspector of the insurance company after making the plaintiff understand
all the questions. Thus, the Court held that the plaintiff had made a false
statement in reply to question No. 8. Therefore, the policy -was void. The Privy
Council held in AIR 1921 PC 195 that if untrue answers are given in a
proposal form the contract is void. The materiality or otherwise of the truth
told is not at all material. In AIR 1962 SC 814 it was held as follows :
"Where according to terms of life insurance policy, all moneys that had
been paid in consequence of policy would belong to the insurance company
if the policy was vitiated by reason of a fraudulent suppression of material
 Law of Insurance 10.51
facts by the insured, and the contract is held on the ground of fraud, the
party who has been guilty of fraud or a person who claims under him
cannot ask for a refund of the money paid. It is a well established principle
that courts will not entertain an action for money had and received where
in order to succeed, the plaintiff has to prove his own fraud. Further, in
case where there is a stipulation that by reason of breach of warranty by
one of the parties to the contract the other party shall be discharged from
the performance of his part of the contract, neither S. 65 nor S. 64 of the
Contract Act, 1872 has any application."
In view of the above authorities the Court held that the plaintiff was
not entitled to claim any compensation for fire having been caught by the
goods in his shop. In the present case question No. 8 was very material and
withholding of the information from the insurance company zoould automatically
absolve the insurance company from any liability under the contract.
Therefore, the plaintiff suit was dismissed.

Life Insurance Corporation of India v. Suit. G.M. Channabasamma

(1991) 1 SCC 357
Note—The burden ofproviding that the insured had made false representation
and suppressed material facts is undoubtedly on the L.I.C.

Facts
Four policies were respectively taken out for Rs. 20,000 on July 30,1959,
for Rs. 20,000 on July 16, 1960, for Rs. 10,000 on July 16, 1960 and for Rs.
25,000 on August 23, 1961. The assured died on October 14, 1961 in a
hospital for turbercular patients. The last policy was thus of a date only
about two months before the death of the insured. It was contended on
behalf of the appellant that since the last policy was of a date only about .
two months before the death of the insured it cannot be believed that he
did not know about his illness. Even the earlier three policies had been
taken out only a short time earlier, and having regard io the nature of the
disease it must be assumed that the insured was fraudulently suppressing
the relevant fact. On the other hand on behalf of the respondent (wife of
the deceased) it was contended that although the assured died of tuberculosis
but neither he nor any member of the family had any knowledge of his
illness at the time of taking out the policies. He was keeping good health
and actively taking part in his business and discovery of the disease which
accounted for his early demise was made very late. The trial court accepted
the defence and dismissed the suit filed by the wife of the insured. On
appeal the High Court, on a consideration of the evidence led by the parties
and the arguments addressed on their behalf, held that thp dpfpndant had
 10.52 General Principles of Insurance
failed to prove that the insured was suffering from diabetes or tuberculosis
at the time of filing of the proposals for the insurance policies or that he
had given any false answer in his statements or suppressed any material
fact which he was under a duty to disclose. The finding of the trial court
that the assured had committed fraud on the defendant Corporation in
taking out the policies was reversed.

Issue
Whether the assured had given any false answer in his statements or
suppressed any material fact which he was under a duty to disclose?

Decision of the Supreme Court

A contract of insurance is contract uberrimafides and there must be
complete good faith on the part of the assured. The assured is thus under
a solemn obligation to make full disclosure of material facts which may
be relevant for the insurer to take into account while deciding whether the
proposal should be accepted or not while making a disclosure of the
relevant facts, the duty of the assured to state them correctly cannot be
diluted. S. 45 of the Act has made special provision for a life insurance
policy, it cannot be called in question by the insurer after the expiry of two
years from the date on which it was effected "unless the insurer shows that
such statement was on a material matter or suppressed facts which it was
material to disclose and that it was fraudulently made by the policy holder
and that the policy holder knew at the time of making it suppressed facts
which it was material to disclose". The burden of proving that the assured
had made false representations and suppressed material facts is undoubtedly
on the Corporation. The Court said:
"Having gone through-the entire evidence in this case it is not possible
to take a view different from the High Court that the appellant LIC has
failed to discharge the burden of proving the defence story about the
serious illness of the insured at this time of taking out the insurance policies
and knowingly suppressing the material information."

