NEGOTIABLE INSTRUMENTS Act

1881
 WHAT ARE NEGOTIABLE INSTRUMENTS?

Exchange of goods and services is the basis of every business activity. Goods are
bought and sold for cash as well as on credit. All these transactions require flow of cash
either immediately or after a certain time. In modern business, large number of
transactions involving huge sums of money takes place every day. It is quite
inconvenient as well as risky for either party to make and receive payments in cash.
Therefore, it is a common practice for businessmen to make use of certain documents
as means of making payment. Some of these documents are called negotiable
instruments.

Meaning of Negotiable Instruments

The concept of negotiability is one of the most important features of commercial paper.
A negotiable instrument is a written document, signed by the maker or drawer, and
containing an unconditional promise to pay (or order to pay) a certain sum of money on
delivery, or at a definite time, to the bearer (or to the order).
To understand the meaning of negotiable instruments let us take a few examples of
day-to-day business transactions.

EXAMPLE
Suppose Pitamber, a book publisher has sold books to Prashant for Rs 10,000/- on
three months credit. To be sure that Prashant will pay the money after three months,
Pitamber may write an order addressed to Prashant that he is to pay after three months,
for value of goods received by him, Rs.10,000/- to Pitamber or anyone holding the order
and presenting it before him (Prashant) for payment. This written document has to be
signed by Prashant to show his acceptance of the order. Now, Pitamber can hold the
document with him for three months and on the due date can collect the money from
Prashant. He can also use it for meeting different business transactions. For instance,
after a month, if required, he can borrow money from Sunil for a period of two months
and pass on this document to Sunil. He has to write on the back of the document an
instruction to Prashant to pay money to Sunil, and sign it. Now Sunil becomes the
owner of this document and he can claim money from Prashant on the due date. Sunil,
if required, can further pass on the document to Amit after instructing and signing on the
back of the document. This passing on process may continue further till the final
payment is made.

In the above example, Prashant who has bought books worth Rs. 10,000/- can also give
an undertaking stating that after three month he will pay the amount to Pitamber. Now
Pitamber can retain that document with himself till the end of three months or pass it on
to others for meeting certain business obligation (like with Sunil, as discussed above)
before the expiry of that three months time period.
You must have heard about a cheque. What is it? It is a document issued to a bank that
entitles the person whose name it bears to claim the amount mentioned in the cheque.
If he wants, he can transfer it in favour of another person. For example, if Akash issues
a cheque worth Rs. 5,000/ - in favour of Bidhan, then Bidhan can claim Rs. 5,000/- from
the bank, or he can transfer it to Chander to meet any business obligation, like paying
back a loan that he might have taken from Chander. Once he does it, Chander gets a
right to Rs. 5,000/- and he can transfer it to Dayanand, if required. Such transfers may
continue till the payment is finally made to somebody. In the above examples, we find
that there are certain documents used for payment in business transactions and are
transferred freely from one person to another. Such documents are called Negotiable
Instruments.

Thus, we can say negotiable instrument is a transferable document, where negotiable

means transferable and instrument means document. To elaborate it further, an
instrument, as mentioned here, is a document used as a means for making some
payment and it is negotiable i.e., its ownership can be easily transferred.
Thus, negotiable instruments are documents meant for making payments, the
ownership of which can be transferred from one person to another many times before
the final payment is made.
Definition of Negotiable Instrument
According to section 13 of the Negotiable Instruments Act, 1881, a negotiable
instrument means “promissory note, bill of exchange, or cheque, payable either to order
or to bearer”.

Explanation
(i).-A promissory note, bill of exchange or cheque is payable to order which is
expressed to be so payable or which is expressed to be payable to a particular person,
and does not contain words prohibiting transfer or indicating an intention that it shall not
be transferable.
(ii).-A promissory note, bill of exchange or cheque is payable to bearer which is
expressed to be so payable or on which the only or last endorsement is an
endorsement in blank.
(iii).-Where a promissory note, bill of exchange or cheque, either originally or by
endorsement, is expressed to be payable to the order of a specified person, and not to
him or his order, it is nevertheless payable to him or his order at his option.
A negotiable instrument may be made payable to two or more payees jointly, or it
may be made payable in the alternative to one of two, or one or -some of several
payees.
 Types of Negotiable Instruments
According to the Negotiable Instruments Act, 1881 there are just three types of
negotiable instruments i.e., promissory note, bill of exchange and cheque. However
many other documents are also recognized as negotiable instruments on the basis of
custom and usage, like hundis, treasury bills, share warrants, etc., provided they
possess the features of negotiability. In the following sections, we shall study about
Promissory Notes (popularly called pronotes), Bills of Exchange (popularly called bills),
Cheques and Hundis (a popular indigenous document prevalent in India), in detail.

i. Promissory Note
Suppose you take a loan of Rupees Five Thousand from your friend Ramesh. You can
make a document stating that you will pay the money to Ramesh or the bearer on
demand. Or you can mention in the document that you would like to pay the amount
after three months. This document, once signed by you, duly stamped and handed over
to Ramesh, becomes a negotiable instrument. Now Ramesh can personally present it
before you for payment or give this document to some other person to collect money on
his behalf. He can endorse it in somebody else’s name who in turn can endorse it
further till the final payment is made by you to whosoever presents it before you. This
type of a document is called a Promissory Note.
Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as ‘an
instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking, signed by the maker, to pay a certain sum of money only to
or to the order of a certain person or to the bearer of the instrument’.
Illustration
A signs instrument in the following terms
(a) "I promise to pay B or order Rs. 500."
(b) " I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for
value received."
(c) Mr. B, O U Rs. 1,000."
(d) I promise to pay B Rs. 500 and all other sums which shall be due to him."
(e) I promise to pay B Rs. 500, first deducting there out 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.

