Negotiable Instruments Act, 1881 The transition of economy from barter to currency based transactions raised lot of issues

pertaining to money circulation, monitoring etc. Globalization and increased international trade further added pressure on these transactions. Most of the transactions are dealt in cash and credit, such credit is usually short term and treated on par with money. Negotiable instruments gained prominence in such situation as they are intended to replace money and give the holder assurance equivalent to money holding. There are number of instruments which have similar characteristics especially transferability, however mere transferability of a document does not make it a negotiable instrument. Negotiable instruments have helped in smooth running of transactions in the present regime of international trade as well. This is possible due to the Negotiable Instruments Act, 1881 which makes it easy for interpretation and application for people in different jurisdictions. The Negotiable Instruments Act is a colonial legislation enacted to regulate negotiable instruments. The law prevailing before the enactment was customary practice among business men, personal law to some extent and the then prevailing English Common Law in force. Traditionally negotiable instruments were referred as hundi in India which evidently mean instruments intended to collect. The codification of law relating to negotiable instruments considered the prevailing practices besides other aspects. Negotiable Instruments Act, 1881 was amended occasionally to suit the contemporary demands. The law after the enactment can be summarized sequentially as follows:

Definition of Negotiable Instruments: Section 13 of Negotiable Instruments Act defines negotiable instruments which read as follows: Section 13: "Negotiable instrument".-(1) A "negotiable instrument" means a 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 to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable. Explanation (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 endorsements is an endorsement in blank. Explanation (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.

(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. Negotiable Instrument is a document which prescribes payment of money at a future date to a specified party and is capable of being transferred to another person. Instrument means document, negotiable means being capable of transfer. This implies that ownership or property in the instrument can be negotiated. The above definition has to two major implications: 1) The definition is exhaustive as it states that only promissory note, bill of exchange and cheque are negotiable instruments 2) Negotiable instruments are not defined by their characteristics such as negotiation etc. though the explanation makes the promissory note, bill of exchange or cheque negotiable. If a note has characteristics of negotiable instrument but is a not a promissory note, bill of exchange or cheque then it is not a negotiable instrument. The earlier practice of referring to transferable notes as hundi is considered as an essential characteristic of negotiable instrument under the Negotiable Instruments Act also. Negotiation remains the essence of negotiable instrument hence the mode of negotiation/ transfer needs to be understood. Transfer of Negotiable Instruments: Section 14 of the Negotiable Instruments Act states about transferability of a negotiable instrument it reads as follows: Section 14: Negotiation.- When a promissory note, bill of exchange or cheque is transferred to any person, so as to continue the person the holder thereof, the instrument is said to be negotiated. The above Section has the following implications: 1) Transfer of a negotiable instrument to constitute the transferee as a holder is referred as negotiation 2) The mode in which the property or a claim in a negotiable instrument can be transferred is by way of negotiation only 3) Negotiable instruments i.e. promissory note, bill of exchange or cheque alone can be negotiated The question that follows the above interpretation is who is entitled to transfer and who is a holder. The ascertainment of holder is important to ensure transferability, claim recovery of money and other related matters pertaining to promissory notes.

Section 8 of the Negotiable Instruments Act defines a holder it reads as follows: Section 8: "Holder".- The "holder" of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the promissory note, bill of exchange or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction. The above definition of holder has the following implications: 1) Holder has the right of possession i.e. the holder might be in actual possession or not in possession but retains the right to possess. Right to possession is an attribute of ownership hence holder can be considered as the owner of negotiable instrument in ordinary sense of the term 2) Holder is empowered to recover and receive the amount due 3) Holder is empowered to recover a lost or a destroyed note 4) Holder has the right to transfer/ negotiate the instrument When the Holder transfers the instrument so as to give the transferee the same rights and privileges such person shall be called as the Holder in due course. Section 9 of the Negotiable Instruments Act defines a holder in due course it reads as follows: Section 9 Holder in due course: "Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorse thereof, if payable to order before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. The above definition of holder in due course has the following implications: 1) A person who merely holds the note for the purpose of receiving the amount or safe keeping shall not be a holder in due course 2) Holder in due course should not be aware of any existing defect in the title of the holder 3) Holder in due course must possess the note before the amount mentioned in the note become payable 4) Holder in due course must become possessor of the note for consideration 5) If all the above conditions are satisfied then a holder in due course may get a better title than the person who transferred the note to him. This is an exception to the rule that no one can transfer a better title than what he himself has The negotiable instruments therefore generally shall be in possession of a holder or a holder in due course who shall transfer them before the amount in it become payable or

