INTRODUCTION

In India, there is reason to believe that instrument to exchange were in use from early times and we find that papers representing money were introducing into the country by one of the Mohammedan sovereigns of Delhi in the early part of the fourteenth century. The word 'hundi', a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root 'hund' meaning 'to collect' and well expresses the purpose to which instruments were utilized in their origin. With the advent of British rule in India commercial activities increased to a great extent. The growing demands for money could not be met be mere supply of coins; and the instrument of credit took the function of money which they represented. Before the enactment of the Negotiable Instrument Act, 1881, the law of negotiable instruments as prevalent in England was applied by the Courts in India when any question relating to such instruments arose between Europeans. When then parties were Hindu or Mohammedans, their personal law was held to apply. Though neither the law books of Hindu nor those of Mohammedans contain any reference to negotiable instruments as such, the customs prevailing among the merchants of the respective community were recognized by the courts and applied to the transactions among them. During the course of time there had developed in the country a strong body of usage relating to hundis, which even the Legislature could not without hardship to Indian bankers and merchants ignore. In fact, the Legislature felt the strength of such local usages and though fit to exempt them from the operation of the Act with a proviso that such usage may be excluded altogether by

appropriate words. In the absence of any such customary law, the principles derived from English law were applied to the Indians as rules of equity justice and good conscience. The history of the present Act is a long one. The Act was originally drafted in 1866 by the India Law Commission and introduced in December, 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the chambers of commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881 being the Negotiable Instruments Act, 1881 (26 of 1881)

Differences from a contract: A negotiable instrument is not a contract, as contract formation requires an offer, acceptance, and consideration, none of which is an element of a negotiable instrument. Unlike ordinary contract documents, the right to the performance of a negotiable instrument are linked to the possession of the document itself (with certain exceptions such as loss or theft).The rights of the payee (or holder in due course) are better than those provided by ordinary contracts as follows: The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque). No notice needs to be given to any prior party liable on the instrument for transfer of the rights under the instrument by negotiation. Transfer free of equitiesthe holder in due course can hold better title than the party he obtains it from. Negotiation enables the transferee to become the party to the contract, and to enforce the contract in his own name. Negotiation can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, it includes the rule of a derivative title which does not allow a property owner to transfer rights in a piece of property greater than his own.

Usage: While bearer instruments are rarely created as such, a holder of commercial paper with the holder designated as payee can change the instrument to a bearer instrument by an endorsement. The proper holder simply signs the back of the instrument and the instrument becomes bearer paper, although in recent years, third party checks are not being honored by most banks unless the original payee has signed a notarized document stating such.

Alternately, an individual or company may write a check payable to "Cash" or "Bearer" and create a bearer instrument. Great care should be taken with the security of the instrument, as it is legally almost as good as cash. Exceptions: 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: Letters of credit, which are governed by Article 5 of the Code. Bills of lading and other documents of title, which are governed by Article 7 of the Code. Securities, such as stocks and bonds, which are governed by Article 8 of the Code.
4

Deeds and other documents conveying interests in real estate, although a mortgage may secure a promissory note which is governed by Article 3 of the Code.

Definition of Negotiable Instrument: "Negotiable instrument":(1) A "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer. Explanation (i):-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 not be transferable. Explanation (ii):-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 endorsements is an endorsement is an endorsement in blank. Explanation (iii):-here a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.

(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one or two, or one or some of several payees.

CHARACTERISTIC OF A NEGOTIABLE INSTRUMENT: A negotiable instrument has the following characteristics: 1) PROPERTY: The possessor of the instrument is the holder and owner thereof. A negotiable instrument does not merely give possession of the instrument, but right to property. Whosever gets possession of the instrument becomes its owner and is entitled to the sum mentioned therein as the holder. It passes by mere delivery where instrument is payable to bearer. 2) DEFECTS IN TITLE: The holder in good faith and for value called the holder in due course gets the instrument free from all defects of any previous holder. 3) REMEDY: The holder can sue upon the negotiable instrument in his own name. All prior parties are liable to him. A holder in due course can recover the full amount of the instrument. 4) RIGHT: The holder in due course is not affected by certain defenses which might be available against previous holder, for example, fraud, to which he is not a party.

5) PAYABLE TO ORDER: All three negotiable instruments are payable to order which is expressed to a particular person. An instrument which does not restrict its transferability expressly is negotiable whether the word order is mentioned or not. The word order or bearer is no longer necessary to render an instrument negotiable. It must be noted that the entire three negotiable instrument is endorsed and is expressed to be payable to the order of a specified person, it is nevertheless payable to him or his order. 6) PAYABLE TO BEARER: the three negotiable instrument is expressed to be payable or on which the only or last endorsement is an endorsement in blank. It specifies that the person in possession of the bill is a bearer of the instrument which is so expressed payable to bearer. 7) PAYMENT: A negotiable instrument may be made payable to two or more payees, or it may be payable in alternative to one or two payees. 8) CONSIDERATION: Consideration in the case of a negotiable instrument is presumed. 9) PRESUMPTIONS: Certain presumptions apply to all negotiable instruments.