Specimen of a Promissory Note

Rs. 10,000/- New
Delhi
September 25,
2002
On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a
sum of Rs 10,000/- (Rupees Ten Thousand only), for value received.
To , Ramesh Sd/
Sanjeev
Address……..
Stamp

Parties to a Promissory Note

There are primarily two parties involved in a promissory note. They are
i. The Maker or Drawer – the person who makes the note and promises to pay
the amount stated therein. In the above specimen, Sanjeev is the maker or drawer.
ii. The Payee – the person to whom the amount is payable. In the above
specimen it is Ramesh. In course of transfer of a promissory note by payee and others,
the parties involved may be -
 a. The Endorser – the person who endorses the note in favour of another
person. In the above specimen if Ramesh endorses it in favour of Ranjan and Ranjan
also endorses it in favour of Puneet, then Ramesh and Ranjan both are endorsers.
b. The Endorsee – the person in whose favour the note is negotiated by
endorsement. In the above, it is Ranjan and then Puneet.
(Endorsement means transfer of any document or instrument to another person by
signing on its back or face or on a slip of paper attached to it)

Features of a promissory note

Let us know the features of a promissory note.
i. A promissory note must be in writing, duly signed by its maker and properly stamped
as per Indian Stamp Act.
ii. It must contain an undertaking or promise to pay. Mere acknowledgement of
indebtedness is not enough. For example, if someone writes ‘I owe Rs. 5000/- to Satya
Prakash’, it is not a promissory note.
iii. The promise to pay must not be conditional. For example, if it is written ‘I promise to
pay Suresh Rs 5,000/- after my sister’s marriage’, is not a promissory note.
iv. It must contain a promise to pay money only. For example, if someone writes ‘I
promise to give Suresh a Maruti car’ it is not a promissory note.
v. The parties to a promissory note, i.e. the maker and the payee must be certain.
vi. A promissory note may be payable on demand or after a certain date. For example,
if it is written ‘three months after date I promise to pay Satinder or order a sum of rupees
Five Thousand only’ it is a promissory note.
vii. The sum payable mentioned must be certain or capable of being made certain. It
means that the sum payable may be in figures or may be such that it can be calculated.
(See specimen below).
Rs. 10,000/- New
Delhi
November 14,
2002
I, Ramesh , s/o Sadanand of Surat, Gujarat promise to pay Sashikant, s/o Sunil
Kumar of Ahmedabad, Gujarat or order, on demand, the sum of Rs 10,000/- (Rupees
Ten Thousand only) with interest at the rate of 10 percent per annum, for value
received.
Sd/- Ramesh
Stamp
To
Sashikant
Ahmedabad, Gujarat

ii. Bill of Exchange

Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer
has to return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can
make a document directing Sameer to make payment up to Rupees Ten Thousand to
Tarun on demand or after expiry of a specified period. This document is called a Bill of
Exchange, which can be transferred to some other person’s name by Tarun.
Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as ‘an
instrument in writing containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to or to the order of a certain person,
or to the bearer of the instrument’.
Specimen of a Bill of Exchange
Rs. 10,000/- New Delhi
May
2,2001
Five months after date pay Tarun or (to his) order the sum of Rupees Ten
Thousand only for value received.
To Accepted
Stamp
Sameer Sameer
S/d
Address
Rajiv

Parties to a Bill of Exchange

There are three parties involved in a bill of exchange. They are
i. The Drawer – The person who makes the order for making payment. In the
above specimen, Rajiv is the drawer.
ii. The Drawee – The person to whom the order to pay is made. He is generally
a debtor of the drawer. It is Sameer in this case.
iii. The Payee – The person to whom the payment is to be made. In this case it
is Tarun.
The drawer can also draw a bill in his own name thereby he himself becomes the
payee. Here the words in the bill would be Pay to us or order. In a bill where a time
period is mentioned, just like the above specimen, is called a Time Bill. But a bill may be
made payable on demand also. This is called a Demand Bill.

Features of a bill of exchange

Let us know the various features of a bill of exchange.
i. A bill must be in writing, duly signed by its drawer, accepted by its drawee and
properly stamped as per Indian Stamp Act.
ii. It must contain an order to pay. Words like ‘please pay Rs 5,000/- on demand and
oblige’ are not used.
iii. The order must be unconditional.
iv. The order must be to pay money and money alone.
v. The sum payable mentioned must be certain or capable of being made certain.
vi. The parties to a bill must be certain.

iii. Cheques
Cheque is a very common form of negotiable instrument. If you have a savings bank
account or current account in a bank, you can issue a cheque in your own name or in
favour of others, thereby directing the bank to pay the specified amount to the person
named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the
only difference is that the bank is always the drawee in case of a cheque.
The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn
on a specified banker and not expressed to be payable otherwise than on demand.
Actually, a cheque is an order by the account holder of the bank directing his banker to
pay on demand, the specified amount, to or to the order of the person named therein or
to the bearer
Specimen of a Cheque
………......20......
.
Pay…….............................................................................................................
.
……....................................................................................................... or
Bearer
Rupees………………………………………………
……………………………………………………
STATE BANK OF INDIA
Jawaharlal Nehru University, New Delhi – 110067
MSBL 653003 110002056 10
Features of a cheque
Let us look into some important features of a cheque.
i. A cheque must be in writing and duly signed by the drawer.
ii. It contains an unconditional order.
iii. It is issued on a specified banker only.
iv. The amount specified is always certain and must be clearly mentioned both in figures
and words.
v. The payee is always certain.
vi. It is always payable on demand.
vii. The cheque must bear a date otherwise it is invalid and shall not be honoured by the
bank.

Types of Cheque
Broadly speaking, cheques are of four types.
a) Open cheque, and
b) Crossed cheque.
c) Bearer cheque
d) Order cheque
Let us know details about these cheques.

a) Open cheque: A cheque is called ‘Open’ when it is possible to get cash over the
counter at the bank. The holder of an open cheque can do the following:
i. Receive its payment over the counter at the bank,
ii. Deposit the cheque in his own account
iii. Pass it to someone else by signing on the back of a cheque.

b) Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to

issue such cheques. This risk can be avoided by issuing other types of cheque called
‘Crossed cheque’. The payment of such cheque is not made over the counter at the
bank. It is only credited to the bank account of the payee. A cheque can be crossed by
drawing two transverse parallel lines across the cheque, with or without the writing
‘Account payee’ or ‘Not Negotiable’.
c) Bearer cheque: A cheque which is payable to any person who presents it for
payment at the bank counter is called ‘Bearer cheque’. A bearer cheque can be
transferred by mere delivery and requires no endorsement.

d) Order cheque: An order cheque is one which is payable to a particular person. In

such a cheque the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may
be written. The payee can transfer an order cheque to someone else by signing his or
her name on the back of it.