claim the amount due on it on the date of the maturity. In case the note is transferred before maturity the transferee who becomes the holder in due course shall claim the amount due on it on the date of maturity. Transfer by endorsement, delivery: Transfer of a negotiable instrument is completed either by endorsement, endorsement and delivery or delivery. Transfer by endorsement, delivery is defined in the Negotiable Instruments Act. Negotiation by delivery is defined in Section 47 which reads as follows: Section 47 Negotiation by delivery: Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by deliver thereof. Exception - a promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens. Negotiation by endorsement is defined in Section 48 which reads as follows: Section 48 Negotiation by endorsements: Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by endorsement and delivery thereof

Section 58 deals about possession of instruments by illegal means. It reads as follows: Section 58 Instrument obtained by unlawful means or for unlawful consideration: When a negotiable instrument has been lost, or has been obtained form any maker, acceptor or holder thereof by means of offence or fraud, or for an unlawful consideration, no possessor or endorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course. Endorsement can be full or blank. Full endorsement means the note is transferred but further transfer of the note is restricted. Blank endorsement empowers the endorsee to further endorse it. The above negotiability is distinct as opposed to the traditional mode of preparing documents and executing a deed of assignment. This is one of the main reasons for the abundant utility of these notes by the business community.

Characteristics of Negotiable Instruments: Promissory Note: Section 4 of the Negotiable Instruments Act defines a promissory note, it reads as follows: Section 4: "Promissory note" - A "promissory note" is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument As per the above definition the essential characteristics of a promissory note are: 1) 2) 3) 4) 5) 6) 7) 8) A Promissory Note should be in writing A Promissory Note should contain an unconditional undertaking A Promissory Note should be signed by the maker A Promissory Note should specify the particular amount of money A Promissory Note should specify only money A Promissory Note should specify the person to whom the money is to be paid A Promissory Note could be an order note or a bearer note A Promissory Note consists of a maker and a payee

Unconditional undertaking: Unconditional undertaking would mean that there should not be any conditions which are uncertain to happen. Specifying a particular future date for payment is not an uncertain happening but specifying that I shall pay when I join the particular office or on the day of my marriage are considered uncertain to happen as they may or may not happen. Money only: Money only, the words used in the section money only to, or to the order of, a certain person, or to the bearer of the instrument should not be understood as money only to it should be read as money only to or to, the difference can be illustrated with the following examples: 1) I promise to pay X rupees one lakh 2) I promise to pay X only rupees one lakh In the above specified first illustration it is money only, in second illustration X only mean money only to. In the above second illustration I promise to pay to X only and none other that also means X cannot transfer this note to any one as I will not pay to that other person, hence the transferability of the note is restricted. If negotiation is prohibited it is no more a negotiable instrument and is not governed by the Negotiable Instrument Act.

The above second illustration prohibits transfer of the note and hence is not a promissory note and is not governed by Negotiable Instruments Act. Transferability of Promissory Note: The transferability of promissory note can be understood by the following illustrations: 1) 2) 3) 4) 5) I promise to pay X I promise to pay X or bearer I promise to pay X or bearer or order I promise to pay X or order I promise to pay X only (prohibits transfer, hence not a promissory note)