PROMISSORY NOTE

A written document in which a borrower agrees (promises) to pay back money to a lender according to specified terms. A written promise to pay a certain sum of money, at a future time, unconditionally. A promissory note differs from a mere acknowledgment of debt, without any promise to pay, as when the debtor gives his creditor an I 0 U. In its form it usually contains a promise to pay, at a time therein expressed, a sum of money to a certain person therein named, or to his order, for value received. It is dated and signed by the maker. It is never under seal. He who makes the promise is called the maker, and he to whom it is made is the payee. Although a promissory note, in its original shape, bears no resemblance to a bill of exchange; yet, when indorsed, it is exactly similar to one; for then it is an order by the endorser of the note upon the maker to pay to the endorsee. The endorser is as it were the drawer; the maker, the acceptor; and the endorsee, the payee. Most of the rules applicable to bills of exchange, equally affect promissory notes. No particular form is requisite to these instruments; a promise to deliver the money, or to be accountable for it, or that the payee shall have it, is sufficient. There are two principal qualities essential to the validity of a note; first, that it be payable at all events, not dependent on any contingency nor payable out of any particular fund. And, secondly, it is required that it be for the payment of money only and not in bank notes.

Illustrations (a) "I promise to pay B on order Rs. 500". (b) "I acknowledge myself to be indebted to B in Rs. 1, 000, to be paid on demand, for value received."

The terms of a note typically include the principal amount, the interest rate if any, and the maturity date. Sometimes, provisions are included concerning the payee's rights in the event of a default, which may include foreclosure of the maker's assets. Demand promissory notes are notes that do not carry a specific maturity date, but are due on demand of the lender. Usually the lender will only give the borrower a few days notice before the payment is due. For loans between individuals, writing and signing a promissory note are often instrumental for tax and record keeping. In the United States, a promissory note that meets certain conditions is a negotiable instrument regulated by article 3 of the Uniform Commercial Code. Negotiable promissory notes are used extensively in combination with mortgages in the financing of real estate transactions. Promissory notes, or commercial papers, are also issued to provide capital to businesses. Historically, promissory notes have acted as a form of privately issued currency. In many jurisdictions today, bearer negotiable promissory notes are illegal because they can act as an alternative currency.

SAMPLE PROMISSORY NOTE This document is to be used as a guideline only. How Stuff Works does not guarantee that this document is suitable, or legally accurate, for all situations, and is not liable for any deficiencies in the documents content.

Name: Street Address: City: State: Zip:

Borrower Information: Date: Date of Birth: Area code/Telephone number: Drivers License Number: Social Security Number:

Name: Street Address: City:

Lender Information: Area code/Telephone number: If paying by check, make check payable to:

10

State: Zip: Send payments to:

Loan Amount:

Loan Information: Loan Period:

Interest Rate:

Payment Schedule:

1. Promise to Pay: For value received, ____________________ (Borrower) promises to pay ____________________ (Lender) $___________ and interest at the yearly rate of _____% on the unpaid balance as specified below. 2. Installments: Borrower will pay ______ payments of $_____ each at monthly/yearly/_________ intervals on the _____ day of the month.
11

Borrower will pay one lump payment on ______________ date. Borrower will pay ______ payments of $_____ each at monthly/yearly/_________ intervals with a final balloon payment of ____________ at the end of the loan term on _________ date. 3. Application of Payments: Payments will be applied first to interest and then to principal. 4. Prepayment: Borrower may prepay all or any part of the principal without penalty. 5. Loan Acceleration: If Borrower is more than _______ days late in making any payment, Lender may declare that the entire balance of unpaid principal is due immediately, together with the interest that has accrued. 6. Security: This is an unsecured note.

Borrower agrees that until the principal and interest owed under this promissory note are paid in full, this note will be secured by a security agreement and Uniform Commercial Code Financing statement giving Lender a security interest in the equipment, fixtures, and inventory and accounts receivable of the business. 7. Collection Costs: If Lender prevails in a lawsuit to collect on this note, Borrower will pay Lender's costs and lawyer's fees in an amount the court finds to be reasonable.

12

The undersigned and all other parties to this note, whether as endorsers, guarantors or sureties, agree to remain fully bound until this note shall be fully paid and waive demand, presentment and protest and all notices hereto and further agree to remain bound notwithstanding any extension, modification, waiver, or other indulgence or discharge or release of any obligor hereunder or exchange, substitution, or release of any collateral granted as security for this note. No modification or indulgence by any holder hereof shall be binding unless in writing; and any indulgence on any one occasion shall not be an indulgence for any other or future occasion. Any modification or change in terms, hereunder granted by any holder hereof, shall be valid and binding upon each of the undersigned, notwithstanding the acknowledgement of any of the undersigned, and each of the undersigned does hereby irrevocably grant to each of the others a power of attorney to enter into any such modification on their behalf. The rights of any holder hereof shall be cumulative and not necessarily successive. Witnessed: __________ Date: ____________ Witnessed: __________ Date: ____________ Borrower: ___________ Date: ____________ Borrower: ___________ Date: ____________

ELEMENTS OF A PROMISSORY NOTE

13

WRITING: The promissory note must be in writing. Oral

engagement or promise is excluded. No particular form of words is necessary. It may be in any form but the words shall be visible. Intention to make a note must be clear.