There is another categorization of cheques which is discussed below:

 Ante-dated cheques:- Cheque in which the drawer mentions the date earlier to
the date of presenting if for payment. For example, a cheque issued on 20th May
2003 may bear a date 5th May 2003.

 Stale Cheque:- A cheque which is issued today must be presented before at

bank for payment within a stipulated period. After expiry of that period, no
payment will be made and it is then called ‘stale cheque’. Find out from your
nearest bank about the validity period of a cheque.

 Mutilated Cheque:- In case a cheque is torn into two or more pieces and
presented for payment, such a cheque is called a mutilated cheque. The bank
will not make payment against such a cheque without getting confirmation of the
drawer. But if a cheque is torn at the corners and no material fact is erased or
cancelled, the bank may make payment against such a cheque.

 Post-dated Cheque:- Cheque on which drawer mentions a date which is

subsequent to the date on which it is presented, is called post-dated cheque. For
example, if a cheque presented on 8th May 2003 bears a date of 25th May 2003,
it is a post-dated cheque. The bank will make payment only on or after 25th May
2003.
Differences between Bill of Exchange & Promissory Notes
Promissory Note
1. It contains an unconditional
promise.
2. There are 2 parties – the maker &
the payee.
3. It is made by the debtor.
4. Acceptance is not required.
5. The liability of the maker/drawer is
primary & absolute.
Distinction between a Cheque and a Bill of Exchange
Cheque
1. It is drawn only on a banker.
2. The amount is always payable on
demand.
3. It can be crossed to end its
negotiability.
4. Acceptance is not required.
Bill of Exchange
1. It contains an unconditional order.
2. There are 3 parties – the drawer,
the drawee & the payee.
3. It is made by the creditor.
4. Acceptance by the drawee is a
must.
5. The liability of the maker/drawer is
secondary & conditional upon
non-payment by the drawee.
Bill of Exchange
1. It can be drawn on anybody
including a banker.
2. The amount is payable on
demand or after a specified
period.
3. It cannot be crossed.
4. Acceptance is a must.
 Features of Negotiable Instruments

After discussing the various types of negotiable instruments let us sum up their features
as under
i. A negotiable instrument is freely transferable. Usually, when we transfer any
property to somebody, we are required to make a transfer deed, get it registered, pay
stamp duty, etc. But, such formalities are not required while transferring a negotiable
instrument. The ownership is changed by mere delivery (when payable to the bearer) or
by valid endorsement and delivery (when payable to order). Further, while transferring it
is also not required to give a notice to the previous holder.

ii. Negotiability confers absolute and good title on the transferee. It means that a
person who receives a negotiable instrument has a clear and undisputable title to the
instrument. However, the title of the receiver will be absolute, only if he has got the
instrument in good faith and for a consideration. Also the receiver should have no
knowledge of the previous holder having any defect in his title. Such a person is known
as holder in due course. For example, suppose Rajiv issued a bearer cheque payable to
Sanjay. It was stolen from Sanjay by a person, who passed it on to Girish. If Girish
received it in good faith and for value and without knowledge of cheque having been
stolen, he will be entitled to receive the amount of the cheque. Here Girish will be
regarded as ‘holder in due course’.

iii. A negotiable instrument must be in writing. This includes handwriting, typing,

computer printout and engraving, etc.

iv. In every negotiable instrument there must be an unconditional order or promise

for payment.

v. The instrument must involve payment of a certain sum of money only and nothing
else. For example, one cannot make a promissory note on assets, securities, or goods.
vi. The time of payment must be certain. It means that the instrument must be
payable at a time which is certain to arrive. If the time is mentioned as ‘when
convenient’ it is not a negotiable instrument. However, if the time of payment is linked to
the death of a person, it is nevertheless a negotiable instrument as death is certain,
though the time thereof is not.

vii. The payee must be a certain person. It means that the person in whose favour the
instrument is made must be named or described with reasonable certainty. The term
‘person’ includes individual, body corporate, trade unions, even secretary, director or
chairman of an institution. The payee can also be more than one person.

viii. A negotiable instrument must bear the signature of its maker. Without the
signature of the drawer or the maker, the instrument shall not be a valid one.

ix. Delivery of the instrument is essential. Any negotiable instrument like a cheque or
a promissory note is not complete till it is delivered to its payee. For example, you may
issue a cheque in your brother’s name but it is not a negotiable instrument till it is given
to your brother.

x. Stamping of Bills of Exchange and Promissory Notes is mandatory. This is

required as per the Indian Stamp Act, 1899. The value of stamp depends upon the
value of the pronote or bill and the time of their payment.
 Negotiation of Commercial Paper

• Assignment
• Negotiation
• Endorsements
• Four Common Types of Endorsements
Assignment Commercial paper that does not meet all of the requirements of
negotiability cannot be negotiated. It can only be transferred by assignment, which is
governed by the ordinary principles of contract law.
Negotiation Negotiation is the transfer of an instrument in such a form that the
transferee becomes a holder. A holder is a person who is in possession of an
instrument issued or indorsed to that person, to that person's order, to bearer, or in
blank.
Endorsements An instrument is endorsed when the holder signs it, thereby indicating
the intent to transfer ownership to another. Endorsements may be written in ink,
typewritten, or stamped with a rubber stamp.
Blank Endorsements: A blank endorsement consists of the signature alone written on
the instrument.
 Special Endorsements: A special endorsement is made by writing the words
pay to the order of or pay to followed by the name of the person to whom it is to
be transferred and the signature of the endorser.
 Restrictive Endorsements: A restrictive endorsement limits the rights of the
endorsee in some manner in order to protect the rights of the endorser. An
endorsement is restrictive if it is conditional.
 Conditional Endorsement: A conditional endorsement, a type of restrictive
endorsement, makes the rights of the endorsee subject to the happening of a
certain event or condition.
 Qualified Endorsements: A qualified endorsement is one in which words have
been added to the signature that limit the liability of the endorser.
 Exceptions Of Negotiable Instruments