In the above illustration all the notes from 1 to 4 are transferable at the instance of X. In the first illustration it does not specify that X can transfer but it being promissory note X can transfer it. In the second illustration X can transfer it by mere delivery also as the bearer is also entitled to receive the amount due on the promissory note. In the third illustration X can transfer the note either by an endorsement and delivery or by mere delivery. In the fourth illustration X can transfer the note only by an endorsement and delivery and not merely by way of delivery as it is an order note. Bill of exchange: Section 5 of the Negotiable Instruments Act defines a bill of exchange, it reads as follows: Section 5 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 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 section 4, although it includes future indicated rate of change, 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 As per the above definition the essential characteristics of a bill of exchange are: 1) 2) 3) 4) 5) 6) 7) 8) 9) A Bill of Exchange should be in writing A Bill of Exchange should specify certain sum of money A Bill of Exchange should be signed by the maker A Bill of Exchange should contain an unconditional order to pay money A Bill of Exchange should specify the person who should make the payment A Bill of Exchange should specify the person to whom money should be paid A Bill of Exchange should specify money only A Bill of Exchange could be an order note or a bearer note A Bill of Exchange contains three parties i.e. maker, acceptor and payee

There are three parties to a bill of exchange. The maker of the note, the person who is ordered to pay i.e. the acceptor and the person entitled to receive payment on the note i.e payee. The acceptor once he/she accepts to make the payment gets three days grace time to make the payment of the bills which are not payable on demand. Traditionally Bills of Exchange drawn and payable at sight were known as Darshani Hundi and those payable after a stipulated period mentioned in the note were known as Muddati Hundi. The bill of exchange can be discounted for value before the date of maturity of the bill. Discounting helps the holder to recover the amount in advance. While the bank which discounts it gains the amount for which it is discounted. The rate at which the Reserve Bank discounts the bills determines the rate at which the commercial banks discount them to its customers. Bill discounting is an old practice highly prevalent in India. Banks consider it better than lending on notes as the amount they receive from the bill is quicker than a loan and more assured. Section 17 of Reserve bank of India Act, 1934 provides that Reserve bank shall be authorized to purchase, sale and rediscount bills of exchange and promissory notes arising out of bona fide transactions. It provides valid time frame depending on the maturing days of the note. Case Study: Sudhir Shantilal Mehta V Central Bureau of Investigation (CBI) (MANU/SC/1415/2009) In the case of Sudhir Shantilal Mehta V Central Bureau of Investigation (CBI) the trial conducted by special court and the conviction ordered therein was challenged before the Supreme Court of India. The case was pertaining to discounting bills of exchange and pay orders issued by State Bank of Patiala and Syndicate Bank in favor of UCO Bank. The allegation is that the discounting happened at the instance of Harshad Mehta a dealer in securities market. The main accusation on the accused is that he diverted huge amounts of money from public sector banks and financial institutions for short term investment in securities market. The claim of the accused is that bill discounting does not come within the purview of shares and hence is out side the purview of the special court constituted to

deal with the issue. Supreme Court held that the jurisdiction of special court is not confined to scam of securities alone but to all transactions pertaining to securities which are connected thereto. The Supreme Court held that the accused facilitated Harshad Mehta and his associates to utilize funds of the bank by not following the Reserve Bank of India (RBI) directions pertaining to test of bona fide commercial transactions in discounting bills of exchange besides not following Bank manual on the procedure for bills discounting. Cheque: Section 6 of the Negotiable Instruments Act defines a Cheque, it reads as follows: Section 6: 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. 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. The difference between a cheque and a bill of exchange can be stated as follows: 1) Cheque is always drawn on a specified banker while bill of exchange can be drawn on any person. 2) Payee should approach the bank and demand for payment such a requirement is not there for bill of exchange 3) There will be three days grace period for bills of exchange while cheques are payable on demand 4) Truncated and electronic forms of cheques are accepted but the same is not the case for bills of exchange 5) Dishonor of cheque gives rise to penal consequences while dishonor of a bill of exchange gives rise to civil action only. 6) Bill of exchange can be discounted while no such facility is available for cheques