UNDERTAKING TO PAY: It is not necessary to use the word

promise but the intention must clearly show an unconditional undertaking to pay the amount. The word promise does not mean that a document is not a promissory note, provided it fulfils the requirements of this section and there is clear intention on the part of the parties to treat the document as a promissory note.

ILLUSTRATIONS: a) I acknowledge to pay on demand Rs 1000 for value received. But I acknowledge receipt of Rs 1000 is not a Promissory note. b) I promise to pay B Rs 1000 on demand. It is a Promissory note. c) I owe you Rs1000 this not a promissory note.

UNCONDITIONAL: It must contain definite and an

unconditional undertaking to pay. Promise to pay should be

14

unconditional. A conditional instrument is invalid. It must be certain of payment.

ILLUSTRATIONS: Conditional promissory note: a) I promise to pay B Rs1000 7 days after Cs marriage. b) I promise to pay B Rs1000 after deducting a sum due to him. These writing are conditional. Payment is subjected to a certain event happening or not happening. Such writing are not promissory notes.

Unconditional promissory note: a) A promise given for an executed consideration. b) Any promise to pay an instrument on lapse of certain periods, after a specified event which is certain to happen. Valid conditional promissory note: a) I promise to pay B Rs500, 3 days after the death of X. This is a valid promissory note as death is a certain event to happen; though time of death is uncertain.
15

b) I promise to pay B Rs500 at Bombay.

SIGNED: The instrument must be signed by the maker thereof.

Person must sign with his consent. It should not only be a physical act but also a mental act with an intention to sign.

CERTAIN PERSON: The maker and payee of the instrument

must be a definite person. A note may be made by several people to bind them jointly. A promissory note cannot be made by two persons. Two different people should fill in the role of a maker and payee. The maker endorses the note. Payee is capable of being ascertained where he is wrongly described, he will be a certain person. E.g. - a promissory note payable to my only niece living in England is a valid promissory note.

SPECIFIC SUM: The sum promise to be paid must be specific.

ILLUSTRATIONS: I promise to pay B Rs 300 and all other sums due to him. However, payment of a note with interest does not invalidate a promissory note. Interest rate may or may not be specified.

16

PROMISE TO PAY MONEY ONLY: The promise to pay must

be money only. Promise to pay anything other than legal tender, in full or in part, is not a promissory note.

ILLUSTRATIONS: a) I promise to pay B Rs. 100 in cash and Rs. 100 worth of cosmetics. b) I promise to pay B Rs. 500 and to deliver him my black horse. c) I promise to pay B Rs. 500 in government Bonds. These are all invalid promissory notes.

STAMPING: Promissory notes are chargeable with stamp duty.

It is advisable to cancel the stamps with makers signature or initials. An unstamped or improperly or insufficiently stamped promissory note is not valid as evidence in court of law. No suit can be maintained upon an unstamped or improperly stamped promissory note.

Case Study: An IT company is developing a specialized IT platform for a customer. Work commenced 1 January 2005. At 31 December 2005, the hardware

17

(which the IT Company also sells separately) has been installed and the software is 50% completed. The IT Company does not anticipate any problem with the software development, which should take another 6 months to complete. The customer has the right to return the hardware if the software does not work according to the customers specifications. The contract as a whole is approximately 70% completed based on the costs incurred, which is a reliable measure of the services performed. Costs incurred to date and costs to complete can be measured reliably for the hardware and software separately and in total. The hardware and software account for 30% and 70% of the total consideration respectively.

Q. Which revenue recognition guidance should be applied to this transaction? A. Hardware: Sale of goods, Software: Rendering of services B. Hardware and software: Rendering of services C. Hardware and software: Construction contract Ans: C. Hardware and software: Construction contract The contract for the construction of the IT platform meets the IAS 11definition of a construction contract: A contract specifically negotiated
18

for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. Revenue should be recognized using the percentage of completion method

BILL OF EXCHANGE

A "bill of exchange" is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. 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 installment thereof being expressed to be on the lapse of certain period
19

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. The sum payable may be "certain", within the meaning of this section and section and section4, although it includes future indicated rater of change, or is according to the course of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, 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 a "certain person," within the meaning of this section and section 4, although he is misnamed or designated by description only.

ESSENTIAL ELEMENTS OF A BILL OF EXCHANGE

WRITING: - A bill of exchange must be in writing and may be in any language, and in any form.