Under the Code, the following are not negotiable instruments, although the law
governing obligations with respect to such items may be similar to or derived from the
law applicable to negotiable instruments.
1. Letters of Credit, which are governed by Article 5 of the Code.
2. Bills of Lading and other documents of title, which are governed by Article 7 of
the Code.
3. Securities, such as Stocks & Bonds, which are governed by Article 8 of the Code.
4. Deeds & other documents conveying interests in real estate, although a
mortgage may secure a promissory note which is governed by Article 3.
5. IOUs. relating to netting practices and domestic payments and settlement
systems.
 Cheque Truncation

Cheque Truncation is a method of payment processing where under movement of the

paper instrument is truncated by substituting with electronic transmission of the cheque
details or data. The Shere Committee had examined the legal issues pertaining to
cheque truncation and had indicated that the definition of presentment in the Negotiable
Instruments Act may have to be amended for adoption of cheque truncation system in
India. Under the Negotiable Instruments Act, 1881, cheques would have to be
presented for payment to drawee / drawer bank. Without such presentment, no cause of
action arises against the drawer. In default of presentment of a cheque to the drawee
for payment, other parties to the cheque are not liable to the holder. It is by banking
practice and under the Uniform Rules and Regulations for Clearing Houses that banks
have agreed for presentment at any place other than the branch, such as the clearing
house. Besides, the implications of the definition of payment in due course under the
Negotiable Instruments Act, 1881 may make it difficult for banks to introduce cheque
truncation system simply by agreement among themselves. The right of the paying bank
to require physical presentation and possession of the cheque are designed to provide
the bank with an opportunity to examine the signature and other authentication of the
cheque. This is meant essentially to protect the interest of the drawer. Therefore, in UK,
the cheque truncation system started with customer consent agreements and was
eventually introduced after a fair degree of familiarization with imaging technology by
the banks. Thus, introduction of cheque truncation system may require adoption of a
fairly standardized imaging technology and appropriate amendments to the Negotiable
Instruments Act, 1881.
 Dishonor Of Negotiable Instruments

Complaints of cheque :
To answer in nutshell, a person desirous to initiate action under section 138 of
Negotiable Instruments Act ("Complainant"), should ensure following:

-The instrument is a cheque (and not any other instrument like bill of exchange or
promissory note)
-Complainant is a payee or holder in due course of a returned cheque
-The cheque should have been in discharge of debt or liability (and not gift etc)
-The cheque should have returned for reasons "want of funds", “a/c closed” or “stopped
payment”
-Complainant should make out a prima facie case. Thereafter, the accused has to prove
absence of consideration
-Complainant should issue a demand notice within 30 days from the Complainant's
receiving information of return. the notice need not be received by the accused (i.e.
drawer of the cheque) within 30 days
-It is advisable to give demand notice only once by a single mode, say registered ad
letter
-Demand notice may cover more than one returned cheque
-Demand notice should demand the drawer to pay within 15 days from its receipt by the
drawer of the cheque
-Advisable to gather the date and evidence of receipt of demand notice by the drawer of
the cheque
-Cause of action arises on 16th day when the drawer of the cheque doesn't pay within
15 days from the Drawer’s receiving or refusing demand notice
-Cause of action arises only once, though there can be several returns. Hence
advisable to give notice only when it is decided to file a complaint
-Complaint should be filed within 30 days from 16th day from the date of receipt by
Drawer of the Demand Notice
-If the last day of limitation for filing a complaint is a holiday, may file it on the next
working day. Courts not allowed to condone delay in filing a complaint and hence timing
hould be adhered to
-Complaint is maintainable against all the partners for a cheque return of their firm
-In case of a company, managing director/ deputy managing director’s liability is
assumed while as regards other directors etc it is necessary that such person was in
charge of and responsible for the conduct of business of the company and this is
specifically averred in the complaint
-It is not necessary to make the company or the firm a party to the complaint
-Complaint runs independent of any other proceeding
-Complaint is not maintainable against legal heirs of the Drawer.

BILLS OF EXCHANGE
Dishonor of the bill: when the bill of exchange is not accepted or not paid on maturity
the bill is said to have been dishonored. From the above it is clear that the bill is
dishonored on two accounts:
a. Dishonor by non-acceptance
b. Dishonor by non-payment
Dishonor by non-acceptance: when the drawee refuses to accept the bill, it stands to
be dishonored. The dishonor by-non-acceptance may have the following reasons:
1. The drawee doesn’t accept the bill within 24 hours of its receipt.
2. When the drawee is not entitled to accept it.
3. When the drawee is a fake person.
4. If the bill is to be conditionally accepted
5. When the drawee disappears.
6. In case there are many drawees, and all the drawees do not sign the bill.
Dishonor by Non-Payment: Another reason for the dishonor of a bill is its non-
payment at maturity the drawee may refuse to make the payment of the bill when it is
presented at maturity, this refusal gives rise to dishonor by nonpayment. The dishonor
affects all the parties to the bill. They include the drawer, all endorse and endorse, who
are all accountable and liable to the holder.
 Case studies

Case 1 : THE JVG SCANDAL

JVG's troubles started in June 1997, after the Securities and Exchange Board of
India (SEBI) asked JVG Finance to refund the Rs 45 crore it had raised from a public
issue in March 1997. A day after the issue had opened, RBI issued a show-cause
notice asking why JVG Finance should not be barred from accepting deposits as the
group companies had already exceeded their deposit limits. By the time RBI
conditionally cleared the issue after assurances from Sharma, the 70-day stipulated
period for listing the shares had passed. Because of the time-lapse, SEBI intervened
and ordered the refund of the public's money according to the allotment rules. Sharma
refused to refund the money to the investors and appealed against the order to the
Finance ministry.