Life Insurance Corporation of India v. Ajit Gangadhar Shanbhag

AIR 1979 Kant 157
Note—A writ cannot be issued if there is no violation of statutory duty on
the part of the State/Statutory Authority.
Facts
One Anil Gangadhar Shanbhag had taken out six policies of Insurance
on his life for Rs. 15,000/-, Rs. 10,000/-, Rs. 10,000/-, Rs. 10,000/- Rs. !
10,000/- and Rs. 25,000/- on 21.9.72, 28.12.75, 28.12.75, 18.3.76, 20.3.76
 Law of Insurance 10.53
and 10.8.78 respectively from the respondent—Life Insurance Corporation
of India and he died on 10.12.80. The claim made by the mother of the
deceased for payment of the amount under the aforesaid policies taken out
by the deceased, after his death, was repudiated or denied by the appellant
on the ground that the deceased while filling-up the proposal forms for
the policies, was guilty of fraudulent, misrepresentation and suppression
of material facts, with regard to his health. The respondent filed a writ
petition under Art. 226 of the Constitution before the Karnataka High
Court in seeking the following reliefs:
"(i) Issue direction of writ to the respondents to produce the material
on the basis of which the claim of the petitioner made on Policy
Nos. 40469599, 40384083, 40384001, 40380276/77 and 40196022
have been rejected.
(ii) Issue writ or direction in the nature of mandamus directing the
respondents to settle the claim of the petitioner by making payments
under the policies 40469599, 40384083, 40384001, 40380276/77,
40196022."
The learned Single Judge of the High Court, by his order dated 5.6.92,
allowed the writ petition in the following terms:
"Accordingly, I allow this petition and direct the respondent-
Corporation to honour its obligations in terms of the policies issued and
settle the claims of the petitioner and make payment of all the amounts
due under the respective policies after satisfying itself that the petitioner
is the sole legal heir of the insured."
The Corporation filed the appeal before the Division Bench of the High
Court.

Issue
Whether a writ should be issued considering the nature of the claim?

Decision of the Division Bench of the High Court

The Court said:
"In the present case..., it cannot be said that the claim made by the
respondent is either misconceived or untenable, but since it involves
disputed questions of fact, this Court cannot go into question of disputed
facts which vzould only be decided in a regularly drawn trial between the
parties before a competent civil court and this Court cannot grant the relief
sought by the respondent in the writ petition The respondent is at liberty
to institute a civil suit to enforce her rights if such a suit is filed by the
respondent within 3 months from the date of this order........................"
 10.54 General Principles of Insurance
The Kidchin der Singh v. Hardy a J Singh Barar, AIR 1976 SC 2216, relied
upon by the learned counsel for the appellants, the Supreme Court held
that a writ petition merely to enforce an agreement entered into between
the employees and the co-operative Bank about giving certain percentage
of promotions to existing employees is not maintainable.
In the case relied upon by the learned Counsel for the respondent, writ
jurisdiction was involved to enforce a provision to advance a loan. The
Supreme Court upheld the issuance of the statutory duty to perform the
terms of the contract to advance the loan. If the Court finds that there is
violation of the statutory duty or unfairness on the part of the statutory
authority or organ of the State, the Court would readily come down to
exercise its power under Article 226 of the Constitution.
In the present case there is no violation of any statutory duty on the
part of the appellants. Further there are several disputed questions of fact
which cannot be gone into in writ jurisdiction. The Court said:
"It has to be mentioned in the above context that an insurer can validly
repudiate a contract of insurance on the ground of misrepresentation or
suppression of material facts. It is well settled that a contract of insurance
is contract uberriama fide and there must be complete good faith on the part
of the assured. The assured is thus under a solemn obligation to make full
disclosure of the material facts, which may be relevant for the insurer to
take into account, while deciding whether the proposal should be accepted
or not. While making a disclosure of the relevant facts, the duty of the
insured to state them correctly cannot be diluted. Section 45 of the Insurance
Act has made special provisions for a life insurance policy, if it is called
in question by the insurer after the expiry of 2 years from the date on which
it was effected. Having regard to the facts of the present case, the learned
counsel for the appellants rightly submitted that the matter involves
questions of disputed facts which cannot be decided in the writ jurisdiction
and they have to be examined on the basis of the evidence to be adduced
by the parties at a trila."

Life Insurance Corporation of India v. Asha Goel

(2001) 2 SCC 160 : AIR 2001 SC 549
Note—Insured remain duty-bound to disclose any material alteration in the
character of the risk, which might occur in the period between the proposal and
its acceptance Further, ordinarily the High Court should not entertain a writ
petition filed under Article 226 of the Constitution for a mere enforcement of a
claim under a contract of insurance.
 Law of Insurance 10.55
Facts
Late Naval Kishore Goel, husband of Smt. Asha Goel - Respondent 1,
was an employee of M/s Digvijay Woollen Mills Limited at Jamnagar as
a Labour Officer. He submitted a proposal for a life insurance policy at
Meerut in the State of U.P. on 29.5.1979 which was accepted and the policy
bearing No. 48264637 for a sum of Rs. 1,00,000 (Rs. one lakh) was issued
by the Corporation in his favour. The insured passed away on 12.12.1980
at the age of 46 leaving behind his wife, a daughter and a son. The cause
of death was certified as acute myocardial infarction and cardiac arrest.
Respondent 1 being nominee of the deceased under the policy informed
the Divisional Manager, Meerut City, about the death of her husband,
submitted the claim along with other papers as instructed by the Divisional
Manager and requested for consideration of her claim and for making
payment. The Divisional Manager by his letter dated 8-6-1981 repudiated
any liability under the policy and refused to make any payment on the
ground that the deceased had withheld correct information regarding his
health at the time of effecting the insurance with the Corporation. The
Divisional Manager drew the attention of the claimant that at the time of
submitting the proposal for insurance on 29.5.1979 the deceased had stated
his usual state of health as good; that he had not consulted a medical
petitioner within the last five years for any ailment requiring treatment for
more than a week; and had answered the question if remained absent from
place of your work on ground of health during the last five years in the
negative. According to the Divisional Manager, the answers given by the
deceased as aforementioned were false. Since Respondent 1 failed to get
any relief from the authorities of the Corporation despite best efforts, she
filed the writ petition seeking a writ of mandamus directing the Corporation
and its officers to pay the sum assured and other accruing benefits with
interest.