PARTIES: - There must be three parties to a bill of exchange, i.e., Drawer, Drawee and Payee.

PAYEE: - Payee as the person named in the instrument, to whom or to whose order the money, by the instrument directed to be paid.

20

ORDER TO PAY: - The bill of exchange must contain an order by the drawer to the drawee to pay under any circumstances.

UNCONDITIONAL: - The 0rder in the bill must be unconditional, for example, payable under all events and circumstances. Conditional bill is invalid.

SIGNED: - The bill must be signed by the drawer. MONEY:- The order must be to pay money only PAYEE MUST BE CERTAIN: - Bill may be made payable to two or more payees jointly or in the alternatives.

CERTAIN SUM: - The sum payable may be certain although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange.

STAMPING: - Bill of exchange is chargeable with stamp duty.

Legislation for Bills of Exchange: Most countries have adopted codified laws on Bills of Exchange. The legal codes in such countries have created laws that follow the rules agreed at the Geneva Conventions in order to standardize the control of Bills of Exchange. The United Kingdom Bills of Exchange Act 1882 is the basis for
21

rules governing Bills of Exchange in Ireland, U.K. and Commonwealth countries that were part of the British Empire. These countries follow a common law framework to create and modify statutes. In relation to the most fundamental aspects of a Bill of Exchange the two sets of rules are similar in that both identify the following:

A bill of exchange is an unconditional order to pay a specific amount of money. The bill of exchange must state a particular time of payment. The bill of exchange must contain the name of the person who is to pay.

There are, however, certain differences between the Bills of Exchange Act (1882) and the Geneva Convention. In particular the United Kingdom Act sets out fewer formal requirements for example:

The term "Bill of Exchange", which is an integral part of the physical Bill according to the Geneva Convention, need not be written on the Bill. Bills can be made payable to 'bearer'. The place and date of issue are also not obligatory parts of the Bill.

The United Nations Commission on International Trade Law (UNCITRAL) is at present trying to harmonize laws through the "United Nations Convention on International Bills of Exchange and International Promissory notes".

22

The function of the Bill of Exchange in International Trade: The bill of exchange performs many functions in international trade including:

Facilitates the granting of trade credit in a legal format by permitting payments on agreed future dates. Provides formal evidence of the demand for payment from a seller to a buyer. Provides the seller with access to finance by permitting them to transfer their debts to a bank or other financier by merely endorsing the Bill of Exchange to that bank or financier. Permits the banker or financier to retain a valid legal claim on both the buyer and the seller. In certain circumstances a bank or financier may have a stronger legal claim under a Bill than the party that sold them the debt. Permits a seller to obtain greater security over the payment by enabling a bank to guarantee a drawee's acceptance (guarantee to pay on the due date) by signing or endorsing the Bill. (See Guaranteed Bills of Exchange below) Allows a seller protect their access to the legal system in the event of problems, while providing easier access to that legal system.

How the bill of exchange is used in international trade: A bill of exchange can either be payable immediately or at some future date.

23

If a Bill is payable immediately, it is usually issued payable at sight. The term "at sight" means that a buyer should pay once they have sighted the Bill that is once the demand for payment has been made. If a Bill is payable at some future date, it must facilitate the calculation of the actual due date. For example Bills of Exchange may be drawn payable at 60 days sight, at 60 days from Bill of Lading Date etc.

Banks should be used as agents for the collection of the Bill. Visit our section on Documentary Collections in the Products and Services or Product Diagrams area of this website for further details.

Guaranteed Bills of Exchange: To provide greater payment security a seller may look to have a bill of exchange guaranteed by a buyer's bank. A guaranteed bill of exchange is one drawn on and accepted by the buyer and to which, the buyer's bank has added its guarantee that the Bill will be paid at maturity. The security to a seller comes from a bank giving an undertaking to effect payment on a certain date regardless of the financial standing of a buyer on that date. Financing Options with Bills of Exchange

24

The ability to negotiate or discount Bills of Exchange can be an extremely important source of finance in international trade. The bill of exchange can provide easier access to financing because it enables the financing bank to retain a claim on all parties to the Bill. In addition parties that finance Bills of Exchange can, in certain circumstances, obtain stronger rights than the party transferring the Bill to them. Bill discounting may provide access to finance rates lower than the overdraft or loan rate the seller could normally obtain. Negotiation Facilities: The negotiation of a Bill is the transfer of the rights under a Bill from one party to another for value. Some banks will negotiate Bills for a customer by purchasing Bills from them for value. For example, the bank will advance 75% of the face value of the Bill and upon receipt of the proceeds will clear the advance together with any accrued interest on the advance. Negotiation facilities can be used to finance Bills payable at sight or Bills payable at a future date even before they have been accepted. Negotiation facilities are normally granted with full recourse to the seller. Bills Discounting with recourse: Discounting of a bill of exchange can only occur once the Bill has a definite maturity date in the future and the buyer has accepted it. Discounting differs from negotiation in that the bank will calculate the net present value of the face value of the Bill utilizing a cost of funds interest rate and a margin. The net amount so calculated is then advanced to the seller. Upon receipt of the

25

proceeds from the buyer at maturity, the bank will clear its Bills discounted account. This finance is provided with recourse to the seller by the bank. Bills Discounting without recourse: Similar to with recourse Bills Discounting, except that the financing bank will waive its rights of recourse to the seller. This can occur when the Bill is guaranteed by another bank, or where the buyer has a very strong credit standing or rating.

