Cheque – Negotiable Instruments Act
In CS Online coaching classes, Negotiable Instrument Act is a very interesting topic of Economic, Business and Commercial Laws here we will discuss on a cheque which is explained below:
What is 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. (Sec. 6, NIA)
Explanation I – For the purposes of this section, the expressions-
- 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 secured system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
- 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 a 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 recognised as such by the Reserve Bank of India.
The topic Negotiable Instrument is an important topic of CS Executive Economic, Business and Commercial Laws (Paper – 7) and is also included in other subjects of CS like BUSINESS ENVIRONMENT & LAW.
A cheque is a kind of bill of exchange but it has additional qualifications also, such as-
1. It is always drawn on a specified banker and
2. It is always payable on demand without any days of grace
Parties to a cheque
- Drawer: Drawer is the person who draws or makes the cheque.
- Drawee: Drawee is the drawer’s banker on whom the cheque has been drawn.
- Payee: Payee is the person who is entitled to receive the payment of a cheque.
Crossing of Cheque
A Crossed Cheque is one which bears, across its face, two parallel transverse lines with or without certain words. Such lines are usually drawn on the left side top corner of the face of the Cheque. However, such lines can be drawn anywhere on the face of the Cheque.
The crossing of Cheque is a direction to the drawee bank to pay the amount of the Cheque to a bank. Therefore, a crossed Cheque is not payable to the payee or holder at the counter of the bank. In order to get the payment of the Cheque, it is required to be deposited in an account with a bank. The bank, in turn, presents the Cheque to the drawee bank and gets payment on behalf of the payee or indorse of the Cheque.
The objects of the crossing of a Cheque are as follows:
To direct the drawee bank to pay the amount of the Cheque only to a bank or a particular bank;
To prevent the payment of the Cheque to an unauthorized or wrong person.
KINDS OF CROSSING
The crossing of Cheque is basically of two kinds:-
1. General crossing, and
2. Special crossing.
The basic kind of crossing may take several forms. Some of them are:
3. Restrictive crossing.
4. Not negotiable.
1. General crossing: A Cheque is deemed to be generally crossed in any of the following cases:
a. When it bears across its face two parallel transverse lines without any words.
b. When it bears across its face an addition of the words “and company” or any abbreviation thereof between two parallel transverse lines. It may also be with or without the words ‘Not negotiable’.
Effects of general crossing
The Cheque is not payable at the counter of the bank. The drawee bank shall pay the amount of the Cheque only to a banker. Therefore, the holder will have to deposit the Cheque in an account with any banker. [Sec. 126 Para 1]
2. Special crossing: A Cheque is said to be specially crossed when the name of a banker is added across the face of the Cheque, either with or without words, not negotiable. Usually, two parallel transverse lines are used in special crossing but they are required not by
Effects of special crossing:
In the case of a Cheque especially crossed, the payment can be obtained only through the particular banker whose name appears across the face of the Cheque or his agent for collection.[Sec. 126, para2]
3. Restrictive crossing: Restrictive crossing has not been described anywhere in the Negotiable Instrument Act. It is a type of crossing which has evolved out of business and banking usage and now recognized by the law. Every Cheque crossed whether generally or specially may be crossed restrictively credit the proceeds of the Cheque only to the account of the payee.
4. Not negotiable crossing: Sometimes, a Cheque crossed generally or specially contains the words ‘not negotiable’ a crossing with such words is said to be ‘not negotiable’ crossing.
The words ‘not negotiable’ on a crossed Cheque destroy the negotiable character of the Cheque but not the transferability of the Cheque. Therefore, any person taking a crossed Cheque bearing the words ‘not negotiable’ shall not have and shall not be capable of giving a better title to the Cheque than the title of the person from whom he took it. [Sec. 130]
Parties to a Negotiable Instrument: Holder and Holder in due course
Holder (Sec. 8, NIA)
Holder means any person entitled in his own name to the possession of a promissory note bill of exchange or cheque and to recover or receive the amount due from the parties thereon. A holder must, therefore, have the possession of the instrument and also the right to recover the money in his own name.
Therefore, the holder of a negotiable instrument is the person:
i. Who is entitled in his own name to the possession of the instrument, and
ii. Who has the right to receive or recover the amount due thereon from the parties thereto?
Characteristics of the person:
a. Entitled to possession of an instrument.
b. Entitled to receive or recover the amount.
c. Holder of the lost or destroyed instrument.