Issue
Whether the LIC be directed to pay the sum, as directed by, the learned
Single Judge in favour of the claimant?

Decision of the Supreme Court

On a fair reading of S. 45 of the Insurance Act it is clear that it is
restrictive in nature. It lays down three conditions for applicability of the
second part of the section, namely: (a) the statement must be on a material
matter or must suppress facts which it was material to disclose; (b) the
suppression must be fraudulently made by the policy-holder; and (c) the
policy-holder must have known it at the time of making the statement that
■Jf- '(A’TJQ C\Y fFmf if cnnnmccorl for’fc if woo mofon'ol /fionlAoo
 10.56 General Principles of Insurance
Mere inaccuracy or falsity in respect of some recitals or items in the
proposal is not sufficient. The burden of proof is on the insurer to
establish these circumstances and unless the insurer is able to do so
there is no question of the policy being avoided on the ground of
misstatement of facts. The contracts of insurance including the contract
of life assurance are contracts of uberrima fides and every fact of material
must be disclosed, otherwise, there is good ground for rescission of the
contract.
The duty to disclose material facts continues right upto the conclusion
of the contract and also implies any material alternation in the character
of the risk which may take place between the proposal and its acceptance.
If there are any mis-statements or suppression of material facts, the policy
can be called into question. For determination of the question whether
there has been suppression of any material facts it may be necessary to also
examine whether the suppression realates to a fact which is in the exclusive
knowledge of the person intending to take the policy and it could not be
ascertained by reasonable enquiry by a prudent person.
As regards the questions of writ of mandamus the Court said:
The position that emerges from the discussions in the decided cases
is that ordinarily the High Court should not entertain a writ petition filed
under Article 226 of the Constitution for mere enforcement of a claim under
a contract of insurance. Where an insurer has repudiated the claim, in case
such a writ petition is filed, the High Court has to consider the facts and
circumstances of the case, the nature of the dispute raised and the nature
of the inquiry necessary to be made for determination of the questions
raised and other relevant factors before taking a decision whether it should
entertain the writ petition or reject it as not maintainable. It has also to be
kept in mind that in case an insured or nominee of the deceased insured
is refused relief merely on the ground that the claim relates to contractual
rights and obligations and he/she is driven to a long-drawn litigation in
the civil court it will cause serious prejudice to the claimant/other
beneficiaries of the policy. The pros and cons of the matter in the context
of the fact-situation of the case should be carefully weighed and appropriate
decision should be taken. In a case where claim by an insured or a nominee
is repudiated raising a serious dispute and the Court finds the dispute to
be a bona fide one which requires oral and documentary evidence for its
determination then the appropriate remedy is a civil suit and not a writ
petition under Article 226 of the Constitution. Similarly, when a plea of
fraud is pleaded by the insurer and on examination is found -prima facie
to have merit and oral and documentary evidence may become necessary
 Law of Insurance 10.57
for determination of the issue raised, then a writ petition is not an appropriate
remedy."
The approach of the LIC in the matter of repudiation of a policy
admittedly issued by it, should be one of extreme care and caution. It
should not be dealt with in a mechanical and routine manner.
The Corporation was directed to pay the sum expeditiously.

M/s Krishna Food & Banking Industry P. Ltd.

v.
M/s New India Assurance Co. Ltd.
2008 (13) SCALE 747
Note—This case deals withfire insurance, loss due to terrorism and assignment
of insurance policy.