Advantages of Bills of Exchange: Companies have used Bills of Exchange for hundreds of years. Their longevity is due to the advantages they provide in a trading transaction.

A bill of exchange facilitates the granting of trade credit to a buyer. A bill of exchange provides a legal acknowledgement that a debt exists. It can provide the seller with access to financing.

26

It can provide easy access to the legal systems in the event of nonpayment.

Legal Protection afforded by Bills of Exchange: An advantage for a seller in using a bill of exchange is the capability of the bill of exchange to provide formal documentary evidence that the demand for payment or acceptance has been made to the buyer. In addition, it may be possible to sue the buyer for non-payment based solely on this documentary evidence. A seller can protect their interests by requesting that a bill of exchange be noted or protested for non-payment or non-acceptance. When a Bill is not paid or accepted it is said to have been "dishonoured".

Noting: A Bill is noted in order to obtain official evidence that it has been dishonoured. A Notary Public re-presents the Bill to the drawee for acceptance or payment and minutes on the Bill the reason given for dishonour. Noting is often followed by a formal protest. Protesting:

27

Protesting is a more formal process than noting and results in the production by the Notary Public of a formal deed of protest bearing a notary's seal. This document again provides formal evidence of the presentation of the Bill to the drawee and the reason for dishonour. The protest is accepted by most courts in the world as evidence that a Bill has been dishonoured.

HUNDI:Bills of exchange drawn in vernacular language called hundis are covered by the Act. The word 'hundi', a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root 'hundi' meaning 'to collect' and well expresses the purpose to which instruments were utilized in their origin. The Act does not affect any local usage relating to any instrument in an oriental language. In the absence of any custom or usage governing such instruments, provisions of the Act will be extended to such other instruments, for example, hundis, bills of landing, railway receipt, etc. The act does not affect the transfer of instruments under ordinary law otherwise than by negotiation, for e.g. by assignment. A bonafide transferee of a negotiable instrument for value, without notice of any defect acquires the instrument free of any defects. He acquires a better title than that of the transferor irrespective of the transferors title being defective.

HOW PROMISSORY NOTE BECOMES A BILL OF EXCHANGE?

28

An instrument which is a promissory note may become a bill of exchange if acceptance is endorsed thereon by a third party.

BILLS IN SETS

Bills of exchange may be drawn in parts. All the parts together make a set, but the whole set constitutes only one bill. Bills are sometimes drawn in several parts. All the parts so drawn are referred as bill drawn in sets. The drawer of the bills in sets has to sign all the parts and deliver all the parts but the acceptance should be written only on one part. If the drawee accepts more than one part and if such separate accepted parts get into the hands of different holders in due course, he and the subsequent endorsers of each part are liable on every such part as if it were a separate bill.

CHEQUE

A ''cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

29

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

(a) "A cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;

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

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

Cheques generally contain: 1. Place of issue 2. Cheque number

30

3. Date of issue 4. Payee 5. Amount of currency 6. Signature of the drawer 7. Routing / account number in MICR format - in the U.S., the routing number is a nine-digit number in which the first 4 digits identifies the U.S. Federal Reserve Bank's cheque-processing center. This is followed by digits 5 through 8, identifying the specific bank served by that cheque-processing center. Digit 9 is a verification digit, computed using a complex algorithm of the previous 8 digits. The account number is assigned independently by the various banks.

8. Fractional routing number (U.S. only) - also known as the transit number, consists of a denominator mirroring the first 4 digits of the routing number. And a hyphenated numerator, also known as the ABA number, in which the first part is a city code (1-49), if the account is in one of 49 specific cities, or a state code (50-99) if it is not in one of those specific cities; the second part of the hyphenated numerator mirrors the 5th through 8th digits of the routing number with leading zeros removed. A cheque is generally valid indefinitely or for six months after the date of issue unless otherwise indicated; this varies depending on where the cheque is drawn [citation needed]. In Australia, for example, it is fifteen months In
31

the United States; it is six months Legal amount (amount in words) is also highly recommended but not strictly required.

In the USA and some other countries, Cheques contain a memo line where the purpose of the cheque can be indicated as a convenience without affecting the official parts of the cheque. This is not used in Britain where such notes are often written on the reverse side. In the USA, at the top (when cheque oriented vertically) of the reverse side of the cheque, there are usually one or more blank lines labeled something like "Endorse here".