Case Study: Ashok Yeshwant Badave vs. Surendra Madhavrao Nighojakar and Another (AIR 2001 SC 1315) In the case of Ashok Yeshwant Badave vs. Surendra Madhavrao Nighojakar and Another Supreme Court of India explained the difference between a cheque and bill of exchange. The Court held that from a bare perusal of Sections 5 and 6 of the Negotiable Instruments Act it would appear that bill of exchange is a negotiable instrument in writing containing an instruction to a third party to pay a stated sum of money at a designated future date or on demand. On the other hand, a cheque is a bill of exchange drawn on a bank by the holder of an account payable on demand. Under Section 6 of the Act a cheque is also a bill of exchange but it is drawn on a banker and payable on demand. A bill of exchange even though drawn on a banker, if it is not payable on demand, it is not a cheque. A postdated cheque is not payable till the date which is shown thereon arrives and will become cheque on the said date and prior to that date the same remains bill of exchange. Dishonor of a Negotiable Instrument: Negotiable Instruments are intended to enable easy transfer of money, enhance mobility and assurance thereby facilitates commercial transactions. Dishonor of a negotiable instrument gives raise to cause of action and the law helps the holder to ascertain his rights in the court. The procedure for establishing the holders right is relatively easy under this Act in view of the following provisions. Noting: Section 99 of Negotiable Instruments Act, 1881 deals with Noting: When a promissory note or bill of exchange has been dishonored for non-acceptance or non-payment, the holder may cause such dishonor to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each. Such note must be made within a reasonable time after dishonor, and must specify the date of dishonor, the reason, if any, assigned for such dishonor, or, if the instrument has not been expressly dishonored, the reason why the holder treats it as dishonored, and the notarys charges. Protest: Section 100 of Negotiable Instruments Act, 1881 deals with Protest: When a promissory note or bill of exchange has been dishonored by non-acceptance or non-payment, the holder may, within a reasonable time, cause such dishonor to be noted and certified by a notary public. Such dishonor to be noted and certified by a notary public. Such certificate is called a protest. Protest for better security. - When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand better security of

the acceptor, and on its being refused may, with a reasonable time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security. Presumptions: Section 118: Presumptions as to negotiable instruments of consideration Until the contrary is proved, the following presumptions shall be made:(a) of consideration-that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration; (b) as to date- that every negotiable instrument bearing a date was made or drawn on such date; (c) as to time of acceptance- that every accepted bill of exchange was accepted within a reasonable time after its date its date and before its maturity; (d) as to time of transfer.- that every transfer of a negotiable instrument was made before its maturity; (e) as to order of endorsements - that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon; (f) as to stamps-that a lost promissory note, bill of exchange or cheque was duly stamped; (g) that holder is a holder in due course - that the holder of a negotiable instrument is a holder in due course; provided that, where the instrument has been contained from its lawful owner, or form any person in lawful custody thereof, by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him The Presumptions that can be drawn under Section 118 of the Act are shall presumptions. Law of Evidence provides for three kinds of presumptions, they are: 1) May Presumption 2) Shall Presumption and 3) Conclusive Proof. In May Presumption Law provides for situations wherein the presiding officer of the Court determines whether to draw such a presumption or not. In Shall Presumption Law provides for situation where the presiding officer of the Court is required to draw such a presumption and there is no discretion provided to the Court. The above Section is an example of Shall Presumption where the law relating to negotiable instruments provides for presumption which has to be drawn. May Presumption and Shall Presumption drawn by the court can be rebutted by the opposite party or the party in whose favor the presumption is not drawn. If the presumption is rebutted by the opposite party the party in whose favor it was drawn shall have to establish those facts otherwise in the court i.e. with the help of other evidence. In