Facts
M/s Krishna Flour and Oil Mills ('Mill') is a partnership firm while
M/s Krishna Food and Baking Industry Pvt. Ltd. ('Company') is a company
registered under the Companies Act, 1956 as applicable to the State of
Jammu & Kashmir. Both the units were located in Nawab Bazar, Srinagar,
in the State of Jammu & Kashmir. Both were sister concerns. Rajendra
Kumar Sawhney was Chairman of the Company as also main partner of
the Mill. The Company was dealing in manufacturing bread, biscuits, cakes
and other bakery items. It is the case of the complainants that during the
period of disturbances caused by militancy in early nineties of the last
century, Mr. Praneet Sawhney, only son of Rajendra Kumar Sawhney was
shot dead by the terrorists on March 27, 1990 in his office. Immediately
thereafter, operations of both the units were suspended and the complainants
had to migrate to Delhi. It was stated that there was "watch and ward staff
as also some other personnel who looked after the premises and stocks and
raw materials lying in the units. It was also stated in the complaints that
the complainants were able to transfer records from Srinagar to Delhi.
According to the complainants, they had obtained three separate
insurance policies from M/s New India Assurance Co. Ltd. (Insurance
Company). Items covered were: (1) Stock of Wheat, Wheat products and
packing material and goods of like nature of Krishan Flour & Oil Mills for
Rs. 40 lakhs; (2) Stocks of raw material like flour, maida, ghee, chemicals
etc. in godowns belonging to Krishna Food & Baking Industries; for Rs.
25 lakhs and (3) Plants Machinery installed in Krishna Food & Baking
Industries, factory buildings, electric fittings for Rs. 53 lakhs. Terrorism
was one of the terms covered by the Insurance Policy.
 10.58 General Principles of Insurance
According to the complainants, in the morning of November 12,1991,
certain terrorists attacked the company as well as the Mill and set them
on fire. Substantial damage had been caused to the building, plant,
machinery and electricity fittings; the raw materials lying in the units were
destroyed; stocks which were in both the units were either destroyed or
substantially damaged. In view of the insurance coverage, a demand was
made by the complaints to the Insurance Company to get the survey done
and to pay the amount of loss sustained by the complainants. The Insurance
Company, however, did not do anything in the matter for a quite long time.
The complainants got the survey done through their surveyors and
demanded the amount to which they were entitled to. The Insurance
Company, however, did not make payment. The complainants approached
the National Commission by filing three complainants. The Insurance
Company repudiated the claim of the complainants. At a belated stage,
survey was carried out by the Insurance Company and assessed the damage
to the plant, machinery, building and electricity fittings to the extent of Rs.
31,373/- and nothing more. With regard to the raw materials and stocks,
the amount was substantially curtailed by the Insurance Company inter
alia, on the ground that the stocks were perishable in nature and had
become unfit for human consumption. It had become worthless at the time
of mishap in 1991. It was also contended that in the absence of proper
'watch and word stiff, there was pilferage of stocks and raw materials by
intruders as well as by the staff members of the complainants' Company
and Mill.
The National.Commission went into the merits of the matter and held
that the complainants were entitled to certain reliefs. The claim put forward
by the complainants, in respect of stock and raw materials, was for
Rs. 37,78,618/-. The Insurance Company recommended to settle the
claim in respect of stock and raw materials of the complainants at
Rs. 5,18,619/-. In a subsequent report, however, the surveyors gave a figure
of Rs. 4,33,122/- for settlement of the claim.
But the Insurance Company repudiated the claim The National
Commission held that there was no pilferage and taking into account the
weather conditions in Srinagar, it could not be held that the raw materials
had become worthless or unfit for human consumption. It was held by the
National Commission that the claimants were entitled to Rs. 4,53,122/-.
In respect of building, plant, machinery and electricity fittings, the
Insurance Company started that the complainants were entitled only to
Rs. 31,373/- against the policy amount of Rs. 53 lakhs. The National
Commission directed the Insurance Company to make payment of
 Law of Insurance 10.59
• Rs. 31,373/- towards damage to building with interest at the rate of 12%.
Being aggrieved by the order passed by the National Commission, three
appeals were filed by the complainants. It wras submitted that the appeals
deserve to be allowed by directing the Insurance Company to pay the full
amount with interest at the rate of 18% from November, 1991 and costs.
Two appeals were filed by the Insurance Company. In the appeals, it was
contended by the Insurance Company that the National Commission was
in error in granting relief in favour of the complainants. Canara Bank,
assignee of the two insurance policies, filed two appeals. It submitted that
i the entire amount to which the complainants were entitled in respect of
! the raw materials policy and plant policy ought to have been ordered to
be paid to the Bank. It was urged on behalf of the complainants that the
appeals filed by Canara Bank were not maintainable in view of Section 3
of the Jammu & Kashmir misgrants (Stay of Proceedings) Act, 1997. On
■ behalf of Canara Bank it was contended that the provisions of 1997 Act
had no application to the instant cases. It was asserted that as on date, the
amount to which the Bank was entitled and complainants were liable to
pay, exceeded Rs. five crores. The Bank, therefore, had the right to get the
entire amount to which the complainants were held entitled to.

Issue
(1) Whether the complainants were entitled to claim compensation
towards building, plant, machinery and electricity fittings, raw
materials, and stocks?
(2) Whether Insurance Company be directed to make payment to
Canara Bank and not to the complainants in respect of the amount,
if any, to be paid to the complainants in respect of raw materials
plant, etc.?
Decision of the Supreme Court
The Court held:
"Taking into consideration the entire facts and circumstances, in our
opinion, the complainants are entitled to claim compensation towards
building, plant, machinery and electricity fittings, raw materials and stocks."
The complainants were held entitled to the following :
Stocks : Rs. 37,78,619/-
Raw Materials: Rs. 23,79,195/-
Plant and Machinery, Factory Building, Electricity Fittings :
Rs. 25,81,600/-
 10.60 General Principles of Insurance
It was further held thdt the claims but forward by Canara Bank were
well founded. Therefore, both the appeals of Canara Bank were allowed
and the Insurance Company was directed to make payment to Canara
Bank and not to the complainants in respect of the amount to be paid to
the complainants in regard to raw materials policy and plant policy.
In the course of judgement, C.K. Thakkar, J. said:
"Having heard the learned counsel for the parties and having gone
through the records and proceedings as also the judgmeht of the National
Commission, it is clear that the complainants were able to establish the
claims put forward by them. It is not in dispute by and between the parties
that the Insurance Policy covered several acts including terrorism and fire.
It has come in evidence and has been believed by National Commission
that the son of the Managing Director w'as killed in March, 1990 by terrorist
attack. It is in the light of the said incident that the Managing Director had
to leave Srinagar and to return to Delhi. It was because of the said incident
that the operation of both the units was suspended. Thus, it was not a case
wherein the complainants did not undertake the activities which were
required to be undertaken by them, but they could not operate the units
and carry on business. No fault, therefore, can be found against the
complainants for suspending the operation of both the units. The
complainants obviously cannot suffer because of non-production in the
Mill as well as in the Company. The National Commission was, therefore,
not right in reducing any amount on the ground that certain stocks and
raw materials were unfit for human consumption. It was not intentional
or deliberate act on the part of the complainants in stopping production
and allowing the stocks and raw materials to get spoiled or damaged and
by making them unfit 'for human consumption. It was because of the
militant activities and terrorism that the Company and the Mill could not
do business and produce goods. Reduction of amount by the National
Commission on that count was, therefore, unjustified and in our opinion;
that part of the order requires interference by this Court.
As regards pilferage by intruders and staff members, except ipse dixit
on the part of the Insurance Company, no material whatsoever has been
placed on record in support of such allegation. The National Commission,
in our opinion, was justified in not accepting such bare assertion without
any evidence or concrete material in support of such plea. In fact, a finding
has been recorded by the National Commission that the godowns were
"full when they were set on fire." Watch and ward staff wrere protecting
the Mill and the Company. There was also a Police post nearby both the
units.
 Law of Insurance 10.61
Smt Dipashri v. Life Insurance Corporation of India
AIR 1985 Bom. 192
(The non-disclosure of the fact that the deceased was suffering from fever or
down with flue on some occasions is not material matter and, therefore, the failure
to disclose the same cannot be constructed as suppression of the relevant fact.)