Types of Cheques in the United States: In the United States, cheques are governed by Article 3 of the Uniform Commercial Code. An order check the most common form in the United States is payable only to the named payee or his or her endorsee, as it usually contains the language "Pay to the order of (name)."

A bearer check is payable to anyone who is in possession of the document: this would be the case if the cheque does not state a payee, or is payable to
32

"bearer" or to "cash" or "to the order of cash", or if the cheque is payable to someone who is not a person or legal entity, e.g. if the payee line is marked "Happy Birthday". Parties to regular cheques generally include a maker, the depositor writing a cheque; a drawee, the financial institution where the cheque can be presented for payment; and a payee, the entity to whom the maker issues the cheque. Ultimately there is also at least one indorsee who would typically be the financial institution servicing the payee's account, or in some circumstances may be a third party to whom the payee owes or wishes to give money.

Cheque crossed generally: Where a cheque bears across its face an addition of the words "and company" or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines, simply, either with or without the words "not negotiable", that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally

Cheque crossed specially:

33

Where a cheque bears across its face an addition of the name of a banker, either with or without the words "not negotiable", that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.

Crossing after issue: Where a cheque is uncrossed, the holder may cross it generally or specially. Where a cheque is crossed generally, the holder may cross it specially. Where a cheque is crossed generally or specially, the holder may add the words "not negotiable". Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection. Payment of cheque crossed generally: Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to the banker

Payment of cheque crossed specially:

34

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

Payment of cheque crossed specially more than once: Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.

Payment in due course of crossed cheque: Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.
35

Payment of crossed cheque out of due course: Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid. Cheque bearing "not negotiable": A person taking a cheque crossed generally or specially, bearing in either case the words "not negotiable", shall not have, and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had.

Non-liability of banker receiving payment of cheque A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment

Maturity of an instrument.
36

The maturity of a promissory note or bill of exchange is the date at which it falls due. Days of grace.-Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable.

ILLUSTRATION:

A bill dated 30th November is made payable three months after date. It falls due on 3rd March.

A note dated 1st January is payable one month after sight. It falls due on 4th February.

Calculating maturity of bill or note can be done according to:(1) Payable so many months after date or sight. (2) Payable so many days after date or sight.

ILLUSTRATION of Maturity of an instrument:-

37

A bill dated 30th November is made payable three months after date. It falls due on 3rd March.

A note dated 1st January is payable one month after sight. It falls due on 4th February.

Classification of negotiable instrument

1. Accommodation bill : This type of bill of exchange most commonly used in Australian financial markets. The accommodation bill grew out of the trade-related bills of exchange which had been widely used since the last century in financing world trade. At present, accommodation bills are a means of providing
38

finance (lending) without necessarily having an underlying trade transaction (whereas trade bills are based on specific transactions). Accommodation parties are defined under the Bills of Exchange Act 1909 - 1973 thus: 'Accommodation party to a bill is a person who has signed a bill as drawer, without receiving value thereof, and for the purpose of lending his name to some other person.' The idea behind the accommodation bill is to lend the weight of the stronger party's name (through accepting/drawing/endorsing the bill) to another party whose name is less marketable. Illustration: - A is in need of Rs. 5000, approaches friend B to borrow money. - B suggests A to draw bill on him which he accepts. - A gets bill discounted with the banker. - Meets his requirements. - On due date, A pays Rs. 5000 to B. - B would honor the bill. - Thus B would honor the bill, B has accommodated A. 2. FICTITIOUS BILL: A bill is fictitious when both the drawer and payee are fictitious persons. Where the drawer is also the payee of the bill, without any intention that payment shall be in conformity with the instrument, the instrument is fictitious. Also when payee is non-existing, the instrument is fictitious. A fictitious bill in the hands of a holder in due course becomes a good bill. The acceptor is liable to a holder in due course, if the holder in due course can show that the signature of the supposed drawer and that of the first endorser
39

or payee are under the same hand. The liability of the holder in case of a fictitious bill is only towards the holder in due course.

3. ESCROW: A bill delivered conditionally is called an escrow. Where a bill or note is delivered conditionally, the liability of the party delivering does not commence till the happening of the event or the fulfillment of the condition. Such a bill may also be delivered for a special purpose as collateral security. It is to be noticed that though a conditional delivery is valid, the condition attaches exclusively to the delivery and this does not affect the rule that the bill or note must be made conditional.

Illustration of ESCROW: A makes a note in favour of his servant and hands it to his solicitor telling to retain the note till his death and then to hand it to the servant if he should still continue in service. If this condition are complied with and the solicitor hands over the instrument to the servant, the servant can claim the amount of the note from the administrators of his masters estate.

40

4. INSTRUMENT PAYABLE ON DEMAND: A promissory note, a bill of exchange in which no time for payment is specified and Cheque are payable on demand. Therefore, following are the instruments payable on the demand: Bills and promissory notes expressed to be payable on demand or at sight or on presentment; Bills and notes where no time for payment is specified; and Cheque is always payable on demand.