Who can be a Holder?
iv. Legal representative or heir
Who is Not a Holder?
iv. Thief or finder
v. Forged endorsee
Powers of Holder
i. He is entitled in his own name to the possession of the instrument.
ii. He can receive or recover the amount due on the instrument.
iii. If necessary, he can sue the parties in order to recover the money due on the instrument.
iv. He can validly discharge the instrument on payment of the instrument.
v. He may indorse the instrument to any other person.
“Holder in due course” (Sec. 9, NIA)
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 the bearer or the payee or endorsee thereof. If payable to the 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 who he derived his title.’
Thus, a person is a holder in due course if he satisfies the following conditions:
a) He must be a holder (possessor) of a negotiable instrument.
b). He must have become a holder (possessor) of the instrument for consideration.
c). He must have become a holder before the maturity of the instrument.
d). He must have obtained the instrument in good faith.
e). He must have received the instrument complete and regular on the face of it.
RIGHTS AND PRIVILEGES OF HOLDER IN DUE COURSE
A holder in due course enjoys certain rights and privileges which are available in the following particular cases:
- In case of an inchoate instrument: Sometimes a person signs a stamped but otherwise incomplete (inchoate) instrument and delivers it to another person. In such a case, it implies that the holder may fill in any amount for which authority has been given by the maker.
- In case of a fictitious bill: Sometimes the name of the drawer or the payee or both is fictitious in a bill. Such a bill is called a fictitious bill. The acceptor of such a fictitious bill is not liable to the holder of the bill. But if the same bill is passed on to a holder in due course, he will have a privilege to claim money on it from the acceptor. [Sec.42]
- In case of the liability of prior parties: A holder in due course has a privilege to hold every prior party to a negotiable instrument liable on it until the instrument is duly satisfied. [Sec.36]
- In case of an instrument without consideration: Sometimes an instrument is made, drawn, accepted, endorsed or transferred without consideration. But, if the same instrument comes into the hands of a holder in due course, he has a privilege to recover the amount from any party thereto. [Sec.43]
- In case of transfer of title to a subsequent holder: A holder in due course has a privilege to transfer the title to an instrument free from all defects to subsequent holder. Therefore, any holder of a negotiable instrument who derives title to a negotiable instrument from a holder in due course enjoys all the rights and privileges of that holder in due course.
- In case of an instrument obtained by unlawful means or for unlawful consideration: Sometimes, a person gets a lost instrument or obtains an instrument by means of an offence (i.e. by stealing or defrauding). In such a case, the holder cannot claim any right against the party liable on it. But if the same instrument is negotiated to a holder in due course, he will get a good title to it.
DISTINCTION BETWEEN HOLDER AND HOLDER IN DUE COURSE
|Basis of Distinction||Holder||Holder in Due Course|
|1. Definition||A holder is a person who is entitled in his own name to the possession of the instrument and to receive the amount due on it.||Holder in due course is a person who becomes the possessor of the instrument for consideration before its maturity and in good faith. [Sec. 9]|
|2. Consideration||A holder need not necessarily acquire the instrument for consideration. For instance, a holder may get the instrument by way of gift.||A holder in due course can acquire the instrument for consideration only.|
|3.Before maturity||A holder may obtain possession before or after the maturity of the instrument.||A holder in due course must obtain the possession before the maturity of the instrument.|
|4. Good faith||A holder need not necessarily acquire possession of the instrument in good faith.||A holder in due course must always acquire possession of the instrument in good faith.|
|5. Inchoate instrument||A holder can claim only the amount which signer of the inchoate instrument intended to pay.||A holder in due course can claim any amount filled in the inchoate instrument provided it is covered by the stamp affixed on it. [Sec. 20]|
|6. Right against prior parties||A holder does not have rights against all the prior parties. He has rights against the original parties and his immediate endorser.||A holder in due course has rights against every prior party to the instrument. He can hold them liable jointly and severally.[Sec. 36]|
|7. Title better than the transferor||A holder can never get a better title than that of the transferor.||A holder in due course can acquire a better title than that of the transferor. In other words, he gets the instrument cleansed of all prior defects.|
Questions from the Blog:-
- Define Cheque?
- Define Parties to Cheque?
- The distinction between holder and holder in due course?
- What are the Rights and privileges of a holder in due course?
- Define who and who is not a holder?
- Define Power of the Holder?
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