Facts
The appellant was petitioner in this case. The petitioner's husband was
employed as a clerk in Mackinnon Mackenzie Private Limited for about
19 years. The deceased husband of the petitioner took out a double benefit
policy while in the employment. The deceased husband submitted to
respondent, that is Life Insurance Corporation of India, a proposal for issue
of an Endowment Policy for 20 years for Rs. 30,000/- on July 5 1975. The
monthly premium of the said policy were to be paid directly through the
salary saving scheme of Mackinnon Mackenzie Private Limited. The policy
was taken out by the deceased husband as provision for future and the
monthly premiums were paid regularly as per the contract of insurance.
Prior to the acceptance of the policy by the LIC, the deceased husband was
examined by doctors on the panel of the LIC and after the doctors certified
about the sound health of the petitioner's husband, the proposal was
accepted by the LIC and the policy was issued on July 7,1975. On October
4,1977, the petitioner's husband while lighting the stove in the kitchen,
accidently sustained severe bums. He was taken to the nursing home and
from there to a hospital but succumbed to his injuries on October 8, 1977
The doctor issued certificate certifying the death occurred due to toxaemi
following 50% bums sustained accidentally by the deceased. It was not ir
dispute that the bums were suffered in the accident when stove caught fire
On October 24,1977, the petitioner (the nominee under the policy) addressee
a letter to the senior Divisional Manager (Respondent) requesting to settle
the insurance claim under the policy. The petitioner was informed by the
Senior Divisional Manager by letterdated August 25, 1978 that the LIC
repudiates all liabilities under the policy as the deceased had deliberately-
made misstatements and with held material information regarding the
health at the time of effecting assurance with the Life Insurance Corporation.
The petitioner pointed out that her husband died at a very young age
of 43 years and the LIC should not jump to the conclusion that the deceased
was suffering from piles, giddiness and influenza merely from the fact that
the deceased had taken sick leave from his office. The petitioner had to
bring up three minor children when her husband died in the unfortunate “
accident. The petitioner (poor widow) was serving as a maid servant to
 10.62 General Principles of Insurance
Issue
Whether the petitioner was entitled to the claim under the policy?
Decision of the Bombay High Court
The Court held that the refusal of the Corporation to pay a pittance
of an amount to the poor widow was, in fact, the gross abuse of the powers.
Section 43 of the Life Insurance Corporation of India Act, 1956, inter
alia, provides that Section 45 of the Insurance Act shall apply to the .
Corporation as it applies to any other insurer. Under the provisions of
Section 45 of the Insurance Act, it is not open for the Corporation to
question any policy merely on the ground that the statement made in
the proposal was inaccurate or false, after the expiry of two years from
the date of commencement of the policy. The Corporation can repudiate
the policy if it is shown that such statement by the policy holder was
on a material matter and was fraudulently made.
Before the Corporation accepted the proposal of the deceased, a
confidential report of the Medical Examiner was secured by the Corporation.
The Medical Officer a Doctorate in Medicine was attached to a General
Hospital and was on the panel of the Corporation. The report unmistakably
establishes that the deceased was enjoying sound health. The report was
made by the Medical Examiner after examining the deceased thoroughly
and the Corporation had not proceeded to accept the proposal of the
deceased only on the statements made in the printed form but on the basis
of the report received from the Medical Officer.
PENDSE, J. said:
"Now even assuming that the certificate issued by the employer is
correct and the deceased had in fact secured sick leave on the relevant dates
by production of Medical Certificate, it cannot be concluded that the
deceased was in fact suffering from the bleeding piles or hypertension. In
my judgement, the ailmept of bleeding piles, influenza and dysentery are
very minor and trival ailments and the failure to disclose such ailments
in the proposal form cannot be treated as a suppression of the relevant
particulars. The deceased might have very well felt that it is not necessary
to state that he had suffered from the flue, dysentery or common cold
because such ailment has no bearing whatsoever to the longevity of the
person. It is well known that people in Bombay do not consult Medical
Practioners for such petty ailments like flue, fever or dysentery but the
medical certificates are required to be produced before the employer in
accordance with the service conditions and the mere fact that the medical
certificate is produced for obtaining sick-leave cannot lead to thp ronrhicir»r»
 Law of Insurance 10.63
that the deceased had taken treatment from the medical practioner. The
reliance on the certificate issued by the employer would not help the
Corporation because the medical certificate issued in December 1972 merely
recites that the deceased was suffering from hypertension. It nowhere
refers to the deceased suffering from giddiness or blood pressure or
weakness. The Corporation has raised false bogie of inaccurate statements
only to defeat the just claim of the poor widow and the action of the
Corporation deserves to be deplored."
PENDSE, J. further said:
"Even assuming that the deceased had made incorrect or false statements
about his ailment, still that fact itself would not suffice for the Corporation
to repudiate the contract in view of the clear-cut provisions of Section 45
of the Insurance Act. Tire concept of consultation with the Medical Practioner
is entirely different from securing medical certificate on the ground that
the person is down with fever. The perusal of the proposal form leaves
no manner of doubt that it is not each and every petty ailment which has
to be disclosed by the proposer and what is required to be- disclosed is
a serious ailment. The deceased was not suffering from any serious ailment
and was a ypung man of 41 years age at the time of taking out the policy.
The Medical Practioner on the panel of the Corporation had examined him
and in these circumstances, it is futile for the Corporation to claim that the
deceased was suffering from any serious ailment. Iia my judgement, the
non-disclosure of the fact that the deceased ivas suffering from fever or
down with flue on some occasions is not a material matter and, therefore,
the failure to disclose the same cannot be construed as suppression of the
relevant facts. As laid down by the Supreme Court, it is not suppression
of the fact ivhich is sufficient to attract second part of Section 45 of the
Insurance Act but what is required is that such suppression should be
fraudulently made by the policy-holder. The expression "fraudulently"
connotes deliberate and intentional falsehood or suppression and some
strong material is required before concluding that the policy holder has
played a fraud on the Corporation. I my judgement, on the facts and
circumstances of the present case, it is impossible to come to the conclusion
that the deceased had suppressed any material facts and such suppression
was done fraudulently .... The second part of Section 45 of the Insurance
Act is not, at all, attracted to the facts of the case and it is not open to
the corporation to repudiate the contract."
The Corporation was directed to pay the amount due under the policy
along with interest at the rate of 15% from the date of lodging of the claim
e. October 24, 1977 till payment.
i.
 20.64 Genera] Principles of Insurance