He admitted that JVG had exceeded its limits while accepting deposits but claimed that
since December 1996 (much before the RBI ban) it had stopped accepting deposits on
its own and had even given RBI an undertaking. RBI did not accept the argument and
barred the group from accepting any more public deposits. In September 1997, post-
dated cheques issued for principal as well as interest on JVG's deposits bounced.
Investors then complained to the civil courts, consumer courts, Company Law Board
and criminal courts under the Negotiable Instruments Act upon which legal
proceedings were initiated against the group. The government received a large
number of complaints on non-repayment of deposits on maturity by the JVG group.

On a complaint filed by the RBI, the Delhi High Court ordered the winding up of the
company. The court also appointed an official liquidator and said that the RBI did not
consider the revival scheme filed by the company viable. The RBI also filed criminal
prosecution petitions in the Metropolitan Magistrates' Courts in New Delhi.
RBI alleged that the company had accepted deposits worth Rs 88.82 crore which was
756.68% of its net owned fund. This was much higher than the permissible limit of 25%
[1]. Similarly, JVG Leasing had received deposits worth Rs 19.28 crore which was
147.58% of its net owned fund. The RBI complaint also said that the deposit forms
issued by the JVG Group did not contain any information regarding premature
withdrawals, which was necessary as per RBI provisions. The companies had not
provided any information about the rate of interest to the investors on the receipts
issued to them. Further, the companies failed to submit their audited balance sheets for
the period ending March 31, 1994 and 1995 15 days after their annual general meeting
(AGM) and did not inform the RBI about the changes in the composition of the board of
directors.

RBI's petition also stated that the company had not maintained liquid assets as required
by section 45IB of the RBI Act, 1934. RBI further contended that JVG Securities
accepted public deposits through JVG Leasing Ltd. and had illegally credited it to the
account of JVG Finance Ltd. Thus, JVG Securities facilitated collection of further
deposits by JVG Finance Ltd., a company which had already accepted public deposits
beyond the permissible limit in spite of the warning from RBI not to accept any further
deposits.
Case 2 : Advocate arrested in credit card fraud case Lawyers, police on warpath

Tribune News Service

Ludhiana, April 28
The local police and the lawyers are heading for a showdown over the issue of arrest of
an advocate by the Division No 8 police in an alleged credit card fraud case.

A verbal spat took place between a group of local lawyers and city policemen at the
Division No 8 police station when the policemen were giving details about a credit card
fraud allegedly committed by a city-based advocate, a pickpocket and a former
employee of a private telephone company.

The police was claiming that it had arrested advocate Amarjit Singh of Fauji Mohalla
here on the basis of evidence along with Vikas, former employee of a telephone
company, for doing shopping worth over Rs 4 lakh from a stolen credit card of an NRI.
The third accused was Sonu, an alleged pickpocket, who had stolen the credit card. He
was missing.

The credit card was stolen six months ago in November 2004 from GRD Academy here
where the Miss World Punjaban contest was being held. The alleged victim, NRI
Jaswinder Singh, was watching the show when his pocket was picked.

However, a group of lawyers led by a former president of the District Bar Association,
Mr. Harish Rai Dhanda, openly charged the police with falsely implicating the accused
advocate. They also alleged that some policemen had demanded money from the
advocate but when he refused to pay, he was booked in a false case. The police have
denied the allegations.

DSP Simratpal Singh Dhindsa stated at a press conference that the accused had
indulged in shopping using the stolen credit card from showrooms of Adidas, Nike,
Weekender, Tanishq, Titan and Sant Ram Mangat Ram.
The police narrowed down on the accused after the complainant learnt that the credit
card was being misused.

However, Mr. Dhanda alleged that the lawyer was innocent and had been falsely
implicated in the case. He said the lawyer was tortured in police custody. A group of
lawyers later filed a complaint before a local Judge against police torture and
harassment.

Meanwhile, taking a tough stand against the arrest and the alleged custodial torture of
the advocate, the District Bar Association (DBA) has demanded immediate suspension
of the guilty policemen.

Mr. Rana Harjasdeep Singh, Secretary, DBA, said in a statement that they had got the
medical examination of the accused advocate conducted from the Civil Hospital. A
delegation of the DBA would meet the SSP tomorrow and demand action against the
SHO and other policemen of the Division No 8 police station.

Former DBA president K.R. Sikri condemned the incident and termed it as breach of
trust and of an understanding reached between the lawyers and a former DGP, Dr A A
Siddiqui, last year that the police would take the DBA into confidence before arresting
an advocate in any case, except a rape or a murder case.
CASE 3 : SUPREME COURT OF INDIA

PETITIONER: K.K. SIDHARTHAN

Vs.
RESPONDENT: T.P. PRAVEENA CHANDRAN AND ANOTHER

DATE OF JUDGMENT: 08/10/1996

BENCH:G.N. RAY, B.L. HANSARIA

Respondent No.1, hereinafter referred to as the respondent, filed a complaint against

the appellant under section 138 read with 149 of the Negotiable Instruments Act,1881
(for short the `Act') and section 420 of the IPC read with sections 190 and 200 of the
Code of Criminal Procedure. The gravamen of the allegation is that the petitioner had
issued two post-dated cheques dated 10.10.1994 and 31.12.1994, each for a sum
of Rs 3,00,000/- drawn on Indian Overseas Bank,Trichur Branch. But on the cheques
being presented, the same were returned unpaid on 15.10.1994 with the endorsement
"Payment countermanded by the drawer". The complaint further stated that the cheques
were returned unpaid for want of sufficient funds in the account. The appellant
approached the HighCourt of Kerala for quashing the complaint but the High Court
refused todo so. Hence this appeal.