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conclusive proof law provides for situations where the court draws conclusive proof in favor of a party and the opposite party is not given a chance to rebut them, hence they are known as conclusive proof. The above procedure helps the holder of a negotiable instrument to establish his case in the court. When the holder approaches the court for dishonor he will produce the instrument and if it is noted by noting or protest it is establishment of the fact of dishonor. The fact of consideration and other disputed facts are presumed in favor of the holder due to the presumption in Section 118 of the Negotiable Instruments Act; hence the entire burden of proof is on the party which is required to make payment on the instrument. The Negotiable Instruments have remained popular for more than a century now due to the advantage the holder tends to gain in case of a dispute. Holding Negotiable Instrument can be considered equivalent to holding cash as it can be transferred in time of need, recover the amount on maturity or file a case without burden to prove in case of dispute. These aspects made negotiable instruments holder comfortable and retained their domain in the business world. The advantages available to prove issues relying on negotiable instruments i.e to promissory notes, bill of exchange and cheques are very helpful to the holder of the instrument; inspite of this cheque alone have been given special preference by the Act in case of dishonor. Dishonor of a cheque shall invite penal consequence also. Amendment is made to the negotiable instrument in 1988 so as to make dishonor of a cheque an offence. The provisions relating to it are as follows:

Dishonor of Cheque: The criminal consequences for dishonor of cheque have changed the jurisprudence of negotiable instruments and the nature of business transactions to a large extent. The nature of proceedings for dishonor determine the extent of utility of the negotiable instruments, while all the notes were widely used holder of a negotiable instrument is put to unnecessary strain of approaching court and pursuing the proceedings for long for remedy. Though the burden of proof was mainly on the person responsible to make payment it would take long time to realize the amount by when the value of money would have come down drastically due to inflation and other market factors. This led to extreme dissatisfaction of the holders. The amendment is the result of this and now the maker of cheque is more cautious as he has to face criminal consequences in case of dishonor. People started accepting post dated cheques as guarantee for their transaction etc. which has made cheques extremely popular and increasing their use drastically. Dishonor of cheque for insufficiency of funds is punishable with imprisonment, fine or with both. The Act mandates the time frame within which the complaint has to be filed; notice has to be served etc. thereby making the remedy faster. The complaint procedure is also distinct and easy as compared to other criminal complaints and the trial procedure is

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also summary, making the trial procedure simple and faster. The complainant and the accused can compromise and compound the case if the payment is made etc. The question of who should be made liable in case of cheque issued by a company is dishonored has been stated in the Act. The person in charge of day to day affairs and the person with whose knowledge consent and connivance the cheque has been issued along with the Company shall be liable. There have been many situations where company personnel accused of dishonor of cheque have approached the High Court pleading that they are involved in the making of the cheque and the criminal proceeding against them may be quashed. There is no vicarious liability for dishonor of cheque and no one can be punished for an act which they are not involved in but persons cannot escape their simply if they say they are not involved. The courts would consider their involvement to determine whether criminal proceedings against them should be continued or not. However the criminal consequences for dishonor of cheque are not applicable where cheque is issued for charity purposes. Section 138: Dishonor of cheque for insufficie.ncy, etc., of funds in the accounts Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for "a term which may extend to two year", or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless(a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. (b) The payee or the holder induce course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer, of the cheque, "within thirty days of the receipt of information by him from the bank regarding the return of the cheques as unpaid, and (c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. Explanation: For the purpose of this section, "debt or other liability" means a legally enforceable debt or other liability.