5. BEARER AND ORDER INSTRUMENTS: An instrument is a bearer instrument when the amount payable thereon is payable to the bearer and he as a holder and in lawful possession thereof is entitled to enforce payment due on it.

6. AMBIGUOUS INSTRUMENTS:

41

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 then forward treated accordingly.

7. INLAND AND FOREIGN INSTRUMENT: A promissory note, bill of exchange or Cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument. Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument. FOREIGN bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn (sec. 104). However, a foreign bill drawn in India need not be so protested. Protest in case of inland bill is optional. In case of foreign bills, it is absolutely essential.

8. FORGED INSTRUMENT: An instrument is a forged when it is drawn, made or alternated in writing to prejudice another mans rights. The most common form of forgery is signing another persons signature, signing the name of fictitious or none existing person. Fraudulently writing the name of an existing person is also forgery. Forgery is a nullity and, therefore, it passes no title. No holder of forged instruments acquires any right on the instruments. Even a holder in due course gets no title if he comes into the possession of a forged instrument. A
42

person has to pay money on a forged instruments by mistake, can recover it from the person to whom he has paid it.

Dishonour of a Cheque: The main object of this piece of legislation is to inculcate faith in the efficacy of banking operations and credibility in transacting business on negotiable instruments. Section 138, THE NEGOTIABLE INSTRUMENTS ACT 1881 is intended to prevent dishonesty on the part of the drawer of negotiable instrument to draw a cheque without sufficient funds in his account maintained by him in a bank and induces the payee or holder in due course to act upon it. The dishonour of cheque is now a criminal offence punishable by imprisonment up to one year or with fine up to the double the amount of dishonored cheque or with both.

Advent of cheques in the market have given a new dimension to the commercial and corporate world, its time when people have preferred to carry and execute a small piece of paper called Cheque than carrying the currency worth the value of cheque. Dealings in cheques are vital and important not only for banking purposes but also for the commerce and industry and the economy of the country. But pursuant to the rise in dealings with cheques also rises the practice of giving cheques without any intention of honoring them. Before 1988 there being no effective legal provision to restrain people from issuing cheques without having sufficient funds in their account or any stringent provision to punish them in the vent of such cheque
43

not being honoured by their bankers and returned unpaid. Of course on dishonour of cheques there is a civil liability accrued. However in reality the processes to seek civil justice becomes notoriously dilatory and recover by way of a civil suit takes an inordinately long time. To ensure promptitude and remedy against defaulters and to ensure credibility of the holders of the negotiable instrument a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 in form of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, which were further, modified by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002[3]. This article endeavors to elucidate the penal provision [4] light of the amendments and the judicial interpretations.

Scope: Of the ten sections comprising the chapter of the Act, section 138 creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker. Section 138 of the Act can be said to be falling either in the acts which are not criminal in real sense, but are acts which in public interest are prohibited under the penalty or those where although the proceeding may be in criminal form, they are really only a summary mode of enforcing a civil

44

right. Normally in criminal law existence of guilty intent is an essential ingredient of a crime.

Circumstances of Dishonour: The circumstances under which dishonour of cheque takes place or that may contribute to the situation would be irrelevant and are required to be totally ignored.

In a Case Study of Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar the Bombay High Court held that: "A clear reading of Section 138 leaves no doubt in our mind that the circumstances under which such a dishonour takes place are required to be totally ignored. In such case, the law only takes cognizance of the fact that the payment has not been forthcoming and it matters little that any of the manifold reasons may have caused that situation." Five ingredients of the offence under section 138. The offence under Sec. 138 of the Act can be completed only with the concatenation of a number of acts. Following are the acts, which are components of the said offence; 1. Drawing of the cheque, 2. Presentation of the cheque to the bank, 3. Returning the cheque unpaid by the drawee bank,
45

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 concatenation of all the above five is sine qua non for the completion of the offence under Sec. 138 of the Act. Drawing of a Cheque: The drawer in payment of a legal liability to discharge the existing debt should have drawn cheque. Therefore any cheque given say by way of gift would not come within the purview of the section. It should be a legally enforceable debt; therefore time barred debt and money-lending activities are beyond its scope.

The words any debt or any other liability appearing in section 138 make it very clear that it is not in respect of any particular debt or liability The presumption which the Court will have to make in all such cases is that there was some debt or liability once a cheque is issued. It will be for the accused to prove the contrary. i.e., there is no debt or any other liability. This of course unless the prosecution restricts itself to a particular liability. The Court shall statutorily make a presumption that the cheques were issued for the liability indicated by the prosecution unless contrary is to be proved.

46

Presentation of Cheque: The presentation of cheque should be within its validity period. Generally a cheque is valid for six months, but there are cheques whose validity period is restricted to three months etc. The question arises as to which bank the cheque should reach within the validity period, is it the payee to his bank presents that of drawers bank or it is enough if the cheque before six months. The courts are divided on the issue. But common sense demands that the cheque should reach the drawer bank within the period of validity as it is that bank that either pays or rejects payment as per the situation existing on that day.