2. The main part of Section 138 of the Act reads as below:

"138.Dishonour of cheque for insufficiency 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, or 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 thisAct, be punished with imprisonment for a term which
may extend to one year, or with fine which may extend to twice the amount of
the cheques, or with both."
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 and Technology Development Corpn, LTD, vs. Indian Technologists and
Engineers (Electronics) (P) Ltd.,1996 (2) SCC 739, that even if a Cheque is
dishonoured because of `stop Payment' instruction to the bank, section 138 would get
attracted.

3. The case of the appellant is that the cheques were returned, not because of
insufficient funds, but because he had issued stop memo to the bank for reasons
detailed in the letter of appellant's Advocate dated 4.10.1994 addressed to the
respondent. This letter was replied by the respondent on 12.10.1994 stating, inter alia,
that the allegations made
in the letter of 4.10.1994 were not true; and date and place may be fixed for perusal of
the accounts and connected records. The appellant has produced and connected
records.The appellant has produced A communication of the Indian Overseas
Bank,Thrissur, Branch, showing that when the cheques in question were presented
there was sufficient balance in the account of the appellant. This communication bears
the numbers of two cheques which tally with those mentioned in the complaint.
courttherefore, satisfied that the cheques were not returned because of insufficient
funds, as is the allegation in the complaint.

4. It may be stated that the learned counsel for the respondent filed a written
submission, without having obtained permission when the case has been finally heard
and reserved for judgment, on 7.10.1996 in which it has been stated that the
cheques in question were issued against Account No. 562 of the petitioner, in which
there was no cover.

5. From the facts mentioned above, court expressed their satisfaction that in the
present case cheques were presented after the appellant had directed its bank to
‘stop payment’. We have said so because though it has been averred in the complaint
that the cheque dated 10.10.1994 was presented for collection on that date itself
through the bank of the respondent which is Catholic Syrian Bank Ltd. from the
aforesaid letter of the Indian Overseas Branch, we find that the cheque was
presented on 15.10.1994 (in clearing).The lawyer's notice to therespondent being of
4th October, which had been replied on 12th from Cochi, which is the place of
the respondent, whereas the Advocate who issued notice on behalf of the appellant
was at Thrissur, it would seem to us that the first cheque had even been presented
after the instruction of 'stop payment' issued by the appellant had become known to the
respondent.

6. The aforesaid being the position, court expressed their satisfaction that no case
under Section 138 of the Act has been made out and we, therefore, quash the
complaint.Court has made it clear that they have not addressed themself on the
question whether the respondent was in fact entitled to receive any amount from the
appellant.

7. The appeal is, therefore, allowed. In the facts and circumstances of the case, we
make no order as to costs.
Case 4 : IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO. 913 OF 2009

Raj Kumar Khurana ...Appellant

Versus

State of (NCT of Delhi) and Anr. ...Respondents

JUDGMENT

1.In the said case apellant kept two blank cheques in his office along with some stamp
papers. They were said to have been stolen from his office. Information as regards
missing of the said cheques was also given to the bank.

2.He lodged a First Information Report with regard thereto, stating:that on his return to
Digras town he found that the cheques and the stamp worth Rs. 50 bearing only
his signatures had been stolen, therefore, to prevent any misuse of my cheques, he
sent a written information to State Bank, Branch Digras and subsequently on 21-04-01 I
filed a complaint in Police Station Digras.

3 The blank cheques were allegedly filled up on 24.06.2001. They were presented
before the bank but the same were returned dishonored with the remarks "said cheque
reported lost by the drawer".

4. Respondent (Complainant) thereafter upon issuance of notices in terms of the

proviso appended to Section 138 of the Act filed a complaint petition in the Court of
Chief Metropolitan Magistrate, Delhi,
5. It is not in dispute that the Superintendent of Police, Digras has issued a certificate
showing that FIR No. 57 of 2003 arising out of the First Information Report filed by the
appellant before the Station House Officer, Digras had been closed.

6 (i)The appelent further filed a complaint petition under various sections of IPC in the
Court of Judicial Magistrate First Class and the same is pending adjudication.
(ii) Admittedly, the appellant had lodged a First Information Report under Various
sections of the Indian Penal Code with the Police Station Digras against the respondent
No. 2 and his brother, wherein also a closer report has been submitted.
(iii) Appellant has filed another criminal complaint against the respondent No. 2 under
Section 409 of the Indian Penal Code which has also been dismissed on the ground
that the dispute is of civil nature.
(iv) Appellant has moreover filed a suit for recovery of a sum of Rs.31,40,131.43 in the
Court of Civil Judge, Sr. Division, Darwha, against the respondent No. 2 and his brother.
(v) Several others applications were filed by the appellant before the said court

7 Appellant filed an application under Section 482 of the Code in the High Court of
Delhi praying for quashing of the proceedings under Section138 of the Act on or about
6.09.2007 on the premise that the same was not maintainable. By reason of the
impugned judgment, the said application has been dismissed.

8 The counsel appearing on behalf of the appellant, would submit that the High Court
committed a serious error in passing the impugned judgment insofar as it failed to take
into consideration that the complaint petition even if given face value and taken to be
correct in its entirety does not disclose an offence under Section 138 of the Act.

9. Mr. Gulshan Rai Nagpal, learned counsel appearing on behalf of the respondent
No. 2, on the other hand, would contend that the appellant had lodged a false First
Information Report with regard to the purported theft of the cheques which having been
found to be not true and, thus, it is evident that he had resorted to various proceedings
to pre-empt the drawee of the cheques to obtain lawful payments due from him.
10. A bare perusal of the section 138 of NIA provision would clearly go to show that by
reason thereof a legal fiction has been created. A legal fiction, as is well known,
although is required to be given full effect, has its own limitations. It cannot be taken
recourse to for any purpose other than the one mentioned in the statute itself.

11. Section 138 of the Act moreover provides for a penal provision. A penal provision
created by reason of a legal fiction must receive strict construction. [See R. Kalyani v.
Janak C. Mehta and Ors. (2009) 1 SCC 516 and DCM Financial Services Ltd. v. J.N.
Sareen and Anr. (2008) 8 SCC 1]. Such a penal provision, enacted in terms of the legal
fiction drawn would be attracted when a cheque is returned by the bank unpaid. Such
non-payment may either be: (i) because of the amount of money standing to the credit
of that account is insufficient to honour the cheque, or (ii) it exceeds the amount
arranged to be paid from that account by an agreement made with that bank.