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The issues pertaining to the interpretation of the provisions of Section 138 have come before the courts in many cases. Certain cases which considered important issues are: Case Study: Ashok Yeshwant Badave vs. Surendra Madhavrao Nighojakar and another (AIR 2001 SC 1315) In the case of Ashok Yeshwant Badave vs. Surendra Madhavrao Nighojakar and Another Supreme Court of India considered the date of computing six month validity period for cheques under Section 138 of the Act. The Court held that for prosecuting a person for an offence under Section 138 of the Act, it is inevitable that the cheque is presented to the banker within a period of six months from the date on which it is drawn or within the period of its validity whichever is earlier. When a post dated cheque is written or drawn, it is only a bill of exchange and so long the same remains a bill of exchange, the provisions of Section 138 are not applicable to the said instrument. The post-dated cheque becomes a cheque within the meaning of Section 138 of the Act on the date which is written thereon and the 6 months period has to be reckoned for the purposes of proviso (a) to Section 138 of the Act from the said date. Thus we hold that six months period shall be reckoned from the date mentioned on the face of the cheque and not any earlier date on which the cheque was made over by the drawer to the drawee. In the above case the cheque was prepared and made over by the drawer to the drawee on 10.11.1995 but the date mentioned thereon was 20.1.1996 and it was presented before the banker for encashment on 7.7.1996, i.e., within a period of six months from 20.1.1996. Thus an offence under Section 138 of the Act is clearly made out. Case Study: Kolla Veera Raghav Rao Vs. Gorantla Venkateswara Rao and Another (AIR 2011 SC 641) In the case of Kolla Veera Raghav Rao Vs. Gorantla Venkateswara Rao and Another the Supreme Court of India had to consider whether a person convicted under Section 138 of the Negotiable Instruments Act could again be tried or punished on the same facts under Section 420 or any other provision of Indian Panel Code, 1860. The issue in this case were the accused was convicted under Section 138 of Negotiable Instruments Act for dishonor of cheque and there was another complaint made out under Section 420 of Indian Penal Code for Cheating on the same accused for dishonor. The accused pleaded that as per Article 20(2) of the Constitution of India and Section 300(1) of Code of Criminal Procedure the prosecution against him under Section 420 is barred. Article 20(2) of the Constitution of India states that no person shall be prosecuted and punished for the same offence more than once Section 300(1) of Code of Criminal Procedure States that person once convicted or acquitted not to be tried for same office, it reads as follows: (1) A person who has once been tried by a Court of competent jurisdiction for an offence and convicted or acquitted of such offence shall, while such conviction or acquittal remains in force, not be liable to be tried again for the same offence, nor on the same 13

facts for any other offence for which a different charge from the one made against him might have been made under Sub-section (1) of Section 221 or for which he might have been convicted under Sub-section (2) thereof. The Supreme Court held that Section 300(1) of Code of Criminal Procedure is wider than Article 20(2) of the Constitution. While, Article 20(2) of the Constitution only states that 'no one can be prosecuted and punished for the same offence more than once', Section 300(1) of Code of Criminal Procedure states that no one can be tried and convicted for the same offence or even for a different offence but on the same facts. In this case, although the offences are different the facts are the same. Hence, Section 300(1) of Code of Criminal Procedure applies. Consequently, the prosecution under Section 420, IPC was barred by Section 300(1) of Code of Criminal Procedure Case Study: M.D. Thomas Vs. P.S. Jaleel and Anr. [(2009) 14 SCC 398] In the case of M.D. Thomas Vs. P.S. Jaleel and another the appellant argued that the conviction under Section 138 of the Act is liable to be set aside because before filing complaint, the respondent did not serve upon him notice as per the requirement of Clause (b) of proviso to Section 138 of the Act. He submitted that service of notice on the appellant's wife cannot be treated as compliance of the mandate of law. It was not disputed that the notice issued was, in fact, served upon the appellant's wife but argued that this should be treated as sufficient compliance of the requirement of giving notice of demand. The Supreme Court held that the notice of demand was served upon the wife of the appellant and not the appellant. Therefore, there is no escape from the conclusion that complainant-respondent had not complied with the requirement of giving notice in terms of Clause (b) of proviso to Section 138 of the Act. Unfortunately, the High Court overlooked this important lacuna in the complainant's case. Therefore, the conviction of the appellant cannot be sustained. Case Study: Vinod Tanna and Anr. Vs. Zaheer Siddiqui and Others [MANU/SC/1475/2001] In the case of Vinod Tanna and Anr. Vs. Zaheer Siddiqui and Others the cheque was dishonored as the drawers signature was incomplete. In case of insufficiency of funds or stop payment instructions from the party they are liable under Section 138 of the Act but not in the case where the signature was incomplete and the bank dishonored due to incomplete signature and not otherwise. So the Court held that criminal liability under Section 138 is not attracted in the case of incomplete signature and consequent dishonor. Section 139: Presumption in favor of holder It shall be presumed, unless the Contrary is proved, that the holder of a cheque received the cheque of the nature referred to in section 138 for the discharge, in whole or in part, or any debt or other liability. 14