OTHER CASES
In Economic Transport Organisation v. Charan Spg. Mills (P) Ltd.
(2010) 4 SCC 114, it was held that the contract of insurance is a contract
of indemnity. It was further held that where insurer pays to the insured
value of goods lost due to negligence of a third party, rights and remedies
of the insured against such third party stand transferred to and vested in
insurer. Such equitable assignments of rights and remedies of insured in
favour of the insurer, implied in a contract of indemnity is known as
"subrogation".
In Amravati District Central Co-op. Bank Ltd. v. United India Fire and
General Insurance Co. Ltd., (2010) 5 SCC 294, it was held that in interpreting
documents relating to contracts of insurance, the duty of the court is to
interpret the words in which the contract is expressed by the parties,
because it is not for the court to make a new contract, however reasonable,
if the parties have not made it themselves. Moreover, the terms of the
agreement have to be strictly construed to determine the extent of liability
of the insurer. It is further held in this case that "excess" clauses are
commonly used in insurance contracts. In insurance parlance, the term
"excess" in the excess clause in the policy refers to "that part of the amount
of loss, under each claim, which is not covered by the policy" or the
"amount that the policy-holder has, by agreement, to bear or contribute
to each insurance claim". In other words it limits the liability of the insurer
in regard to each claim only to the amount of loss, in excess of the sum
specified in the excess clause which the insured has agreed to bear (either
himself or by securing other insurance coverage).
In United India Insurance Co. Ltd. v.Kantika Colour Lab, (2010) 6 SCC
449, it was held that contracts of insurance are generally in the nature of
contracts of indemnity. Except in the case of contracts of life insurance,
personal accident and sickness or contracts of contingency, such as a transit
risk contract, all other contracts of insurance entitle the assured for the
reimbursement of actual loss that is proved to have been suffered by him.
The happening of the event against which insurance cover has been taken
does by itself entitle the assured to claim the amount stipulated in the
policy. It is only upon the proof of the actual loss, that the assured can claim
reimbursement of the loss to the extent it is established, not exceeding the
amount stipulated in the contract of insurance which signifies the outer
limit of the insurance company's liability.
In Export Credit Guarantee Corporation of India Ltd. v. Garg Sons
International, (2014) 1 SCC 686, it was held that the terms of the insurance
Law of Insurance 10.65
contract have to be construed strictly. Every attempt should be made to
harmonise the terms thereof.