Before a proceeding thereunder is initiated, all the legal requirements therefor must be
complied with. The court must be satisfied that all the ingredients of commission of an
offence under the said provision have been complied with.

The parameters for invoking the provisions of Section 138 of the Act, thus, being limited,
we are of the opinion that refusal on the part of the bank to honour the cheque would
not bring the matter within the mischief of the provisions of Section 138 of the Act.

12. The court while exercising its jurisdiction for taking cognizance of an offence under
Section 138 of the Act was required to consider only the allegations made in the
complaint petition and the evidence of the complainant and his witnesses, if any. It
could not have taken into consideration the result of the complaint petition filed by the
respondent No.2 or the closer report filed by the Superintendent of Police in the First
Information Report lodged by the appellant against him.
13. Before us a contention has been raised that the appellant did not have sufficient
funds in his bank account. Such an allegation has not been made in the complaint
petition. In any event, it was for the bank only to say so, as the complainant is not
supposed to have knowledge in regard to the amount available in the account of the
appellant.

14. Keeping in view the facts and circumstances of the case, we are of the opinion that
the complaint petition does not disclose an offence punishable under Section 138 of the
Act.

15. For the reasons aforementioned, the impugned judgment being unsustainable is
set aside. The appeal is allowed.
Case 5 :

SUPREME CORT OF INDIA

Appeal (crl.) 83-85 of 2004

PETITIONER:
N.K. Wahi

RESPONDENT:
Shekhar Singh and Ors.

DATE OF JUDGMENT: 09/03/2007

BENCH:Dr. Arijit Pasayat & Lokeshwar Singh Panta

1.Challenge in this appeal is to the order passed by a learned Single Judge of the Delhi
High Court, allowing the three applications filed by the respondents for quashing the
order passed by the learned Metropolitan Magistrate, New Delhi, on 25th November,
2000.

2. Background facts in nutshell are as under

3. Appellant presented a criminal complaint under Section 138 read with Section 141 of
the Negotiable Instruments Act, 1881 (in short the 'Act') in the Court of Metropolitan
Magistrate, New Delhi. It was pleaded that M/s Western India Industries Ltd. is a limited
company and the respondents and some others were the Directors/persons responsible
for carrying on the business of the company and the liability of these persons is joint
and several. It was stated that certain cheques had been issued by the company which
were dishonored on being presented. After giving the necessary notice the complaint
was filed. The respondents filed an application for dropping the proceedings stating that
they were not Directors of the company and further there was no allegation against
them in terms of Section 141 of the Act and as such they should not have been made
parties.Learned Metropolitan Magistrate dismissed the application holding that whether
the applicants in the aforesaid petitions were Directors at the relevant point of time or
not is to be decided on evidence.

4. It was further held that the company is a juristic person and works through persons
responsible for carrying out its activities and, therefore, they have been rightly
impleaded as parties. Respondents filed applications invoking Section 482 of the Code
of Criminal Procedure, 1973 (in short the 'Code'). The High Court held that the
preliminary evidence does not establish that the respondents were either incharge or
were responsible to the companies for the conduct of business. In the absence of any
such evidence or assertion, it was held that the learned Metropolitan Magistrate was not
justified in issuing summons to the respondents.

5. In support of the appeals, learned counsel for the appellant submitted that there was
clear material to show that respondents were either Directors or persons incharge of the
business of the company. The High Court found that preliminary evidence had been
recorded and subsequent evidence was forthcoming. The appellant who appeared at
that time only stated that accused 2 to 12 are Directors and responsible for the
company and as such liable by the acts of the company. The High Court held that there
was no clear averment or evidence to show that the respondents were incharge or
responsible to the company for the conduct of the business as well as the company.
Accordingly the proceedings were quashed so far as the respondents are concerned.

6. The respondents on the other hand supported the order of the High Court.

7. Chapter XVII has been incorporated under the Act with effect from 1.4.1989. In
certain contingencies referred to under Section 138 of the Act on the cheques being
dishonored a new offence as such had been created.But to take care of the offences
purported to have been committed provisions of sub-section (1) to Section 141 of the
Act come into play. It reads as under:-"141 - Offence by companies - (1) If the person
committing an offence under section 138 is a company, every person who, at the time
the offence was committed, was in charge of, and was responsible to, the company for
the conduct of the business of the company, as well as the company, shall be deemed
to be guilty of the offence and shall be liable to be proceeded against and punished
accordingly. Provided that nothing contained in this sub-section shall render any person
liable to punishment if he proves that the offence was committed without his knowledge,
or that he had exercised all due diligence to prevent the commission of such offence."

8. This provision clearly shows that so far as the companies are concerned if any
offence is committed by it then every person who is a Director or employee of the
company is not liable. Only such person would be held liable if at the time when
offence is committed he was in charge and was responsible to the company for the
conduct of the business of the company as well as the company. Merely being a
Director of the company in the absence of above factors will not make him liable.

9. To launch a prosecution, therefore, against the alleged Directors there must be a

specific allegation in the complaint as to the part played by them in the transaction.
There should be clear and unambiguous allegation as to how the Directors are incharge
and responsible for the conduct of the business of the company. The description should
be clear. It is true that precise words from the provisions of the Act need not be
reproduced and the court can always come to a conclusion in facts of each case. But
still in the absence of any averment or specific evidence the net result would be that
complaint would not be entertainable.

10. In order to bring application of Section 138 the complaint must show:
• That Cheque was issued;
• The same was presented;
• It was dishonored on presentation;
• A notice in terms of the provisions was served on the person sought
• to be made liable;
• Despite service of notice, neither any payment was made nor other obligations, if
any, were complied with within fifteen days from the date of receipt of the notice.
11. Section 141 of the Act in terms postulates constructive liability of the Directors of the
company or other persons responsible for its conduct or the business of the company.