Section 140: Defence which may not be allowed in any prosecution under section 138 It shall not be a defence in a prosecution of an offence under section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. Section 141: Offences 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 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. "Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter. (2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attribute to, any neglect on the part of, any director, Manager, secretary, or other office of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation: For the purpose of this section. (a) "Company" means any body corporate and includes a firm or other association of individuals; and (b) "Director", in relating to a firm, means a partner in the firm. Criminal Law jurisprudence does not contemplate vicarious liability. A person will be liable for his act in the commission of the crime and no one can be made liable for others criminal actions. However if an offence is committed by a company persons responsible for the commission of the offence will be liable along with the company. Any person who is accused of an offence committed by a company can plead that the charges made out against him are baseless and can seek the trial proceedings initiated against him quashed by a High Court. Depending upon the facts of the case the High Court may or may not abdicate him of such charges.

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Case Study: P. Rajarathinam Vs. State of Maharashtra and Others [(2000)10 SCC 529] In the case of P. Rajarathinam Vs. State of Maharashtra and Others the Company and its Directors have been arraigned as accused and one of them has approached the Supreme Court for quashing of proceedings, having unsuccessfully tried for such relief before the High Court in jurisdiction under Section 482 of the Criminal Procedure Code. It has been urged that at the very outset it be identified as to who out of the arraigned persons is to face the prosecution. The Supreme Court held that the reading of Section 141 of the Act mandates that some facts must come on the record in order to figure as to who should answer the charge ultimately. Necessarily, pre-charge evidence assumes importance. The complainant will have to put his side of the case as given out in the complaint and the persons summoned would have to put on the record all what is material to extricate them out. In any case, the crucial time would be when framing charge whereat a decision in that respect would be required to be made by the court. Presently, it appears to us premature to be resolving the conflict and the ratio deduced thereby may turn out to be obiter. Therefore, we think that we need not resolve such conflict at present and leave it to the court concerned to pass appropriate orders at the time of framing of charge. Section 142: Cognizance of offences Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974).(a) No court shall take cognizance of any offence punishable under section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque; (b) Such complaint is made within one month of the date on which the cause of action arises under clause (C) of the proviso to section 138: "Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a complaint within such period. (c) No court inferior to that of a Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138. Section 143: Power of Court to try cases summarily (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974) all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials:

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Provided that in the case of any conviction in a summary trial under this section, it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding five thousand rupees: Provided further that when at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code. (2) The trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing. (3) Every trial under this section shall be conducted as expeditiously as possible and an endeavour shall be made to conclude the trial within six months from the date of filing of the complaint. Section 147: Offences to be compoundable: Notwithstanding anything contained in the Code of Criminal Procedure, 1973, (2 of 1974.) every offence punishable under this Act shall be compoundable. Dishonor of cheque for insufficiency of funds is punishable with imprisonment, fine or with both. The Act mandates the time frame within which the complaint has to be filed; notice has to be served etc. thereby making the remedy faster. The complaint procedure is also distinct and easy as compared to other criminal complaints and the trial procedure is also summary, making the trial procedure simple and faster. The complainant and the accused can compromise and compound the case if the payment is made etc. Case Study: Damodar S. Prabhu Vs. Sayed Babalal H.(AIR 2010 SC 1907) In the case of Damodar S. Prabhu Vs. Sayed Babalal H the Supreme Court of India laid down guidelines for compounding cases under Section 147 of Negotiable Instruments Act for offences under Section 138 of the Negotiable Instruments Act. The Supreme Court of India expressed that they are also conscious of the view that the judicial endorsement of the guidelines could be seen as an act of judicial law-making and therefore an intrusion into the legislative domain. It held that it must be kept in mind that Section 147 of the Act does not carry any guidance on how to proceed with the compounding of offences under the Act. The Court has already explained that the scheme contemplated under Section 320 of the Criminal Procedure Code cannot be followed in the strict sense. In view of the legislative vacuum, we see no hurdle to the endorsement of 17