EXAMINATION QUESTIONS
1. Contracts of Insurance are "uberrima fides “. Elucidate with the help
of judicial decisions and statutory provisions on the subject.
2. (a) What is doctrine of causa proxima in a Marine Insurance?
(b) Fruits loaded on a ship were insured against damage consequent
on collision with any other ship. During the course of voyage
insured ship collided with another ship and thereby damaged
which rendered it necessary for her to put into a port for repairs.
When the ship arrived at the port of discharge after repairs a
portion of fruit had gone bad. Is insurance company liable for
the loss ?
Hint: See Pink v. Fleming, (1899) 25 QBD 396 and Leyland Shipping Co.
Ltd. v. Norwich Union Fire Insurance Society Ltd., (1918) AC 350.
3. (a) Define insurable interest. Is it essential in a contract of insurance?
(b) Can a father insure life of his son who is dependent on his father
for his livelihood?
Hint: A father cannot insure the life of his son who is dependent on
his father for his livelihood.
4. (a) What is insurable interest?
(b) Whether A has insurable interest in the life of following persons?
(i) In the life of his father who is dependent and with whom he had
strained relations.
(ii) His girl friend with whom he is engaged for marriage.
Hint: (i) A cannot insure the life of his father who is dependent^and
with whom he had strained relations as in this case A has no insurable
interest in the life of such father.
(ii) A cannot insure the life of his girl friend even when he is engaged
with her for marriage as he has no insurable interest in her life.
5. (a) Contracts of insurance are of utmost good faith. Explain.
(b) One D insured his life with L.I.C. In the proposal there was a
fraudulent suppression of heart attacks which D had in recent
past. However, doctors of L.I.C. gave the opinion that D was fit
to be insured at the. time of their examination. Whether
 10.66 General Principles of Insurance
Corporation can avoid the claim under section 45 of Insurance
Act 1938?
Hint: The mere fact that the insured company had the assured examined
by its own doctor will not relieve him from the legal consequences of
the false statement. (Mithoo Lai Nayak v. LIC, AIR 1962 SC 814).
6. To prevent misuse of the "Basis Clause", Sec. 45 of the Insurance Act,
1938 puts some limits on the rights of the insurer with respect to a
policy of life insurance. Explain these limits by referring to that statutory
provision and the facts of a relevant case.
7. (a) Distinguish between the Doctrine of Causa-proxima and the
Doctrine of utmost good faith in a contract of insurance.
(b) Sugar bags loaded on a ship were insured against loss by sea
water. A rat made a hole in the pipe of the ship. Sea w’ater leaked
through that hole into the ship and damaged sugar in the bags
lying there. Whether insurance company is liable to pay this loss
under policy of ship's goods?
Hint: The facts of this problem are similar to the facts of Hamilton
Fraser & Co. v. Pondorf & Co. (1887). It was held in this case that the
proximate cause or damage was sea water and thus the insurer was
held liable.
8. State the facts, issues and the principles of law laid down in Mithoolal
Nayak v. LIC (AIR 1962 SC 814).
9. (a) What is insurable interest?
(b) Can A insure the life of his aged and retired father?
(c) Can A insure the life of his girl friend?
Hints : (b) A cannot insure the life of his aged and retired father as
A does not have insurable interest.
(c) A cannot insure the life of his girl friend due to absence of insurance
interest.
10. (a) What do you mean by the principle of 'utmost good faith'?
(b) A was suffering from shortness of breath and congested heart
got his life insured with LIC for Rs. 1,00,000 by concealing these
ailments in answering questions about his health. After one year
he died of heart failure. Will his nominee get the insured amount
from LIC?
Law of Insurance 10.67
Hint: The nominee of the deceased will not get the insured amount
from LIC as A did not disclose the ailments in answering questions
about his health. (Swit. Krishna Wati Puri v. LIC, AIR 1975 Del 19).
11. A was suffering from heart disease for which she underwent open
heart surgery in 1950. After one year she insured her life with LIC for
Rs. 5 lac but did not disclose anything about her heart ailment or open
heart surgery. After 5 years, she died of heart attack. Can nominee of
A claim on the insurance policy? Decide in the light of S. 45 of the
Insurance Act, 1938.
Hint: The instant case is covered by second part of S.45. The nominee
cannot claim on the insurance policy. [Mithoolal Nayak v. LIC, (1962)32
Comp. Cas. (SC)}
12. (a) What is insurable interest in a contract of insurance?
(b) Can a son insure the life of his father who is independent. Hint:
Seethe heading "Insurable Interest" in the text.
13. A took a "Householder's Comprehensive Policy" of insurance with
the defendant, insuring the contents of her flats including jewellery,
against loss or damage caused by fire. On 31.12.2000 while leaving her
flat, for protection against theft, she concealed the jewellery in the
grate under coal and wood, which were ready for lighting. On returning,
she inadvertently lit the fire and jewellery got damaged. Will A succeed
upon the claim under the above said policy?
Hint: There had been ignition of insured property not intended to be
ignited and the loss falls within the plain words of the policy. [Harris
v. Poland, (1941ft K.B. 462].
14. The insured owes a duty to disclose every material fact, of which he
knows or ought to know before the contract of insurance is made.
Discuss this statement in the light of the decided cases, i.e., "Mithoolal
Nayak v. LIC and "Smt. Krishna Wati Puri v. LIC"
15. Explain the doctrine of "Proximate causa" in the context of marine
insurance. Refer to Pink v. Fleming, (1890) 25 QBD 396.
16. X took a 'Comprehensive Policy' of insurance with company Y, insuring
the contents of her flat, including jewellery, against loss by theft or
damage caused by fire. For purposes of protection against theft, on
leaving her flat.one day, she (X) concealed the jewellery in the grate
under the coal and wood, which was ready for lighting. On returning,
in the evening, she (X). inadvertently lit the fire and, as a result, the
jewellery was damaged.
10.68 General Principles of Insurance
She (X) files a claim against company Y. Will she succeed? Decide
referring to the judicial decision on the subject.
Hint: Y will succeed. [Harris v. Poland, (1941) 1 K.B. 462].
17. "It islrue of all types of insurance contracts that it is the duty of both
the parties to help each other in reaching to a right conclusion, by
disclosing all material facts relating to the contract of insurance and
not to hold each other at arm's length in defence of their conflicting
interests." With the help of leading cases, explain the nature and scope
of this duty. What could be the consequences, if this duty is not carried
out?
18. Reena has an insurance policy against theft and house breaking, with
a condition that her house shall always remain occupied. The house
was left unattended on one Sunday between 2 p.m. and 7 p.m., when
she had gone to see her ailing mother. On her return she found the
locks of her safe broken and her jewellery worth Rs. 20,000 missing.
Reena claims the loss under the policy from the insurer. Decide, stating
the principles of interpretation of insurance policy with reference to
decided cases, if anv.
Hint: In Simmond v. Cockell, (1920)1 K.B. 843, it was held that the
words "premises are always occupied" does not mean that premises
are never to be left unattended. It means that premises are to be used
continuously and without interruption. If the language of a warranty
in a policy is ambiguous it must be construed against the underwriter
(Simmond v.. Cockell, (1920) 1 KB 843). Reena is entitled to the insurance
claim.
19. A son insured the life of his father with whom he had strained relations.
The father was independence of son. Whether contract of insurance
in such a case is valid and binding? What are the rights of insurance
company in such a case?
Hint: The contract in the aforesaid case is not valid as the son does
not have insurable interest, in this case, in the life of his father.
20. A insured his house against fire. He agreed to sell the house to B.
Before sale was Completed fire took place and damaged the house. A
received claim for loss form the insurance company. After this, sale
was completed and A received full sale consideration from B. Discuss
the rights of the insurance company in such a case.
I