12. The only averment made so far as the respondents are concerned, reads as under:

"Preliminary evidence had been recorded and at that time also no specific evidence on
assertion was forthcoming. Shri Wahi who appeared at that time only stated that
accused 2 to 12 are directors and responsible officers of the company. They are liable
for the acts of the company. In other words, there was no averment or evidence that the
present petitioners were incharge of or responsible to the company for the conduct of
the business of the company as well as the company. The accused Nos. 2 to 12 are the
Directors/persons responsible for carrying out the business of the company and the
liability of the accused persons in the present complaint is joint and several".

13. In S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Anr., [2005] 8 SCC 89, it was,
inter-alia, held as follows:-

"18. To sum up, there is almost unanimous judicial opinion that necessary averments
ought to be contained in a complaint before a person can be subjected to criminal
process. A liability under Section 141 of the Act is sought to be fastened vicariously on a
person connected with a company, the principal accused being the company itself. It is
a departure from the rule in criminal law against vicarious liability. A clear case should
be spelled out in the complaint against the person sought to be made liable. Section
141of the Act contains the requirements for making a person liable under the said
provision. That the respondent falls within the parameters of Section 141 has to be
spelled out. A complaint has to be examined by the Magistrate in the first instance on
the basis of averments contained therein. If the Magistrate is satisfied that there are
averments which bring the case within Section 141, he would issue the process. We
have seen that merely being described as a director in a company is not sufficient to
satisfy the requirement of Section 141. Even a non-director can be liable under Section
141 of the Act. The averments in the complaint would also serve the purpose that the
person sought to be made liable would know what is the case, which is alleged against
him. This will enable him to meet the case at the trial.

19. In view of the above discussion, our answers to the questions posed in
the reference are as under:

(a) It is necessary to specifically aver in a complaint under Section 141 that at the time
the offence was committed, the person accused was in charge of, and responsible for
the conduct of business of the company. This averment is an essential requirement of
Section 141 and has to be made in a complaint. Without this averment being made in a
complaint, the requirements of Section 141 cannot be said to be satisfied.

(b) The answer to the question posed in sub-para (b) has to be in the negative. Merely
being a director of a company is not sufficient to make the person liable under Section
141 of the Act. A director in a company cannot be deemed to be in charge of and
responsible to the company for the conduct of its business. The requirement of Section
141 is that the person sought to be made liable should be in charge of and responsible
for the conduct of the business of the company at the relevant time. This has to be
averred as a fact as there is no deemed liability of a director in such cases.

(c) The answer to Question (c) has to be in the affirmative. The question notes that the
managing director or joint managing director would be admittedly in charge of the
company and responsible to the company for the conduct of its business. When that is
so, holders of such positions in a company become liable under Section 141 of the Act.
By virtue of the office they hold as managing director or joint managing director, these
persons are in charge of and responsible for the conduct of business of the company.
Therefore, they get covered under Section 141. So far as the signatory of a cheque
which is dishonoured is concerned, he is clearly responsible for the incriminating act
and will be covered under sub-section (2) of Section 141".
14. The matter was again considered in Sabitha Ramamurthy and Anr. v. R.B.S.
Channabasavaradhya and Anr., [2006] 9 SCALE 212, and Saroj Kumar Poddar v. State
(NCT of Delhi) and Anr., JT (2007) 2 SC 233. It was, inter-alia, held as follows:
"....Section 141 raises a legal fiction. By reason of the said provision, a person although
is not personally liable for commission of such an offence would be vicariously liable
therefore. Such vicarious liability can be inferred so far as a company registered or
incorporated under the Companies Act, 1956 is concerned only if the requisite
statements, which are required to be averred in the complaint petition, are made so as
to make the accused therein vicariously liable for the offence committed by the
company. Before a person can be made vicariously liable, strict compliance of the
statutory requirements would be insisted....".

15. In view of the legal position set out above, the inevitable result is that the appeals
are without merit, deserve dismissal, which we direct.
 Conclusion

Legal issues relating to electronic transaction processing at banks are very many and
the need to address them by amending some of the existing Acts and by promoting
legislation in a few hitherto unexpected areas has assumed critical urgency. Necessary
legislative support is essential to protect the interests as much of the customers as of
the banks / branches in several areas relating to electronic banking and payment
systems. This is specially required to establish the credibility of ECS and EFT schemes
based on the electronic message transfer. Since the Reserve Bank is embarking on
large electronic schemes such as the nationwide RTGS, it is time that efforts are made
to bring about necessary legislative framework that synchronizes and synthesizes with
the initiatives taken by the Government of India, Department of Electronics for
promotion of the Information Technology Bill, 1999 and / or the Electronic Commerce
Bill, 1999.

Need for Regulation / Legislation on Netting

There is a growing debate on the legality of netting in inter-bank funds transfer

transactions. This is more so in the case of large value transactions. The position gets
all the more complicated in the case of cross border netting arrangements. In fact, the
issue gained critical significance while examining the proposal for setting up of a foreign
exchange clearing and settlement system in India. The basic issue in netting systems is
that of the settlement risk and the systemic risks borne by the participants if one or
some of the participants fail to meet the clearing liability. In case of funds transfers
settled on a gross basis, the parties involved are only two and principal risk if any, is
only for the specific transaction. But in multilateral netting systems where claims and
obligations accumulate over a period of time (called the clearing cycle), incoming and
outgoing payments are set off against each other. In case of failure of a party in meeting
the clearing liability, the methodology of identifying the counter-parties / counterparts
and determining the exposure level becomes difficult. Although netting system is in
vogue in India for all inter-bank clearings by way of procedural details embodied in the
Uniform Rules and Regulations for Clearing Houses, it is necessary that the provisions
are made statutory. There is a need to amend Section 58 of the Reserve Bank of India
Act, 1934 with a view to enabling RBI to frame specific regulations
BIBLOGRAPHY

1. damodaran.com

2. knowlegeworld.com

3. indialaw.com

4. casestudy.com

5. indiankanoon.com

6. google.com