Returning Of the Cheque Unpaid: Lot of controversy had arisen on the issue. What reasons are relevant to hold the drawer of the cheque criminally responsible for bouncing of a cheque? The case laws on the subject have now made the position clear. It is not what the bank says in its return memo that is relevant but the actual position as on the date when the cheque reaches the drawer bank whether there were enough funds in the drawer account to honour the cheque.

Notice:
47

Notice is a very important stage. It is the non-payment of dishonoured cheque within fifteen days from the receipt of the notice that constitutes an offence. Issuing of a cheque and its dishonour is not an offence. The offence is when the drawer receives a notice from the payee and he fails to pay the dishonoured cheque amount within the grace period of 15 days that constitute an offence. Any demand made after the dishonour of cheque will constitute a notice. It is not necessary that the notice should be sent by Registered Post alone, it could be sent even by fax. It is not necessary that the notice should be in any particular form or style. What is essential is that there should be a demand to pay the dishonoured cheque amount.

Amendments of section 138 in 2002: In section 138 of the principal Act, (a) For the words a term which may be extended to one year, the words a term which may be extended to two years shall be substituted; (b) In the proviso, in clause (b), for the words within fifteen days, the words within thirty days shall be substituted. Limitation: These being a special legislation certain time limits have been laid down and
48

they should be strictly followed. Any lapse in adhering to the schedule, shall take away a cause of action under Sec. 138. The time limits placed cannot be condoned by the Courts. Therefore the question of making an application for condonation of delay as in the case of civil does not arise at all under the said section. What then are the limitations one has to keep in one mind and follow them strictly to prosecute the drawer of cheque who has failed to pay the said sum within fifteen days from the receipt of the notice? Cheque should be presented to the bank for encashment within its validity period. Within fifteen days from the receipt of return memo indicating reason of dishonour, a notice should be sent demanding the amount of dishonoured cheque.

If the drawer does not pay the amount of dishonoured cheque within the grace period, a complaint thereafter should be filed within one month in the relevant court of Metropolitan Magistrate/Judicial Magistrate as the case may be, having jurisdiction. Conclusion: This article does not claim to be all exhaustive one on the subject. But this should provide a basis and an insight into the main characteristics of the amendment to the N.I.Act. Making bouncing of cheque a criminal offence. If this article kindles ones desire to know more, the main purpose can be

49

considered as fulfilled. Though insertion of the penal provisions have helped to curtail the issue of cheque lightheartedly or in a playful manner or with a dishonest intention and the trading community now feels more secured in receiving the payment through cheques. However there being no provision for recovery of the amount covered under the dishonoured cheque, in a case where accused is convicted under section 138 and the accused has served the sentence but, unable to deposit amount of fine, the only option left with the complainant is to file civil suit. The provisions of the Act do not permit any other alternative method of realization of the amount due to the complainant on the cheque being dishonored for the reasons of "insufficient fund" in the drawers account.

Case Studies

Q1. What can one do when a cheque is dishonoured for the reason of insufficient funds? What legal action can he take to get the amount cleared? Ans: On the dishonour of a cheque, one can file a suit for recovery of the cheque amount along with the cost & interest under order XXXVII of Code of Civil Procedure 1908 ( which is a summary procedure and) can also file a Criminal Complaint u/s 138 of Negotiable Instrument Act for punishment to the signatory of the cheque for haring committed an offence. However, before filing the said complaint a statutory notice is liable to be given to the other party.
50

Q2. Mr. A has got his cheque dishonoured few months back. It was issued by a Company. What can he do now? Ans: On the dishonour of cheque by the company you can file a suit for recovery of the amount under Order XXXVII of CPC. As you have stated that cheques were dishonoured few months back and you have issued no notice to the company bringing to their knowledge the dishonour of cheques and the life of the cheque is still valid which is usually six months from the date of issue. You please present the cheque again and on receipt of the information about the dishonour of the cheque you immediately issue notice within 30 days from the receipt of the information of dishonour of cheque to the company. If the company does not pay the amount within 30 days from the receipt of the notice, you can file complaint under Section 138 of the Negotiable Instrument Act. The said complaint is to be filed within one month on the expiry of 30 days period of notice.

Q3. XYZ is the software distribution co. During course of our business we had supplied software worth Rs.3 lacs. But our client dishonoured the cheque. We have filed court case on him after that he paid us Rs. 1 lac and then he has run away. We do not have any idea about his where about. Court has issued proclaimed offender notice, but we do not now how to trace him. He has closed his account and bankers are not cooperating with information like his other address. Please advice?

51

Ans: Let the proceedings of declaration of proclaimed Offender be completed. The accused will be declared Proclaimed offender and can be arrested at any time. At this stage, you can not do anything else. However, simultaneously you can file Suit for Recovery with the last known address of the accused.

52