some suggestions which have been designed to discourage litigants from unduly delaying the compounding of the offence in cases involving Section 138 of the Act. The graded scheme for imposing costs is a means to encourage compounding at an early stage of litigation. In the status quo, valuable time of the Court is spent on the trial of these cases and the parties are not liable to pay any Court fee since the proceedings are governed by the Code of Criminal Procedure, even though the impact of the offence is largely confined to the private parties. Even though the imposition of costs by the competent court is a matter of discretion, the scale of costs has been suggested in the interest of uniformity. The competent Court can of course reduce the costs with regard to the specific facts and circumstances of a case, while recording reasons in writing for such variance. Bona fide litigants should of course contest the proceedings to their logical end. Even in the past, this Court has used its power to do complete justice under Article 142 of the Constitution to frame guidelines in relation to subject-matter where there was a legislative vacuum.

The Guidelines (i) In the circumstances, it is proposed as follows: (a) That directions can be given that the Writ of Summons be suitably modified making it clear to the accused that he could make an application for compounding of the offences at the first or second hearing of the case and that if such an application is made, compounding may be allowed by the court without imposing any costs on the accused. (b) If the accused does not make an application for compounding as aforesaid, then if an application for compounding is made before the Magistrate at a subsequent stage, compounding can be allowed subject to the condition that the accused will be required to pay 10% of the cheque amount to be deposited as a condition for compounding with the Legal Services Authority, or such authority as the Court deems fit. (c) Similarly, if the application for compounding is made before the Sessions Court or a High Court in revision or appeal, such compounding may be allowed on the condition that the accused pays 15% of the cheque amount by way of costs. (d) Finally, if the application for compounding is made before the Supreme Court, the figure would increase to 20% of the cheque amount.

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Negotiable Instrument and Actionable Claims Negotiable Instruments are documents which assure payment to the person entitled. The right of the person so entitled include right to claim the money on the date of maturity or transfer them to other person. The nature of right is a claim which can also be transferred so these notes qualify to be called as actionable claims; however they are out side the purview of actionable claims as per law. Transfer of Property Act, 1880 governs the law relating to transfer of property. It governs immovable property and its transfer like sale, mortgage etc. With regard to movable property Sale of Goods Act, 1930 also deals with it besides aspects of pledge etc, which are dealt by Transfer of Property Act. Actionable claims are dealt by Transfer of Property Act, it defines actionable claim as follows: Section 3 of Transfer of Property Act defines actionable claim as follows: "actionable claim" means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent; Section 130 to 137 of Transfer of Property Act, 1880 deals with transfer of actionable claims, however Section 137 of the Act bars the application of the these provisions to negotiable instruments. It reads as follows: Section 137of Transfer of Property Act, Saving of negotiable instruments, etc.: Nothing in the foregoing sections of this Chapter applies to stocks, shares or debentures, or to instruments which are for the time being, by law or custom, negotiable, or to any mercantile document of title to goods. Explanation: The expression "mercantile document of title to goods" includes a bill of lading, dock-warrant, warehouse-keeper's certificate, railway receipt, warrant or order for the delivery of goods, and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented. In view of the above provisions Transfer of Property Act provisions relating to actionable claims are not applicable to negotiable instruments and the Negotiable Instruments Act alone governs them. There are many documents relating to goods which are negotiable and can be called as negotiable documents of goods, however they all are governed by Transfer of Property Act and other relevant laws such as contract law etc. and not by the Negotiable Instruments Act.

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Negotiable Instrument and Contracts: Negotiable instruments have similarities to contractual agreements one of the main contrasting factors is that minor can be a party to a negotiable instrument while it is not allowed in contracts. Section 26 of the Negotiable Instruments Act, 1881 deals with capacity of parties to make notes it reads as follows: Section 26: Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque. Minor: A minor may draw, indorse, deliver and negotiate such instrument so as to bind all parties except himself. Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered. Section 26 of Negotiable Instruments Act permits minor to be party to the negotiable instruments while Section 11 of Indian Contract Act, 1872 do not allow minor to be party to a contract. It reads as follows: Section 11: Who are competent to contract: Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject. The other contrasting feature is that while consideration is essential to a contract, consideration is presumed in case of negotiable instruments.

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