1 Hint: See Castellian v. Preston (1833) 11 QBD 380. The insured is

entitled to only the value of the loss or damage caused to the property
Law of Insurance 10.69
and not exceeding the amount of the policy. The insured is not allowed
to make a profit when loss or damage occurs by the event insured.
21. A insured his life with LIC. At the time of proposal, he replied to a
number of questions, -contained in the proposal form as to whether
he suffered from certain specified diseases during the last two years.
He replied them in the negative. But in fact, he did suffer from these
diseases. After one year he assigned the policy to Ramesh and died.
Can Ramesh recover the amount of policy from LIC? Decide.
Hint: Ramesh cannot recover the amount of policy from LIC because
he not only failed to disclose what it was material for him to disclose
but he made a false statement to the effect that he had not suffered
from the diseases during the last two years (Smt. Krishna Wati Puri
v. LIC, AIR 1975 Del 19).
22. A aged 40, had heart attack on 1-1-1990 but recovered from it On 1-
1-1991. He insured his life with LIC for Rs. 10,000 but did not disclose
anything about his heart attack. After some months he had another
heart attack and died. A claim was made against LIC which was
turned down on the ground of concealment of material fact. Decide
Hint: LIC has rightly turned down the claim (Smt. Krishna Wati Puri
v. LIC, AIR 1975 Del 19).
23. What are tire rules of interpretation of liability clauses in an insurance
policy?
24. Explain the proper construction of the words “Loss by fire" in an
insurance policy as laid down by the court in Harris v. Poland, (1941)
1 KB 462.
25. "An insurance without insurable interest is a wager." Comment.
26. What do you understand by material facts in relation to a contract of
insurance? What is the extent of duty of the insured to disclose material
facts? State the consequences of non disclosure and misrepresentation
of material facts with reference to the facts of Kasum Ali Bulbul v. The
New India Insurance Co., AIR 1968 J&K 39).
27. Kasin insured his carpets against fire. One of the questions in the
proposal for insurance was: "Did you insure your goods against fire
with any insurance company in past, if so, give details." Kasim replied
it in negative. In fact he had insured his carpets against fire with
another insurance company and a claim for loss by fire was
compromised with said company. Examine the effect of this
concealment on present policy.
10.70 General Principles of Insurance
Hint:. Suppression of material facts.
Hint: Where a policy Is reasonable susceptible of two constructions,
then that interpretation will be adopted which is more favourable to
the insured (Simmonds v. Cockell, (1920) 1 KB 843).
28. Write short notes on any four of the following:
(a) Indorsement in blank and insorsement in full.
(b) Material alteration of a Negotiable Instrument.
(c) Effect of Account Payee Crossing.
(d) Cause Proxima.
(e) Insurable Interest.